Takings and Tax Revenue: Fiscal Impacts of Eminent Domain

This paper provides the first examination of the relationship between eminent domain activity and the growth (and level) of state and local revenue. We restrict our attention to takings that are for private use, such as the one that led to the landmark Kelo decision in 2005.

The United States Supreme Court decision in Kelo v. City of New London in 2005 sparked outrage around the country. In this decision, the US Supreme Court allowed the use of eminent domain to transfer property in New London, Connecticut, for private benefit, not for public use as set forth in the takings clause of the US Constitution. This case focused the attention of citizens, politicians, and academics on property takings. The general public expressed concern that homes, churches, or other properties can now be expropriated on the grounds that redevelopment could decrease unemployment and increase government tax revenue.

Many regarded the Kelo decision as an abuse of government power and a threat to liberty (Benson 2010; C. Cohen 2006; Lopez, Kerekes, and Johnson 2007). Politicians scurried to reassure troubled voters by examining, and in some cases modifying, state constitutional constraints on the use of eminent domain. Academics published articles that chronicled eminent domain abuse (Berliner 2006), scrutinized state takings for private benefit (Kerekes 2011; Lanza et al. 2013), and analyzed state reforms in the wake of the Kelo decision (Lopez, Jewel, and Campbell 2009; Lopez and Totah 2007; Sandefur 2006a; Somin 2007, 2009).

This paper is an extension of a study that emerged from this literature. Turnbull and Salvino (2009) were the first to empirically examine the relationship between eminent domain for private benefit and the size of state and local public sectors. The purpose of their paper was to test the Leviathan hypothesis proposed by Brennan and Buchanan (1980). This argument states that broader eminent domain powers (i.e., allowing governments to use eminent domain for redevelopment in order to increase employment or to increase the tax base) provide state and local governments additional means through which to increase their overall size. In effect, the 2005 decision in Kelo weakened a constitutional constraint on government size. As a result, state and local public sectors may increase in size.

We utilize the Turnbull and Salvino (2009) model and extend it to investigate the effects of eminent domain from a different angle. The Kelo ruling allows the compulsory transfer of property between individuals based on the claim that eminent domain used for redevelopment results in increases in the tax base that, in turn, convey public benefits. Our question is whether such applications of eminent domain will actually increase revenue. As we discuss below, if more expansive eminent domain powers undermine the security of private property rights, eminent domain for private benefit may cause the tax base to shrink as a result of decreases in private investment. In addition, redevelopment takings may also affect government revenues through potential increases in rent-seeking behavior. Given the significant potential negative consequences that arise when government undermines property rights, it is worth investigating whether eminent domain for development purposes actually generates the additional government revenue it is purported to create.

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