October 17, 2014

Does Eminent Domain Even Raise Revenue?

Dean Stansel

Research Associate Professor, O'Neil Center for Global Markets and Freedom, Southern Methodist University
Summary

Proponents of eminent domain for private development -- i.e., of forcibly taking private property and giving it to another private party -- claim it will generate more revenue for state and local governments. The Supreme Court even based its landmark 2005 case Kelo v. City of New London on this assertion, holding that the alleged economic benefits for communities legally justify these takings as "public use."

Contact us
To speak with a scholar or learn more on this topic, visit our contact page.

Proponents of eminent domain for private development -- i.e., of forcibly taking private property and giving it to another private party -- claim it will generate more revenue for state and local governments. The Supreme Court even based its landmark 2005 case Kelo v. City of New London on this assertion, holding that the alleged economic benefits for communities legally justify these takings as "public use."

The claim that eminent domain leads to higher revenues has largely gone unchallenged. We recently examined the available data, and our study finds virtually no evidence that eminent-domain activity for private development is associated with higher government revenue. To the contrary, we find some evidence that eminent domain is associated with lower growth of government revenue in the future.

In other words, governments' primary justification for taking property from private owners like Susette Kelo and transferring ownership to big companies like Pfizer is based on faulty assumptions. In fact, the redevelopment plan for which Ms. Kelo's house (and those of her neighbors in New London, Conn.) was taken never happened. The land was actually used as a temporary dump for storm debris in the aftermath of Hurricane Irene in 2011.

Confiscating someone's home or business and using the land as a dump is an egregious property-rights violation. Even if eminent domain for private development did achieve the objective of producing higher revenues for state and local governments, it would be an abhorrent activity. However, it also has serious negative implications for the future economic prosperity of the community.

Private-property rights are the foundation of a successful market economy. Any encroachments on private-property rights -- like eminent domain -- hamper economic growth and result in lower standards of living than we would otherwise enjoy.

For example, in countries like Cuba and North Korea, where private-property rights are very insecure, entrepreneurs are less willing to invest in the new machines and equipment they need to expand their businesses. Individuals in these countries have a reasonable expectation that any machinery or equipment, or overall business or land itself, may at some point be taken from them by government predation or by individual criminals.

Fortunately, property rights in the United States are relatively secure -- but things are heading in the wrong direction. The Fraser Institute publishes an annual index that ranks countries according to their economic freedom using data in five areas: size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation. In the recently released 2014 Economic Freedom of the World report, the United States fell to 12th, down from the second spot in 2000 and the seventh spot in 2008. In the area of "legal system and property rights," the United States fell all the way to 36th.

Our study's findings confirm that policymakers and the public are right to be skeptical of attempts to justify the seizure of private property with the promise of future financial windfalls. In reality, these encroachments may hamper economic growth and lead to lower standards of living for more than just those who have lost their homes or businesses.