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Should Decreases in Property Value Caused by Regulations Be Compensated?

Abraham Bell

May 2009, English

Ideally, government could recoup the benefits of land use planning and redistribute them to those who bear the costs. In this case takings compensation is justified. Given the reciprocal nature of the matter, would it be sensible to argue against compensation for takings when there is no recapture of the benefits of givings? Abraham Bell analyzes this subject and concludes that arguments for paying compensation for regulatory takings are compelling.

Bell first examines the economic justification for expropriation compensation to draw parallel lessons for the analysis of regulatory takings. Three arguments in favor of eminent domain compensation are (1) to keep government from underestimating the costs of takings; (2) to negate potential opposition from propertied interest groups; and (3) to minimize the risk of corruption. Bell claims that these arguments can also support paying compensation for regulatory takings.

Second, it is hard to argue against compensation for regulatory takings when there is consensus on the compensation requirement for eminent domain. For instance, if compensation were required for the use of eminent domain but not for regulatory takings, local governments would rely more on regulation than on property expropriation to manage land use, even when expropriation is more efficient. This fiscal incentive can generate distortions. In addition, when real estate owners are not charged for public givings, paying compensation to owners of condemned property but not to those whose assets lose significant economic value due to government regulation raises issues of unequal treatment.

Third, Bell suggests that property taxes can be treated as both a taking compensation and a giving charge if the effects of land use regulation are fully capitalized in property value. The positive effect of regulation (givings) will increase property value and thus result in higher tax payments (giving charge). Similarly, a taking reduces asset value, which in turn lowers property tax liability. Yet property taxes are generally a small percentage of asset value, and tax reductions compensate only a small percentage of takings. If capitalization is weak or absent, property taxes will become even less compensatory. Bell therefore argues that property taxation cannot provide a strong reason for not compensating owners for regulatory takings.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2008 and is Chapter 10 of the book Property Rights and Land Policies.