Public policy interest that has resulted in tax subsidy for structured settlement arrangement can be simply summed up as: A government action to reduce the chances that an injured party prematurely exhaust off the settlement (compensation) amount, and winds up being supported through one or more of the taxpayer funded support programs.

Congress has adopted specific tax rules (The Periodic Payment Settlement Act of 1982 (P.L. No. 97-473)) to encourage the use of structured settlements. Section 104(a)(2) of the Internal Revenue Code makes the full amount of the structured settlement payments tax-free -for the victim. On the other hand, any investment earnings on a lump sum payment are fully taxed.

It is no surprise that there are dissenting views on this interesting provision in the aforementioned US Tax Law.

Arguments Opposing Tax Subsidy For Structured Settlement Arrangements: Those that do not like this provision argue that tax subsidies now being accorded to structured settlement periodic payment arrangements are designed to (inappropriately) influence, limit, and distort individual choice -which, they argue, potentially leads to outcomes that do not serve the injured parties real well. Many have voiced their opinions that these kinds of government sponsored programs are designed to limit personal freedom to make a free choice. Those that oppose this often characterize these tax breaks as governmental interference in how someone manages (or mismanages) his/her economic resources.

Arguments Supporting Tax Subsidy For Structured Settlement Arrangements: Many argue that it is government's responsibility to not waste taxpayers' hard earned dollars. It can be argued that irresponsible (or negligent) actions of an individual who chooses to receive the lump sum settlement can (almost inevitably) create additional (undue) burden on taxpayers at large.

Here is why many in this camp feel that lump sum payments are potentially more troublesome than structured payments: The total amount of damages being paid in most cases (such as those involving personal physical injuries, physical sickness, or workmen’s compensation cases) are usually based on the lifetime medical (and other) needs of the injured party. If such a recipient were to be paid a (significantly large, one time) lump sum amount, there is a great possibility that he/she may mismanage those funds prematurely and be left with no resources to pay for services needed during the years ahead. Should that happen, it is more than likely that such an individual may have to be eventually supported and be medically cared for under various taxpayer-funded programs such as Medicaid, or Medicare.

By extending tax subsidies, the legislative intent has been to make it more attractive (for the injured party) to be compensated in periodic payments that are spread over (possibly) many years. That is the price our government is willing to pay to "promote" responsible behavior -for the ultimate goal of keeping those individuals from causing additional (and some may argue even Undue) burden on all taxpayers.

Under the structured settlement arrangement, because the amount and period of the payments are fixed at the time of the settlement, the payments are more likely to be available (assuming that the said payment stream is not subsequently sold/transferred by the recipient) in the future to cover anticipated medical expenses. Supporters of this tax subsidy seem to believe that in doing so, our legislators are not trying to impose or mandate a choice, but are rather offering a financial reward (inducement) for making more responsible choices.

Those that support these tax subsidies have further argued that it is entirely appropriate that the government tries to stretch the taxpayer dollars by inducing injured persons to make (responsible) choices to better protect themselves -especially in such matters involving their own life-long medical care.

Interesting enough, a majority of recipients are still opting for a lump sum payment in stead of tax-free structured settlement payments spread over many years.