Policy Paper — TAKINGS: A Complicated Subject that Needs Careful Study

Part I: Background

The "takings" issue derives its name from the portion of the Fifth Amendment to the U. S. Constitution, which reads in part: "nor shall private property be taken for public use without just compensation." This clause not only states that government must compensate (pay) for property it takes for some public benefit (such as right of way for a new highway), but also establishes its right to do so (usually via the process known as "eminent domain").

As the term is used in the contemporary political context, the "takings" issue refers to the following question: Is compensation required only when all use of the property in question has been denied its owner, or is it also required in cases where only part of the value of the land has been reduced? To date, the Supreme Court has consistently ruled in the former manner, and has never ruled in favor of compensation for a partial taking.

A vocal minority of Americans, however, believes that compensation should be required for a partial taking. They argue that a partial taking has occurred, for example, when a piece of property has been "downzoned" (i.e., rezoned from a high income use such as commercial development, to a lower income use such as low density housing), and that they should therefore receive compensation. The courts have not agreed with this position and, Republicans for Environmental Protection believes, with good reason.

Starting in the 1990s, proposals have periodically been introduced into Congress to authorize property owners to be monetarily compensated if a government action reduces by more than a certain percentage the market value of their property. Some advocates would lower the bar to require compensation if even 10% of the value had been removed. Current practice, however, which has been reaffirmed by recent Supreme Court decisions such as the Lucas case in South Carolina, holds that compensation is needed only when all developmental possibilities for a parcel have been removed by a governmental action. Indeed, in April 2000 the U.S. Supreme Court upheld a lower court decision which said that even this test was not necessarily sufficient.

Is legislation authorizing compensation for partial takings a good idea? At first glance, it might seem so. But the issue is not as simple as it appears, and the potential effects of such an enactment are so far-reaching that they need to be well understood and debated in advance of initiating any Congressional action.

Part II: What are the Implications?

Let's consider a couple of typical cases. Suppose a city wishes to upgrade a local road into a major arterial. Houses in the expanded right-of-way will be acquired by eminent domain at fair market value, as stipulated by the Constitution. But there will inevitably be people whose existing homes will front on the enlarged highway. It will be easy for these owners to make a case that the new road will bring increased amounts of noise and air pollution directly into their front yards, resulting in an adverse affect on the market value of their homes. Under existing legal practice, the city would not be obligated to pay them compensation. Under the proposed legislation, it might.

Or, as another example, suppose you live next door to a vacant lot. The county decides to allow a hog rendering facility to be erected on it. Your neighbor just had a significant increase in his property value, but this governmental action reduces your property value. If a takings bill were in place, the hog fellows could have sued if denied their permit. Fairness would dictate that, because government action reduced your property value, you should also be able to sue. Thus, government would be able to take no action without always being confronted by lawsuits on takings claims, from one side or the other. Considering that the plaintiff's lawyers would collect between 33% to 50% of the recovery, takings bills are a dream come true for trial lawyers. Is this really something Republicans should be supporting?

If "takings" legislation passes and requires payments in such situations as this, many other questions will arise. Here are some considerations citizens and lawmakers alike should think about in this context:.

• The costs are potentially staggering. In the scenario described above, there will probably be hundreds of homeowners who find their homes fronting directly on the expanded road. If they are all deemed eligible to receive compensation for the partial loss of value that they suffer, the bill to the local city or county will be in the tens of millions of dollars, including vast litigation expenses. In the 1970s, a state law was passed in California which required local zoning to conform with general plans. Achieving this goal, which prevented much urban sprawl and over-development, required downzoning large areas in almost all California cities and counties. But this downzoning, where it occurred, may have reduced land values. Had the proposed "compensation for partial takings" law been in effect at the time, the cost to local governments statewide would have been in the billions of dollars.
  
  
• It goes without saying that "the cost to local governments" really means "the cost to taxpayers." If Congress passes a "takings" bill, we taxpayers will have to pick up the billion-dollar compensation price tags in our local property and sales taxes. REP finds it ironic that at a time when so many elected officials are championing reducing taxes, many of the same politicians support "takings" legislation that would require increased tax revenues.
  
  
• However, local governments will naturally be hesitant to take actions that run a compensation risk. If Congress approves a "takings" bill, the new arterial highway described above will probably never be built. Neither will airports, trash-handling facilities, or anything else that could have the effect of reducing nearby property values. The ability of government to perform its necessary public health, safety, and welfare functions would be seriously hampered.

The "takings" issue raises other interesting questions as well...

1. If it is right to pay landowners for actions that reduce the value of their property, does it really matter who it was that took the action?
   
   Suppose, for example, that instead of an arterial highway, the project is a high-voltage transmission line. Should the local utility company be required to pay compensation for reduced value to nearby properties?
   
   Or suppose that the new project is a noisy factory. Should the private company pay compensation for the reduced value to nearby homes? Should the private sector be treated any differently than the public sector in this regard?
   
   Or, to personalize it, if you like to throw noisy late-night parties, should your neighbors have the right to demand compensation from you for reduced property value?
   
   
2. And why should the general public interest be ignored?
   
   Unwise development destroys property we all hold in common: air, water, fisheries, wildlife. Why, under a partial takings law, shouldn't individuals be able to sue developers, corporations, etc., for their share of damage caused to property held in common, such as air, water, and soils? If a fish goes extinct because of a development project or timber cut, isn't that a taking of the public's property.
   
   It seems clear that if any legislation to compensate for partial takings were to be passed by Congress, a very scary precedent would have been established.

Part III: What About the Reverse?

The "takings" bills that often are proposed in Congress would compensate landowners from government actions that reduce the value of their investments in land. But what about protection from losses in other kinds of investments resulting from government actions? The government, for example, frequently changes interest rates, which directly affects the value of public and private securities. If such an action reduces the value of an individual's stock portfolio, should he or she be compensated for the loss? Why should investors in real estate receive special remunerative umbrellas that investors in other areas do not? Landowners have no constitutionally guaranteed right to upzonings.

Does it make fiscal sense for the compensation requirement to be unidirectional? In other words, if a government action which diminishes property values requires a payment from the government to the landowner, should a government action that greatly enhances property values require a payment from the landowner to the government?

In the earlier highway example, property near an improved intersection may be upzoned to commercial uses. Should the property owner pay for this land value windfall? This concept, known as an "upzoning-downzoning revolving fund," is not a new idea. It merely suggests that compensation for changes in land values should be two-directional, and suggests using windfall profits from upzonings to pay for property value lost due to downzonings.

Part IV: Recommendation:

Republicans for Environmental Protection urges Congress to reject all "Compensation for Partial Takings" bills.

One certain result of the passage of a "compensation for partial takings" bill would be an increase in litigation, posing a further burden on taxpayers and further reducing the likelihood that governments would undertake needed community improvements. Since most suits would be settled in a manner not involving compensation, the only real monetary winners would most likely be the lawyers.

REP America believes that "compensation for partial takings" legislation is generally unwise, and would be potentially an unacceptable burden on taxpayers. The courts, in decisions going back to at least 1922, have noted that government would be hard-pressed to function normally if compensation were required any time a decision had an adverse effect on property values. Only in cases where all developmental value is removed, the courts have said, should compensation be required. This basic philosophical position has been upheld by many court opinions over the years, and was not fundamentally altered by the Lucas case.

There are many reasons why over 75 years of court decisions have consistently seen no wisdom in radically altering longstanding American practice in the area of compensation. REP America sees no compelling reason to alter it now, or to question the Supreme Court's rulings.

We oppose all "compensation for partial takings" legislation.