In the summer of 2020, jarring footage of a Minneapolis police officer murdering George Floyd, an unarmed Black man, sparked demonstrations across 140 cities.
Protestors in Minneapolis called for the police officers responsible for Mr. Floyd’s death to be fired and prosecuted.
And in July of that summer, Mr. Floyd’s family filed a civil suit against the city of Minneapolis and the police officers, alleging a deprivation of Mr. Floyd’s rights.
The lawsuit settled for $27 million in March 2021.
This story—one of police action resulting in devastating human consequences and costing a city a large settlement payout—is not uncommon. The city of Louisville, Kentucky, settled with Breonna Taylor’s family for $12 million in September 2020.
The city of Cleveland, Ohio, settled with Tamir Rice’s family for $6 million in 2016.
The city of St. Anthony, Minnesota, settled with Philando Castile’s mother for $3 million in 2017.
And New York City settled with Eric Garner’s family for $5.9 million in 2015.
Cities have several ways to raise money when they need to satisfy large police brutality payouts. They might have insurance to cover the costs.
Alternatively, they can pay from the city’s general fund or the city police department’s budget.
Or they could sell bonds—coined “police brutality bonds.”
When investors buy bonds, they typically have to pay federal income taxes on the interest proceeds. Municipal bonds, however, produce tax-exempt interest. As a result of the exemption and the economics of the bond market, investors in the top tax bracket tend to receive more interest on municipal bonds, such as police brutality bonds, than they would after-tax on corporate bonds.
Therefore, the Internal Revenue Code (the Code) enables the wealthiest individuals to benefit from the suffering of victims of police brutality.
This Note demonstrates how the Code allows such a tax benefit and why the benefit is worrisome. It then considers proposals on how to eliminate the benefit. In Part I, this Note will demonstrate how and why municipalities face large judgments and settlements for police brutality,
how municipalities fund these payouts, including by issuing bonds,
and how interest on those bonds is tax exempt.
In Part II, this Note will show how the Code sanctions a tax benefit for the richest investors for funding police brutality bonds, which is normatively problematic and emblematic of uninformed investing.
Moreover, because tax exemption is a form of federal subsidy, this Note argues that the use of tax-exempt bonds for police brutality payouts is inconsistent with the legislative intent and economic justification for tax exemption on municipal bonds interest.
In Part III, this Note will explore ways to limit this tax benefit using existing provisions of the Code.