This was originally posted on James Magazine Online.
Georgia businesses and homeowners are at risk of higher property taxes because of unlimited municipal liability set forth in Georgia’s laws.
Tort liability is not something that most people connect to higher property taxes but Georgia, unlike many other states, does not have a limit on the amount of damages that can be assessed against a city. When it comes to tort damages, the state protects itself and counties from excessive jury verdicts, but state law doesn’t protect Georgia’s 537 cities nor protect the businesses and property owners who live in those cities.
While much has been written about excessive jury verdicts in Georgia and the effect of those verdicts on businesses and insurance companies, less has been said about the potential exposure of cities and city taxpayers. In fact, Georgia has been designated a “judicial hellhole” by the American Tort Reform Association for its nuclear verdicts, awarding of “phantom” damages, and lack of caps to protect businesses and taxpayers as provided by many other states.
In discussing Georgia’s current tort liability system, and the magnitude of some recent judgments, some commentators have referred to the “tort tax” in Georgia and its effect on businesses and consumers
In the case of cities, the effect of Georgia’s tort system is an actual tax (without quotation marks), and more specifically it’s a property tax.
When someone is injured because of the negligence of another person, the injured individual deserves compensation. But the compensation must come from somewhere, and in the case of injuries caused by governmental action, the compensation comes from taxpayers.
Georgia has addressed this fundamental fact in the case of state employees and state action with the “State Tort Claims Act.” That law provides that injured individuals will receive compensation for their injuries, but the law limits the recovery to no more than $1,000,000 per person and no more than $3,000,000 per occurrence. Those limits are reasonable, and they strike a balance between the need to compensate the injured but also protect the taxpayers.
In the case of cities, there is no similar limitation.
If a person is injured because of the actions of a government employee or because of some other governmental action, there’s no logical reason the amount of tort damages should be different whether the government was the state or a city. In every such case, the person received the same injury, and the taxpayers are the ones absorbing the claim. However, that inequity in law currently exists and unfairly punishes residents and businesses within cities, for identical claims that are otherwise capped for the state itself.
In the case of cities, if a judgment exceeds the limit of liability of insurance, the city must fund the balance of the judgment from general city funds, which are typically derived from ad valorem property taxes. And if the judgment exceeds the city’s reserve funds, the city will have no option but to raise the property tax rates and cut services to cover the excessive judgment.
Georgia cities are not sounding the alarm about a hypothetical scenario. Cities have been hit with judgments in the tens of millions of dollars range, while they typically only carry one or two million dollars in liability insurance. Even if cities could get higher limits of liability, and it is doubtful they could because of the current insurance environment, the premiums would far exceed the city’s budget for insurance, which means the city would have to raise property taxes to pay for insurance.
The General Assembly could address this inequity by capping liability for municipalities like the State Tort Claims Act which protects the state and state taxpayers.
The state has over $16 billion in its reserve fund, and yet the state has protected itself from excessive tort claims. Even though cities almost always operate with reserve funds, no city in Georgia has that kind of reserve fund and, in fact, all 537 Georgia cities combined don’t have that kind of reserve fund.
Additionally, unlike private businesses with excessive judgments that have the option of filing for bankruptcy protection, a Georgia city cannot file bankruptcy. Georgia cities, after depletion of their reserve funds, only have property owners to collect a tax from to pay the judgment or significant reductions in services, each of which would severely impact families and businesses. Surely neither tax increases nor reductions in services are something the General Assembly would support.
The injured deserve reasonable compensation for their injuries, but someone needs to be looking out for the taxpayer. If Georgia is to retain its well-deserved standing as the No. 1 state for business, tort reform must be addressed. The $3 billion in jury awards in the past six years in Georgia is not sustainable for the state’s businesses and local taxpayers. It is completely irrational for a zip code or jurisdictional boundary to be a determining factor in the award of damages.
In the 2025 session of the General Assembly, legislators can protect the taxpayer by adopting a cap on municipal tort liability with other tort reforms being considered.