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Thursday, May 20, 2004

Update on Gov. Schwarzenegger's Proposed 75% Tax on Punitive Damages

Thursday, May 20, 2004

Following up on Saturday's post: Today's Wall Street Journal (at A2) has a great piece on California Gov. Schwarzenegger's Proposed 75% Tax on Punitive Damages. Among the interesting points:

• Of the eight states (Alaska, Georgia, Illinois, Indiana, Iowa, Missouri, Oregon and Utah) that currently impose similar taxes, seven let the lawyers eat first (the state takes their share only after attorneys' fees are paid). California would join Indiana in taking its 75% share before the payment of attorneys' fees.

• The article predicts that Gov. Schwarzenegger's proposal may succeed if the tax is whittled down to 50% and the lawyers are allowed to eat first. The 50% figure is supported by an article by two Vanderbilt economists (Andrew Daughety & Jennifer Reinganum) posted on SSRN, Found Money? Split-Award Statutes and Settlement of Punitive Damages Cases. Here is the abstract:

We examine the effect of the "split-award" tort reform (wherein the State takes a share of a punitive damages award) on equilibrium settlements and the incentives to go to trial. Using both signaling and screening models of settlement negotiations, we find that the equilibrium settlement is increasing in the likelihood of the defendant being found liable, in the size of both the compensatory and punitive damages, and in the share of the punitive damages award that the plaintiff may keep. We also find that increases in the same attributes (except for the compensatory damages award) increase the likelihood of a case proceeding to trial. Thus, split-award statutes simultaneously lower settlement amounts and the likelihood of trial, as both parties act to cut out the State (since the statutes only apply to awards at trial).

We then develop an analysis of the revenue that split-award statutes could generate, conditioned on the allocation of a punitive damages award between the plaintiff, his lawyer and the State. We construct a symmetric random proposer model (a composite of the signaling and screening models) and find the revenue-maximizing share for each state currently using a split-award statute with a mandated rate. We find that (for all states but one) the predicted state's share is approximately 50% (for the remaining state, the revenue-maximizing share should be approximately 66%). These results are robust to variations in economic parameters and to whether the state's share is gross or net of the plaintiff's attorney's fee.

One surprising result is that these statutes do not deter filings and that their use can actually encourage plaintiffs' attorneys to accept and pursue weaker cases than would have been brought absent the statute. Finally, we use our results (along with information about the evidentiary standard employed, the allocation scheme used and the presence or absence of caps imposed on damages awards) to infer the likely motivation for passing a split-award statute for six states of interest. We find that policies in Indiana and Oregon are more consistent with a primary motivation of deterrence reduction while policies in Georgia, Iowa, Utah and Missouri seem to be more consistent with a primary motivation of revenue generation.

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» I think I like it from The Ranting Chemist
Here's an interesting idea: tax punitive damages. Not only does it discourage frivolous lawsuits for profit, but state coffers get filled without taxing the crap out of the money people earn for actually working. The one major downside I can... [Read More]

Tracked on May 20, 2004 12:03:52 PM

» I think I like it from The Ranting Chemist
Here's an interesting idea: tax punitive damages. Not only does it discourage frivolous lawsuits for profit, but state coffers get filled without taxing the crap out of the money people earn for actually working. The one major downside I can... [Read More]

Tracked on May 20, 2004 12:22:28 PM

» A Tax on Thee for Suing Me! from a tort et a travers
Evidently, California (see todays' WSJ sub required) has discovered the Georgia approach to taxation. Georgia currently taxes punitive damage awards. The idea is that the injured party should not reap a windfall from the punitive damages. Under crimina... [Read More]

Tracked on May 20, 2004 1:33:35 PM

» A Tax on Thee for Suing Me! from a tort et a travers
Evidently, California (see todays' WSJ sub required) has discovered the Georgia approach to taxation. Georgia currently taxes punitive damage awards. The idea is that the injured party should not reap a windfall from the punitive damages. Under crimina... [Read More]

Tracked on May 20, 2004 1:41:31 PM

» Hasta la vista, irresponsible law suits from The Trimblog
Governor Schwarzenegger is proposing a 75 percent tax on punative damages in California. More at Tax Prof Blog. [Via Instapundit] Considering the cost of malpractice insurance in the state, I'm sure some doctors and politicians in Pennsylvania are sali... [Read More]

Tracked on May 23, 2004 4:43:08 PM

» Hasta la vista, irresponsible law suits from The Trimblog
Governor Schwarzenegger is proposing a 75 percent tax on punative damages in California. More at Tax Prof Blog. [Via Instapundit] Considering the cost of malpractice insurance in the state, I'm sure some doctors and politicians in Pennsylvania are sali... [Read More]

Tracked on May 23, 2004 4:52:05 PM

» Schwarzenegger punitive damage plan from Overlawyered
My op-ed on the subject appears in today's Wall Street Journal. (Walter Olson, "More Punitives to the People!", Jun. 2)($$). The California governor's proposal to have the state take 75 percent of punitive awards has gotten a more favorable reception... [Read More]

Tracked on Jun 3, 2004 6:57:48 PM

» Saturday, June 12, 2004 11:01 PM from Critical Section
Arnold Schwarzenegger has proposed a 75% tax on punitive damages. Excellent. That's tort reform.... [Read More]

Tracked on Jun 13, 2004 3:06:37 AM

» Hasta la vista, irresponsible law suits from The Trimblog
Governor Schwarzenegger is proposing a 75 percent tax on punative damages in California. More at Tax Prof Blog. [Via Instapundit] Considering the cost of malpractice insurance in the state, I'm sure some doctors and politicians in Pennsylvania are sali... [Read More]

Tracked on Aug 11, 2004 7:44:32 PM

Comments

What are the odds that Arnold came out with the 75% figure knowing that he'd have to settle at 50%?

Posted by: chris | May 20, 2004 11:24:51 AM

Or why didn't he push for a statute to eliminate punitive damages in the state of California so that "all the attorneys making big $$ while the doctors flee the state" et al issue would just go away? Yeah, I know, that would be unfair to plaintiffs who share a ten million dollar punitive damages award with their shyster (err, lawyer). (sigh)

Posted by: Steve | May 20, 2004 11:36:37 AM

I'm not sure I understand all of this modelling, but if government is to receive a large piece of punitive awards, then doesn't government have an incentive to act to increase the size of such awards, to increase the scope of lawsuits that can produce punitive awards, and to encourage the seeking of punitive awards? The market for demagoguery in lawsuits already seems quite out of control - adding another interested party with a big pulpit seems a bit risky.

And once such a system was in place, wouldn't the political forces to prevent reform of such a system be quite strong?

Posted by: Cliff Styles | May 20, 2004 11:39:49 AM

Exactly waht is the current history of Alaska, Georgia, Illinois, Indiana, Iowa, Missouri, Oregon and Utah in regard to become co-conspirators with the trial lawyers in pushing cases that normally wouldn't fly.
The best example of this is the tobacco settlement with the states, where the states are now co-conspirator, or sorts, with the tobacco companies in order to keep revenues coming in to their treasuries. I've never had it explained to me how this settlement doesn't have the states wanting their citizens smoking as long as possible. Worse yet, imagine it with national healthcare.

Posted by: J_Crater | May 20, 2004 11:43:04 AM

I'll support this so long as the lawyers don't "eat first". As a matter of fact, I'd support it if only the lawyers paid. 99% would be better in that case.

Posted by: Ken Hahn | May 20, 2004 11:44:43 AM

I think this is a great idea, but it should be 50% of the gross and the Attorney should get their percent of the net.

Many of the so-called "nuisance" suits are spurred on by lawyers who know they usually walk away with more money than the client (although this is more common with Class Action suit where the lawyers make millions and the plaintiff gets a $50 gift certificate).

Taking 50% of the gross means that the lawyer gets less and makes it much more likely that they will only file when the conduct of the defendant is particularly egregious, and the probability of a large payout is more likely.

Posted by: Bankerdanny | May 20, 2004 11:52:30 AM

Interesting. What effect does such a tax have on the size of verdicts? For instance, if a jury knows about a 50% tax, wouldn't it seem likely to just double the size of the verdict?

Posted by: Carl Spackler | May 20, 2004 11:58:23 AM

This guy can't be happy about it.

Posted by: John K. | May 20, 2004 12:23:33 PM

I've been advocating something different; 100% of punative awards goes to the Federal Government. The lawyers get no part whatsoever of the punative awards, only of real damages.

Posted by: Jim Gwyn | May 20, 2004 12:54:00 PM

In California and other states that take a piece of the punitive awards, the jurors might consider that the higher the punitive award the less taxes they might have to pay. Is this due process? Isn't there a built in conflict of interest? Might defendants that may be subject to such claims remove their operations from such a state? Or is the idea based upon punishing the lawyers who pursue punitive damages? In California perhaps with the state's fisc being so compensated Arnold would not have to take a part time job with a body building magazine. In the end, the defendant's customers, or its employees, will bear the burden. Arnold is looking for a free rider benefit. Maybe his wife should just go back to work.

Posted by: Shag from Brookline | May 20, 2004 1:47:32 PM

I'm pretty happy with the idea. People actually victimised will not be screwed over, as they're compensated by "actual damages", not punitive damages. Punitive damages are supposed to act as a disincentive to the offender to commit similar actions; if that is truly their function, the recepient of the money is immaterial, what matters is the size of the damages.

The only case where this is a bad idea, and one which ought to be exempted from the tax, is the case where the State is the defendant. In that case, taxing punitive damages absolves the tortfeasor from the full level of punishment.

Posted by: Anthony | May 20, 2004 2:22:57 PM

I hate trial lawyers, so I am not their advocate. But it seems that the bill, as currently constructed, would be a double tax on them if the award got taxed first, and then the lawyers got taxed again when they declared their share on their income tax return. Point being, as someone who hates double taxation, I wouldn't be unhappy about this idea, as long as lawyers got to eat first.

On the other hand, I really do like that 99% idea! After all, the notion of a punitive award is to prevent the liable entity from repeating that which is deemed punishable. So why do the lawyers get to keep the "punishment" money? The purpose of punitive damages is NOT to make the lawyers rich. The purpose is to act as a future deterrent. All compensation for losses are covered in the actual damages. Let that remain taxed as is. But why are we letting any single individual enjoy the benefits of an award whose purpose is to act as a deterrent?

Posted by: Don | May 20, 2004 2:41:38 PM

Wouldn't this create a conflict of interest for the government as they would now have an economic incentive to award higher punitive damages?

Posted by: Thorley Winston | May 20, 2004 4:22:04 PM

It's not "double taxation", at least, not of the attorney. The award goes to the plaintiff, NOT the attorney.

Personally, I'd like to see 100% taxation of "punitive damages". Punitive damages are fines. Fines go to the State. (And, for that matter, they require a finding of guilt by a unanimous jury, and the burden of proof is on the accuser, not the defendant.)

Posted by: Greg D | May 20, 2004 5:02:49 PM

if government is to receive a large piece of punitive awards, then doesn't government have an incentive to act to increase the size of such awards

This is also my thought. It seems to me that where the state is taking a large share (or 100% as proposed above) of punitive damages, we ought to call it a "fine", not "damages". And if I'm not mistaken, levying a fine requires criminal standards of proof, not civil.

Posted by: jaed | May 20, 2004 7:25:06 PM

On this issue may I go down the royal road of learning. Will informed people post their summaries of what they think has happened and will happen. Is this a win, loss, or tie and for who?

Posted by: ju | May 21, 2004 3:47:52 AM

I have a quiz:

1. Do we suppose the government will regretfully accept the "taxes" it receives, lecturing trial lawyers about greed, and "investing" the revenues in programs designed to lessen and eliminate bogus tort, hoping that, over time, the sources of these revenues will dry up and go away?

2. Thus giving trial lawyers pause to consider the toxic effects of winner-takes-more-than-all tort and, in their consequent shame, the lawyers devote themselves to other more recognizably useful pursuits like petty vandalism and graffiti artistry ("Big Tobacco Still Sucks" painted on the wall of your local 7/11), so that the tort system withers away in a few years?

3. Or do we suspect that the government will come to need those "taxes," and make it easier and more lucrative for trial lawyers to sue, who will enthusiastically shoulder that patriotic public service?

(Hint: this is a problem that will be solved by consultation between government and trial lawyers.)

Posted by: John Mendenhall | May 21, 2004 7:35:27 AM

You HAVE to put the ATLA members LAST in line, and then do not put the money in the STATE coffers, where the incentives for revenue-dependency abuse (think tobacco) are obvious. One more time: all punitive damages should go into broad, non-specific victim compensation funds for the benefit of people who are damaged by either criminal or tortious behaviors.

Posted by: Duane | May 21, 2004 10:03:18 AM

1. Tax angle. If the damages are taken by the state as a tax ,it may be non-deductible by the plaintiff under AMT resulting in a disaster.

2. Incentive effects. Hard to say. Remember that SCOTUS has limited punies to a single digit multiple of actuals to force judges to control juries. I assume, but do not know, that juries will not be instructed as to 75% tax.

3. This is a better idea than Ohio where the supreme court has taken to stealing punitive awards on its own motion. See 2002-ohio-7113.doc downloadable at:
http://www.sconet.state.oh.us/ROD/documents/

Posted by: Robert Schwartz | May 22, 2004 11:54:11 AM

1. Tax angle. If the damages are taken by the state as a tax ,it may be non-deductible by the plaintiff under AMT resulting in a disaster.

2. Incentive effects. Hard to say. Remember that SCOTUS has limited punies to a single digit multiple of actuals to force judges to control juries. I assume, but do not know, that juries will not be instructed as to 75% tax.

3. This is a better idea than Ohio where the supreme court has taken to stealing punitive awards on its own motion. See 2002-ohio-7113.doc downloadable at:
http://www.sconet.state.oh.us/ROD/documents/

Posted by: Robert Schwartz | May 22, 2004 11:55:03 AM

Sorry about the double post. I recieved an error message in error so to speak.

Posted by: Robert Schwartz | May 22, 2004 12:04:25 PM

Does anyone think about the victim of unspeakable treatment by their employers? The 75% should be guaranteed to the victim under certain discriminations. The gov't and lawyers should suck hind tit for a change.

Posted by: Annie | Jun 15, 2004 7:15:39 PM