Former Mayer Brown partner Lori Lightfoot’s landslide election victory in the Chicago mayoral race marks many important firsts for the city, and could mean another new development—a tax on transactions by major law firms located there.
The tax is still more an idea than a detailed policy proposal. But if it takes off once Lightfoot, the city’s first black female mayor-elect and its first openly gay mayor-elect, is inaugurated in May, it will likely stir up objections from Big Law attorneys, who are not accustomed to paying such fees.
Lightfoot, a Democrat, discussed her proposal as a solution to the Windy’s City’s fiscal troubles in a recent interview with WGN Radio. She also referred to taxing other large professional services firms beyond just Big Law.
“One of the things I propose is a tax on high-end law firms, accounting firms, akin to like the VAT tax, a value-added tax in Europe — not on the little guys or the solo practitioners or small CPA firms, but a firm like mine, which is a large international law firm,” Lightfoot said. “Putting a small fee on the invoices they send their clients will barely be noticed, but yet could generate hundreds of millions of dollars in revenue.”
Legal industry observers said they had never heard anyone propose such a tax on U.S. law firms’ transactions and expressed concerns about what it might mean.
Kent Zimmerman, a law firm strategy adviser at the Zeughauser Group in Chicago, noted that the legal sector is an important part of the city’s economy. “Penalizing them is going to be counter-productive,” he said.
Chicago is the headquarters for many large firms with international reach including Mayer Brown, Kirkland & Ellis, and Sidley Austin.
Roberta Kass, a law firm recruiter at SeltzerFontaine, also said such a tax would be harmful because the likely end result would be client rate increases.
“We need more detail to know whether it’s realistic,” she said of Lightfoot’s proposal.
A Tricky Idea
Taxing law firms is a move that could help Lightfoot, a former federal prosecutor, further burnish her progressive credentials. As a partner at Mayer Brown, which declined comment on her proposal, she was a litigator who helped clients with white-collar defense and investigations.
In addition to causing concern in Big Law, such a tax would raise a lot of practical questions, according to Bill Apple, who serves as a partner at accounting and advisory firm Baker Tilly Virchow Krause.
Apple said only three U.S. states have specific taxes that apply to the provision of professional services, though California is also considering such a move. And these are sales taxes, which are applied once at the point of sale, not a VAT tax like Lightfoot’s. VAT taxes, found mostly in Europe, apply throughout the production process at each individual point where value is added.
Such a tax would also raise jurisdictional questions, Apple said, since many large law firms have many offices nationally and internationally. It’s also unclear how the client’s location would play into the way the tax functions.
“Depending on how a tax gets levied, that could have an impact on the ability of Chicago law firms to generate business outside of the city,” Apple said.
Even getting such a tax passed would likely be challenging, said Todd Maisch, president and chief executive of the Illinois Chamber of Commerce.
He expressed doubts about Lightfoot’s ability to impose any type of VAT tax on law firms and other service providers without permission from the Illinois General Assembly. He said the VAT proposal is inconsistent with Chicago’s current authorities as a home rule municipality.
“If you are talking about taxes on law firms and banks, that would have to fall under a broader service tax that Illinois doesn’t currently have,” Maisch said. “And we would contend the City of Chicago does not have the authority to levy such a tax. It certainly would be litigated.”
—With assistance from Michael Bologna