Senator Thom Tillis (R-NC) has introduced S. 1821, the misleadingly named “Tackling Predatory Litigation Funding Act,” a bill that would impose a punitive and extreme tax burden—imposing effective tax rates in excess of 50 percent—on the commercial litigation finance industry, intentionally crippling it. Besides being terrible tax policy, it would set a dangerous precedent for the tax legislative process.

Litigation finance firms provide essential capital to litigants and their lawyers in exchange for a financial interest in any resulting settlement or judgment. These businesses serve litigants by providing them or their lawyers with necessary liquidity during the pendency of their lawsuits, which can span many years and cost many millions of dollars. Additionally, litigation finance shifts risk from risk-averse litigants onto well-diversified asset managers. These managers are backed by institutional investors, such as public pension funds and tax-exempt organizations, which also benefit because litigation finance is generally uncorrelated with the stock market, providing valuable investment diversification.

While the stated intent of the bill is “to establish a tax on income from litigation that is received by third-party entities that provided financing for such litigation,” this is highly misleading. Income from litigation finance investments is already taxed the same as other investment income, such as capital gains. There are no tax “loopholes” specific to litigation finance. However, S. 1821 would impose significantly harsher, punitive tax treatment in three key ways:

Even more troubling is the prospect that this bill could be quietly inserted into an enormous, fast-moving, too-big-to-fail reconciliation package. If it slips through as a last-minute addition, it would set a dangerous precedent: the weaponization of the tax code to dismantle disfavored but entirely legal industries. Any sector with a handful of vocal critics—think firearms manufacturers, cryptocurrency, or ideological nonprofits—could be next in line for IRS targeting.

Our tax code is already burdened by an array of opaque loopholes, carve-outs, and incentives that complicate compliance and invite undue influence. However, what it has generally avoided is the targeting of specific industries for punitive treatment simply because they are unpopular with a small handful of lawmakers. If S. 1821 becomes law, that line would be crossed, potentially for good. Congress should resist the temptation to weaponize the tax system in this way by shelving this misguided bill.

Gregg Polsky is a Professor of Practice at the New York University School of Law. He has taught, researched, and published in the area of federal tax law for twenty-five years.