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BHI examines the economics of tort law |
from NewsLink, Vol. 1, No. 4, Summer 1997
A major study released by the Beacon Hill Institute in late spring assessed the economic implications of the tort liability system in Massachusetts. Taxation by Litigation: The Economics of Civil Justice Reform in Massachusetts, estimated the economic effects that adoption of the Civil Justice Reform Act (S-896) could be expected to exert.
Consider the following examples that illustrate the need for reform:
• A worker gets a putty knife stuck in a wall. Disobeying a work rule requiring him to wear protective glasses, he suffers an eye injury as he is pulling the putty knife out of the wall. He sues the manufacturer of the putty knife and receives $70,000 in damages.
• A woman purchases a cabinet for her kitchen. She installs the cabinet in drywall, ignoring written instructions admonishing against this. The cabinet falls on her head. She sues the store that sold her the cabinet for damages.
These are examples of individuals suing manufacturers for damages purportedly sustained from the use of their products. Over the last half century there has been a substantial expansion in producers' liability.
This has resulted in a reduction in the capacity of American business to create jobs and capital. Resources that would have gone into productive investment are shifting instead into businesses' efforts to protect themselves against lawsuits.
Tort law plays an essential role in the American civil justice system, but the modern expansive tort law regime has come to impose unnecessary costs, or what BHI calls “tort taxes.” Like any other tax, tort taxes penalize business for creating jobs and capital. Several states across the nation have reformed their civil justice systems with an eye toward both competitiveness and fairness. Massachusetts, however, lags in reforming its tort system.
In 1992 (the latest year for which published data are available), Massachusetts tort costs totaled $4.13 billion, or 2.55 percent of gross state product (GSP), amounting to a tort cost of $687 for every Massachusetts resident. Assuming that Massachusetts tort costs fall entirely on residents, the average Massachusetts resident incurred 32 percent more in tort costs than the average American. BHI estimates that in 1995, Massachusetts tort costs were $5.1 billion, or $833 for every Massachusetts resident, accounting for 2.68 percent of GSP.
If tort reform were measured in terms of tax relief by a market-clearing model such as STAMP, BHI estimates that the Civil Justice Reform Act would add
• 71,649 to 241,224 new jobs;
• $9.3 billion to $31.9 billion in new capital;
• $2.4 billion to $8.2 billion in new annual payrolls; and,
• $144.9 million to $488 million in new annual tax revenues.
By raising the cost of living and by putting upward pressure on prices and state taxes, tort costs diminish Massachusetts' ability to compete for business and workers.
In May, BHI Executive Director David Tuerck testified on behalf of the Civil Justice Reform Act at a hearing of the Massachusetts Joint Committee on the Judiciary. His opinion editorial, “Tort reform needs a fair trial,” appeared in the July 3, 1997 edition of the Boston Globe.
NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-2003. All rights reserved.
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