Wampum

Taxing Pixie Dust

I previously expressed doubt that Governor Schwarzenegger’s proposed 75% tax on punitive damages would realize the revenue stream envisioned.

The New York Times notes that the Governor estimates that his proposal would generate about $450 million per year in revenue for the state. Where, I wondered, did that estimate come from?

The Times reports:

It is based on a study prepared by two scholars at the McGeorge School of Law in Sacramento. They found that juries had awarded punitive damages in about 500 California cases in the decade ending in 2000, for a total of $6.4 billion, or about $640 million a year.

A little Googling located the original report by Drs. Kelso and Kelso here (PDF).

Kelso and Kelso looked at punitive damage awards in California for the period of 1991 through 2000. Because no one collects information on all such awards, Kelso and Kelso relied on the self reporting of verdicts contained in a publication known as the California Jury Verdict Reporter.

The reliance on self reports means that some verdicts awarding punitive damages are not included in the study. I suspect that all large awards are included. It is the rare plaintiff’s attorney who having won a large punitive damage award would fail to garner the publicity and prestige of having it reported.

The study also failed to account for reductions in punitive damages awards by the trial court after verdict or by appeals courts. As we shall see, that is an important limitation that causes the study to overstate the amount of punitive damages actually paid.

Kelso and Kelso found that during the decade studied there were 489 punitive damage awards in California. The total amount of punitive damages awarded by the jury in those cases was about $6.4 billion.

Governor Schwarzenegger's estimate of a $450 million per year revenue stream results from taking the $6.4 billion dollar figure for the decade, dividing it by ten to get a yearly figure of $640 million and assuming that the state’s annul revenue will be 75% of that figure.

If the Governor had read the entire report (gotta check those footnotes), he would have discovered that the figure he used for his revenue estimate is skewed dramatically by one result. In the case of Anderson vs. General Motors, the jury awarded $4.2 billion in punitive damages. Kelso and Kelso included the $4.2 billion figure in their report. While including that figure, Kelso and Kelso note that the trial court reduced the punitive damage figure to $1.2 billion before entering judgment.

Three billion dollars of the $6.4 billion in punitive damages on which the governor based his revenue estimates were eliminated by the trial court and will never be paid. About half of the total amount on which the Governor is planning to impose a 75% tax is a fiction. Does anyone still believes that the Governor’s proposal will generate $450 million a year in revenue for the state?

I do not know if the error was made through mendacity or neglect but it is a pretty serious error if California is making budget plans based on the Governor’s estimate. Taxing pixie dust does not generate revenue for the state.

Posted by Dwight Meredith at June 1, 2004 01:20 PM | TrackBack