New Taxation Through Legal Representation

Outside of Las Vegas is a little pawn shop that does big business. It buys everything from jewelry to cowboy boots to dentures from broke gamblers who need money for gas to get home. It is a testament to the rule that where there are fools, there are opportunities.

This month, the pawn business has moved into the big time. Broke state officials across the country have been looking for businesses to buy their assets at a fraction of their worth to pay for budget shortfalls.

Like every itinerant gambler, they want to avoid facing the public with the news that they bet on the economy and lost in a big way.

Looking around for things to sell, many states have quickly latched onto their most valuable movable commodity: tobacco damages. This is fitting because states first won, and then squandered, billions in windfall damages to their residents.

This scandal began when state leaders cut outrageous contingency deals with private lawyers that guaranteed fees as high as a billion dollars. Rather than using government lawyers for these lawsuits, politicians allowed private attorneys to pocket billions in damages suffered by citizens. Then, flush with the expected cash from the settlements, state officials spent wildly.

When the economy soured, they woke up with a huge budget headache and an unpaid bill.

Now these same leaders are selling off the remaining awards for a fraction of their worth to make up for budget shortfalls.

In return for ready cash now, the states trade away the full value of damages to be paid over time. Thus, residents in some states may receive as little as 25% of the damages that they incurred through smoking, while attorneys and businesses could receive the other 75%.

Take Maryland. Lawyer Peter G. Angelos was given a contract to pay him 25% of the state’s damages, or about $1 billion. (Angelos recently agreed to accept the paltry sum of $150 million in fees.) Lt. Gov. Kathleen Townsend, who is running for governor, now has proposed selling off some of the remaining damages at 72 cents on the dollar. She is not alone. Fifteen other states have sold off these damages at discounts as low as 25 cents on the dollar.

This may be one reason why states are looking for new litigation prospects. State governments are crowding into courtrooms seeking damages for products ranging from paint to guns.

It is part of a new era of government revenue generation: seeking millions not in taxation but in litigation.

The result is a type of government ambulance chasing that would make the most hardened slip-and-fall lawyer blush.

For example, Rhode Island and other states have sued paint companies for their use of lead paint in public housing and government buildings.

The lawsuit suggests that the dangers from lead were known long before lead paint was banned. Yet this ignores the fact that the government had much of the same available knowledge and decided to use the paint anyhow. Moreover, the injuries to children in public housing were in part caused by a failure of the state in allowing walls to crumble without new paint or maintenance.

In California and other states, gun manufacturers are the designated defendants of the day.

State officials argue that gun manufacturers should be liable for violent crimes and should pay them hundreds of millions of dollars. One common claim is that these companies should have better monitored the use of their guns in crime and avoided selling to dealers responsible for such sales.

Once again, however, the question is the government’s own responsibility. The government could demand the same information and regulate gun licenses based on improper sales. It could also outlaw handguns.

There is nothing more dangerous than a politician short of cash.

Hope springs eternal in litigation lottery. The question is whether citizens will impose some discipline on their leaders and stop the litigation-liquidation cycle. First, however, they will have to catch them. These days, every sound of an ambulance siren can empty out an entire state Legislature.