July 05, 2005

Taxation and Takings: Lessons from the Kelo Case

Last week's Supreme Court decision affirming the right of the government to take private property for public purposes has drawn a lot of attention--but a lot of the outcry over this case is a bit overblown. Here's a brief take on what's good (and bad) in the Kelo decision.

What it's about:
New London, CT is a pretty economically depressed place. Its military base closed in the 90s, its unemployment rate has been about twice as high as the state average. So right around the time that Pfizer decided to build a new plant on the site of the old military base in 1998, the city decided that they'd try to kick start the local economy by implementing an ambitious economic development strategy centered around a big new multi-use development. Retail, residential, parks, a marina, all in one big monolithic site next to the new Pfizer plant. The city developed a plan for the location of the planned development and started buying up property from the current owners. A dozen or so people (mostly owner-occupied residential, plus a couple of investment properties) refused to sell, so the city used its eminent domain powers to condemn the properties, paying the owners the fair value of the properties.

The property owners filed a suit against the city. Their argument was that the city's eminent domain power (that is, their power to take away private property and reimburse the owners) cannot be used for the purpose of economic development. In particular, they argued that the 5th Amendment of the US Constitution, which says that "private property [shall not] be taken for public use, without just compensation," means something other than economic development when it says "public use."

What the decision says (relevant page numbers in parentheses):
1) The properties being condemned in this case are not "blighted" in any sense. They're being taken only because they're located in the place where the city wants to develop. (p.4-5)
2) Takings are clearly not permitted under some circumstances (like when you're simply shifting ownership from one private person to another in a way that only benefits the recipient of the property), and are clearly permissible under other circumstances (like when private properties are taken to help build a public highway or railroad that benefits almost everybody). In between, you've got a fuzzy area where private people benefit from the taking, but a public benefit also exists. (p.6)
3) The City of New London clearly had a "carefully considered" plan for economic development in mind when they did these takings. And there's no evidence that this plan was designed to benefit any particular individual or company. One of the tests the Court has used to identify unacceptable economic development-oriented takings in the past is whether the plan "was adopted...'to benefit a particular class of identifiable individuals,'" so the City's plan passes this test. (p.7-8)
4) The City's proposed development would be only partially available for "public use." But that doesn't matter: the "'Court long ago rejected any literal requirement that condemned property be put into use for the general public.'" What the Court actually looks at is whether the taking is designed to achieve a "public purpose." So all that really matters in this case is whether the City's plan actually serves a "public purpose"-- and the Court has a policy of deferring to legislative judgment about what constitutes a public purpose. (p.8)
5) In a 1954 case, Berman v. Parker, the Court upheld an economic development taking in Washington DC. The area being reclaimed was pretty blighted, but a department store owner whose property was not blighted at all sued. The Court said the taking was legitimate because it doesn't matter how the plan affects any individual person. All the Court can do is to ask whether the legislature enacting this plan was acting to achieve some "public welfare" goal. And in DC, they clearly were. (pp.10-11)
6) In a 1984 case, Hawaii Housing Authority v. Midkiff, the state legislature decided that property wealth was too concentrated in a few hands-- and took away property from rich landowners and transferred it to poorer Hawaiians. The Court said this was OK even though it was a transfer from one private party to another, because "the State's purpose of eliminating the 'social and economic evils of a land oligopoly' qualified as a valid public use." In fact, the Court said, it didn't matter at all who the property was being given to at all as long as there was a good reason for it: "it is only the taking's purpose, and not its mechanics" that matter in evaluating whether there's a public use involved. (p.11)
7) The City of New London decided that the city was economically distressed, and the Court is not gonna second guess them on that goal. The City also put together a comprehensive plan for revitalizing the economy. Since their well-thought-out plan for doing so "unquestionably serves a public purpose," the plan does not violate the Constitution. (p.13)
8) The slippery-slope argument being made by the other side-- that this case opens the door for takings that are designed to benefit private individuals, but are disguised to look like public benefits--doesn't need to be addressed now, because that's not happening in this case. (especially lame paragraph on pp.16-17)
9) When the legislature's stated purpose for a taking is "economic development," we can't expect them to prove that the desired development will occur. That goes against the Court's tradition of deferring to legislative objectives, and would simply not be possible anyway in some cases. (How can you prove that a plan will work before you try it?) (pp.17-18)
10) If this decision seems insufficiently protective of private property rights, states can always take action to limit takings-- and many states have. In the meantime, the Court will continue to think just about one technical thing: whether a given taking achieves a "public purpose." (p.19)

What's bad: The Kelo case does create the potential for a slippery slope leading to backroom deals between lawmakers and developers. To satisfy the constitutional conditions set out in Kelo, all a crooked city council member would have to do is to put together some sort of fake "grand plan" for economic development built around their land grab, and take some steps to make it look like the bidding process for the development is fair when it's not. As long as they can plausibly describe this land grab as achieving a public purpose, it's constitutional. And that's worrisome.

Of course, that's not what's happening in the Kelo case at all. The city was in a bad way economically, and city leaders came up with a plan to create jobs. And the court seems to believe that you couldn't tell ahead of time which developers would benefit from the plan.

And you'd sure like to believe that the public would be able to sniff out this sort of backroom dealing when it happens. As long as the public and the media are even mildly vigilant about this sort of thing, the nightmare scenarios envisioned by opponents of this decision are unlikely to emerge.

Of course, the potential for back-room deals still makes me nervous. It seems at least technically possible that local governments could take one person's property away and give it to another more favored constituent for no real public reason. And it's also quite possible to imagine government taking properties away simply because the government thinks they could be more productive in other hands (paving your home over to build a Walmart, for example).

But at the end of the day, you have to trust that local politics (and local media) can work this sort of thing out. If the evil developers can push truly bad deals through in the 21st century, then local media and local voters are to blame-- not the Supreme Court. I have no faith in the ability of my local news channel to say anything sensible about whether Bush was lying about WMD's-- but you know they're gonna do a bang-up job covering some kid who fell down a well. And an 85-year-old widow getting evicted from her home to build a golf course is exactly the sort of human interest story that local news will eat up.

What's good: Two things.
#1: The Court is doing exactly what it ought to do--keeping its hands off state policy decisions. Starting from the sensible perspective that the Court should defer to state decisions about what policy choices serve the public welfare, all the Court had to do was to convince itself that the elected officials of New London had some reasonably well developed plan in mind when they did this taking.

So it's fine to be mad about the abuses that could result from the Court's decisions, as this guy is. But that's not the sort of thing the Court can really worry about until it happens. Which is basically what Stevens' opinion says in point #8 above.

#2: This case highlights the fact that governments have a real claim on their citizens' property. "Private property" only exists because government protects it. So if we owe the existence of our property to the effectiveness of our government, our right to that property is not absolute-- it's contingent. We owe something to our government, which is where taxes come in.

Of course, taxes and takings are very different things. A 1% property tax rate on your home is a lot less punitive than simply having your home taken away from you. But these two kinds of government action are based on the same basic principle: government needs resources to operate, and uses them to provide public services.

Governments exist to provide public benefits. And while there is tension between the unrestricted ownership of private property and the provision of these public benefits, the sort of takings being done in New London seem well within the bounds of what's permissible.

And who knows-- maybe the anti-tax loons out there will look at this case and realize that taxes can actually be a pretty good deal compared to takings...

A question for another day: is there any inconsistency between this decision, which says local governments can take property away in the name of economic development, and the Cuno case, which says (to oversimplify) that state governments cannot offer corporate tax breaks in the name of economic development?


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