Taking Another Look At The "Tort Tax"

(As my first post for TortDeform.com, I thought I'd revist the "tort tax" argument that's sure to make the rounds in time for the November elections.) 

I’ve previously explained why the “tort tax” argument is a fallacious argument that falls apart under even casual analysis. But let’s put reality aside for a moment (as tort reformers often do) and pretend that all of the costs of the civil justice system are indeed a tax.

In case you’ve never heard it before, the “tort tax” argument claims that since roughly 2% of America’s Gross Domestic Product is related to the legal system, every U.S. citizen pays about $800 per year in “tort tax”. Of course, we don’t write a check to the IRS to pay our “tort tax” bill. Instead, this “tax” purportedly comes in the form of higher prices on goods we purchase. In other words, the “tort tax” is really a consumption tax.

While there has been a lot of debate about the real effects of consumption taxes, one thing is agreed upon by all sides: How much consumption tax an individual pays is in direct proportion to how much he or she consumes. Thus, any attempt to quantify the costs of our civil justice system on a per-person basis without looking at the expenditures of every person is doomed to failure, as no two persons consume the same amount of goods. So when a tort reformer claims every family of four pays about $3,200 per year in “tort taxes” you know that he or she either doesn’t understand how consumption taxes work, or that he or she is more interested in clever sound bites than the truth.

The “tort tax” argument may be flawed and misleading, but it can be used to rebut another common argument for tort reform: That our tort system is inherently unfair because juries in different communities may award very dissimilar compensation to individuals with very similar injuries. Tort reformers argue that fairness requires similar injuries be compensated similarly. Is this true? Not if we’re to believe the “tort tax” argument.

That’s because there is one part of our civil justice system that is like a tax: Punitive damages. Punitive damages are awarded in part to discourage a certain type of dangerous behavior that often leads to injury. That sounds quite a bit like “sin taxes” placed upon such items as cigarettes and booze, doesn’t it? Just as state taxes on cigarettes are assessed in part to discourage people from smoking, punitive damages are assessed to discourage others from engaging in whatever conduct brought the defendant before the jury. And just as cigarette taxes vary from state to state, so too do jury awards.

South Carolina, for instance, assesses only .07 cents in taxes on every pack of cigarettes – the lowest in the land. Surely, one reason for such a low tax rate must be the deep roots the tobacco industry has in South Carolina. Those deep roots mean that the average South Carolina citizen has a different attitude about tobacco and tobacco companies than Americans in non-tobacco-growing states. Take Rhode Island, for example. That state places a tax of $2.46 on every pack of cigarettes sold there.

If tort reformers are correct when they say that it’s unfair for juries to make a defendant in Miami pay $25,000 in “taxes” for causing the same injury another defendant in Fargo paid only $10,000 in “taxes” for, then it’s also unfair for the legislature in Rhode Island to tax smokers $2.46 per-pack when smokers in South Carolina only pay .07 per-pack.

So why doesn’t Philip Morris, one of the biggest backers of tort reform, start a campaign to force every state to lower their taxes on cigarettes to .07 per pack? I can think of two reasons off the top of my head. First, it would undoubtedly be condemned as a self-serving campaign with no logical basis other than to enrich the tobacco industry. Secondly, it would also be viewed as an unconstitutional assault upon the sovereign rights of every state.

Even though the “tort tax” argument is a total lie, comparing jury awards to taxes does illustrate a useful principle. Taxes on cigarettes, liquor, and gasoline vary from state to state, from county to county, and from city to city. Those taxes are created based upon the unique values and beliefs of the citizens of every state, county, and city that assess them. To force every community to replace their own taxes with one national sales tax would not only be unconstitutional, but would undermine our entire system of Federalism. What’s more, even if we were to implement a national sales tax, would it be wise to let manufacturers dictate what the taxes on their own products should be?

Similarly, jurors in different communities across America return the verdicts they do based upon the values and beliefs prevalent in that community. In criminal cases, rural juries will generally return longer jail sentences than urban juries, and in civil cases, urban juries will generally return higher verdicts than rural juries. That doesn’t mean that our jury system is broken. It means our jury system mirrors the diverse group of values and beliefs of our melting-pot of a nation. Just as legislatures should have the right to set taxes in line with the needs, beliefs, and values of their communities, so too should jurors have the right to return civil and criminal verdicts that are in line with the beliefs of their community. For the same reason we shouldn’t let Philip Morris decide how much a state legislature can tax a pack of cigarettes, we shouldn’t let them decide how much money a jury can force them to pay to a cancer victim. Doing so would be like letting inmates rewrite the penal code.

Tort reform, in many ways, tries to force jurors to abandon their own values and beliefs and adopt values and beliefs that place profits ahead of people, and corporations ahead of communities. I reject those flawed values, and hope you’ll join with me in fighting to preserve our jury system.