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Press Release

    The Impact of Judicial Reforms on Economic Activity in Texas

    08/09/2000

    Executive Summary

    The intent of the civil justice system is straightforward: to establish a fair and equitable framework for resolving conflict. If the mechanism functions well, it provides a means to compensate legitimately harmed parties and deter undesirable behaviors. On the other hand, a poorly conceived or implemented system can result in (among other consequences) increased costs and risks of doing business; disincentives for innovations that benefit consumers; inducements to file “frivolous” (of questionable merit) lawsuits; inflated insurance premiums; and—importantly—encumbrances to economic development and the accompanying job creation.

    Historically, Texas had a judicial system that was widely believed to be imbalanced. The unpredictability and risk associated with this situation added to the cost of living and doing business in Texas. During the past decade, however, the civil justice system in Texas experienced a significant metamorphosis. The Perryman Group (TPG), an economic research and analysis group based in Waco, Texas, was recently commissioned by Citizens for a Sound Economy to quantify and evaluate the impact of these recent reforms on the Texas economy. A complete explanation of the methodology employed appears in the report.

    The result of the new judicial procedures has been a more efficient and effective use of the state’s scarce economic resources, savings on the goods and services purchased by consumers, and a stimulus to economic development; these efforts have benefited the entire state.

    The results of the analysis reveal that the total cost of the tort system in Texas in 2000 was $15.482 billion. In the absence of the recent changes, the costs would have been $25.889 billion. The total direct savings were, thus, $10.407 billion. Of this amount, approximately 26.7%, or $2.777 billion, may be attributed to improvements at the national level. The savings resulting from reforms and related factors in Texas are estimated to be $7.630 billion. Of the total savings, it is estimated that $2.542 billion goes directly to benefit consumers. Texas enjoyed very modest inflation of only 1.57% per annum over the past five years. In the absence of the reforms, the rate would have been 1.64%, or 4.3% higher. This reduction currently brings net savings to Texas consumers in the form of reduced prices of approximately $1.796 billion per annum. There was also a gain in productivity in growth of about 2.56%.

    The Benefits to Consumers

    The present study reveals many additional positive outcomes that consumers received:

    $1.796 billion in annual cost savings from reduced inflation ($216 per household);
    $7.056 billion in annual total personal income ($862 per household);
    $4.234 billion in enhanced consumer spending per year ($517 per household);
    Substantially improved job prospects; and,
    A more efficient judicial system to compensate for legitimate losses.
    Tort reform measures also provide enhanced consumer choice, greater innovation, higher output, and lower prices.

    Overall Economic Impacts on the State Economy

    The overall impact of tort reform on the Texas economy, including all direct, indirect, and induced effects, is estimated for 2000 to include:

    $23.207 billion annual total expenditures;
    $11.601 billion in annual gross state product;
    $7.056 billion in annual personal income;
    $2.901 billion in annual retail sales; and,
    195,727 permanent jobs.
    The benefits represent about 5.64% of aggregate income growth, 5.32% of overall output expansion, and 11.4% of net job creation over the 1995-2000 period. In addition to these specific effects, legal reform was a notable factor in creating a better environment for economic development within Texas.

    Moreover, based on the analysis of economic development patterns within the state, tort reform was a notable (although not necessarily the sole or primary) factor in the creation of 295,151 permanent jobs in Texas over the past few years, above and beyond the 195,727 jobs attributable to legal reform. This increase also brings $15.618 billion in additional personal income and $28.464 billion in gross state product.

    Synopsis

    The results of this analysis indicate that the costs of the civil justice system have been substantially reduced, the efficiency has improved, and the competitiveness of the state has been enhanced. Savings to the typical Texas household in terms of lower prices and total personal income may be viewed as equivalent to a $1,078 annual reduction in the “tort tax.” These positive impacts are likely to continue and expand over time. In conclusion, tort reforms have produced broad-based benefits that have affected consumers, producers, and all major segments of the economy.

    Full Study:

    The Impact of Judicial Reforms on Economic Activity in Texas
    (PDF format, 20 p. 6.03 Mb)