The deteriorating economy has pushed many state budgets into deficit, including Alabama’s, but the problem is not uniform.
Indeed, a new study by the National Conference of State Legislatures examines the revenue and expenditure situation in the 50 U.S. states for the current fiscal year and next.
Sixteen states face budget deficits in the current 2008 fiscal year, and 23 states will face budget deficits in the 2009 fiscal year.
Alabama, for example, will face a projected budget deficit of nearly 13 percent next fiscal year.
A reading of the National Conference of State Legislatures’ report raises a key question: Is there a connection between a state’s revenue outlook for 2009 and its tort-liability system? In other words, does a better tort system contribute to a healthier state budget by encouraging economic growth and greater inflows of tax revenue?
Based on the evidence, the answer is yes.
The states that the report clas sifies as “optimistic” in revenue outlook for 2009 have an average tort-system ranking of 4 (1 is the best ranking, 50 the worst). The rank of each state’s tort system came from the Pacific Research Institute’s “U.S. Tort Liability Index: 2008 Report.”
North Dakota and Alaska ranked 1 and 2 in the Tort Index for having the lowest relative tort costs and fewest tort-litigation risks. They also have the best revenue outlooks for 2009.
In contrast, the states with a “pessimistic” revenue outlook for 2009 have a dismal average tort-system ranking of 36th. A costly and risky tort system produces a grim revenue picture.
States with a “stable” revenue forecast for 2009 have an average tort-system ranking of 23rd — right in the middle, as expected.
The lesson is clear: States with a better tort system enjoy a greater inflow of tax revenue because they have a stronger economy. States with a poor tort system suffer from weaker economies and sluggish tax revenues.
Past evidence is revealing.
In 2006, job growth was 57 percent greater in the 10 states with the best tort systems than in the 10 states with the worst. The same year, state-level GDP grew 25 percent faster in the 10 best vs. the 10 worst.
In 2006, the top 10 tort states had an average growth rate of tax revenues that was 24 percent greater than the bottom 10. The greater infusion of tax revenue, it should be noted, was due to higher economic growth, not higher tax rates.
In fact, taxpayers in the top tort states paid 8 percent less in effective tax rates in 2006 than those in the bottom states.
A tort system’s impact on the economy is real. According to a McKinsey & Co. study, when a company is deciding where to expand, tort risks rank second in significance, trailing only the availability of qualified workers.
Entrepreneurs and investors are attracted to states that have reliable tort systems that discour age lawsuit abuse. They are also less likely to run from states with good tort systems when these economies slip.
This is what the National Conference of State Legislatures’ budget numbers tell us. A good tort system acts like a shock absorber. It makes a state’s economy and tax base more resilient to economic downturns.
The legal environment is an important ingredient for long-term economic and budget stability.
A University of California-Berkeley economist found that implementing just one of six common tort reforms boosts a state’s employment by 1 percent.
If more states had enacted meaningful tort reform in the past, perhaps fewer states would be experiencing budget woes today.
All states can improve by enacting tort reforms proven to enhance economic performance.