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Study: ‘Virtually No Evidence’ Eminent Domain Increases Tax Revenue

There is “virtually no evidence” that the use of eminent domain for private redevelopment increases state or local tax revenue, and “some limited evidence” that the practice may even depress future tax revenues, according to a study by the Mercatus Center.

The study, conducted by economists Carrie Kerekes and Dean Stansel of Florida Gulf Coast University, builds on research conducted in the wake of the United States Supreme Court’s decision in the case of Kelo v. City of New London, in which the court “allowed the use of eminent domain to transfer property…for private benefit, not for public use.” (RELATED: Five Years After Kelo)

Eminent domain authority is derived “from the takings clause of the Fifth Amendment to the U.S. Constitution,” the interpretation of which has changed over time.

“The traditional interpretation of public use includes taking private property for the provision of public facilities and infrastructure,” the authors say, but through a series of court cases, the definition was expanded to include the transfer of property from private citizens to other individuals (including corporations), provided the government could justify the transfer as being of public benefit.

In the Kelo case, a homeowner attempted to prevent the City of New London from seizing residential property in order to make room for “a hotel and shopping center and research, office, and retail space to accompany a new facility for the pharmaceutical company Pfizer.”

The court ultimately ruled in favor of the city, claiming that, “eminent domain used for redevelopment results in increases in the tax base that, in turn, convey public benefits,” which according to the authors “implied that eminent domain can now be used to transfer private property from one private party to another for private benefit.”

Recognizing “the importance of secure, well-defined property rights for economic development,” Kerekes and Stansel were dubious about the court’s assertion, and set out to determine whether eminent domain activity truly has a positive correlation with subsequent revenue levels or growth.

To do this, they used state data to quantify eminent domain activity for the periods of 1998-2002 and 2005-2006, then examined “tax revenue levels in 2004 and 2008 and tax revenue growth from 2004 to 2007 and from 2008 to 2011,” allowing a two-year lag for the revenue effect to become apparent.

For both state and local governments, they find “no statistically significant relationship between eminent domain activity and the level of government revenue,” suggesting that eminent domain neither shrinks nor grows the tax base. (RELATED: Taxpayers May Bear Burden of Eminent Domain Scheme)

However, they do “find limited evidence of a negative relationship between eminent domain and revenue growth.” In terms of combined state and local revenue growth, they conclude that, “a one standard deviation change in eminent domain activity is associated with a decline in the three-year growth rate…of about 0.74 to 0.77 percentage points.”

One possible explanation for these results, the authors claim, is that “more expansive eminent domain powers undermine the security of private property rights,” making individuals “less likely to undertake capital investments as the threat of expropriation of property and physical assets increases.”

Another possibility is that, because “economic impact studies of new local developments are often plagued by double counting and the omission of opportunity costs…the subsequent impact on the local economy, and therefore on government revenue, is often much lower than anticipated.”

The anecdotal evidence from the Kelo case seems to support their conclusions, as “failed fundraising attempts and a lack of financing derailed components of the initial development plan.” As a result, the promised 3,169 new jobs and $1.2 million a year in tax revenues failed to materialize, and “the property at the center of this landmark Supreme Court case sits vacant.” (RELATED: This Week Marks an Unhappy Anniversary for Homeowners)

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