Tuesday, June 28, 2005

Eminent Domain - A Loophole for the Taxers

In the Kelo decision last week, the Supreme Court ruled that government could expand the definition of “public use” and more easily claim properties in eminent domain cases.

Forget the boring legal and constitutional ramifications, let’s examine the economics.

Don’t let anyone tell you otherwise, but today eminent domain is all about that nexus between politics and economics – TAXES.

Why would local or state legislatures stomp all over property rights? On its face, such action would seem to be political dynamite, but the pols see potential budgetary cuts as the far worse political risk to bear.

Whether it is sports arenas, “big box” retailers, luxury condos, or other commercial development, local politicians view economic development as a vehicle to higher tax revenue and less political heat come budget time. To many, it is not a tough sell to argue that eminent domain grabs serve the greater good at the expense of a few property owners.

Of course the critics clamor about the constitutional rights of private property and invoke the “slippery slope” warning. What will stop local governments from expanding eminent domain to condemn just plain old ugly homes? Or low taxpaying businesses on main streets?

For one thing, I hate slippery slope arguments. Censorship-phobes use it to decry any standards for television content, even on channels that broadcast over government granted spectrum. Here in Charlotte, slippery slope is being used to thwart the bar/restaurant smoking ban. Prominent radio personality Jason Lewis warns, “What’s next? Kicking out beer drinkers…..” I love Jason, but that is ridiculous.

I am not categorically dismissing all “slippery slope” arguments, I just think that they are too oft abused and are lazy scare tactics that muddle or even ignore important contextual issues. For instance, in Jason’s opinion, it should be up to individual bar owners to determine whether or not smoking is permitted. Consumers via their free market choices would then determine what restaurants should do. Heck, I am as big a free market advocate as Jason Lewis, but this just isn’t consistent with existing laws and regulations.

Lewis’s argument ignores the fact that bars are already extremely regulated. They can’t serve minors, stay open all night, can’t have rats in the kitchen, and most onerous of all, they need a liquor license. In some places, such as Boston, licenses are extremely expensive, hard to get, and such barriers to entry preclude any claims of a free market in the bar/restaurant business.

I was at a bar downtown recently when a couple of other customers lit up cigarettes near me. Fortunately the bar was empty and I just moved away from the smoke. But the pregnant bartender had no such recourse. She was hanging at the end of the bar, as far away as she could possibly get. So while there are laws granting disability and maternity leave (10 weeks paid) for other pregnant workers, in Charlotte pregnant bartenders have to work in a smoke filled environment. Allowing smoking in bars is just inconsistent with other laws already on the books. Ultra free-marketers would be wise to inveigh against other more prohibitive regulations.

I am no fan of the Kelo decision, but I think that many people don’t realize how limited private property rights already are. In some tony Long Island towns you can’t get an above-ground pool or even hang your wash outside on a clothesline. I believe some towns limit Christmas light displays, all in the name of road safety (seriously). What about property taxes? If you truly owned the land, why must you pay ever escalating (they will get worse) property taxes?

I know a guy who finished his basement in a New Jersey development. Someone must have noticed through that small cellar window and he was reported for breaking a local ordinance. Property owners often need permits to cut trees down or build fences above a certain height. People that buy homes in historic districts of New York City have to get all remodeling plans approved by the Landmarks Commission. And forget about making a new window or altering the exterior.

Real private property is a nice CONCEPT, but in reality that is all it is.

As I alluded to previously, government agencies are like octopi and no where is this more accurate than in describing taxing authorities.

Taxers (federal, state, and local agencies) are in a constant battle with free market capitalism. They throw a tax out there and taxpayers adjust by buying less, moving, innovating, or any other means possible.

Economically illiterate and lazy politicians feel they have to constantly find ways to generate tax revenue because God forbid they had to cut spending or seek out more efficient government. Here in Charlotte they have several ambitious projects: a new arena, commuter rail, huge interstate highway proposal, NASCAR Hall of Fame, etc. When the issue of cost comes up, the immediate response is “we’ll tax rental cars and hotels….”

I just rented a car in Boston and was hit with at 20% rental tax (25% total including sales tax). It was almost $400 to rent a car for 5 days. I will never do that again, and I am sure that only the dumb, desperate, or very rich would rent a car up there more than once.

The same goes for hotels. Here in Charlotte, big companies have all sorts of corporate housing arrangements that circumvent these taxes. So politicians constantly have to come up with new taxing schemes.

The latest new scheme in North Carolina is to tax “SUVs” just as they recently tried unsuccessfully in Connecticut. It is all about semi-socialist lawmakers trying to use the wedge of class warfare to create a new source of tax revenue. They meekly argue that SUVs are heavier and cause more wear and tear on the roads - but what they fail to address is that SUVs already pay tons more in gasoline taxes, which accrue on a per gallon basis and thus fall mostly on "gas guzzlers". Based on fuel efficiency, Toyota Camry owners pay half the gasoline taxes of Ford Explorer owners and one third that of Hummer owners. But heck, if politicians can get SUV owners to pay more.....that is one less after-school program they have to cut.

Why do politicians try to tax car rentals, hotels, SUVs, tobacco ????

The simple answer is because THEY CAN.

Not many local constituencies are fearful of the aforementioned taxes. To the public, they are a tax on outsiders, a veritable white knight to politicians.

Why are cigarettes so heavily taxed? Politicians will say that smoking related healthcare costs are a burden on state Medicare and Medicaid budgets. But instead of drastically reducing the healthcare options available to smokers, politicians elect to tax current smokers. Tobacco tax revenues go into the general coffers of the states and may or may not find their way to helping Medicare and Medicaid – that is if they don’t get usurped by mismanaged public schools or a football stadium. This is a revenue grab, pure and simple. If golf became politically incorrect tomorrow, they’d start taxing tee times, drivers, hot dogs at the halfway house, and if possible they would tax curse words uttered after bad shots.

The Kelo ruling is a definite short term victory for the Taxers. It will embolden politicians to forge ahead with aggressive tax boosting developments. But what good are stadiums and convention centers if nobody wants to live in those high tax locales? And how good of a contrary indicator will this be that in 2005, politicians were given the green light on real estate investment? Time for everyone else to sell? It smacks of the Clinton Administration suggesting that some of the Social Security "trust fund" be invested in the stock market - in 1999. That was some great timing as well.

Who knows, it may turn out that this ruling becomes a great catalyst for change on the Supreme Court. Kelo can always be reversed.

But in the interim, I see no doomsday scenario here. Taxers have proven no match for free market capitalism.

Just take a step back and look what is going on. Bostonians drive to New Hampshire to buy lower taxed liquor, businesses move just outside of the Philadelphia line to avoid the city-wage tax, budding retirees buy their investment/retirement homes in Nevada and Florida where they'll enjoy no state income taxes, and naïve young people pile on deductible mortgage debt.

Many cities and towns are technically already bankrupt from public pension liabilities so taxes will only go up. Read this from anti-Businessweek. I haven't fisked it yet so Caveat Reader.

Here is my nominee for the Supreme Court opening.


Anonymous said...


WEARE, N.H. - Following a Supreme Court ruling last week that gave local governments power to seize private property, someone has suggested taking David Souter's New Hampshire farmhouse and turning it into a hotel.

"The justification for such an eminent domain action is that our hotel will better serve the public interest as it will bring in economic development and higher tax revenue to Weare," Logan Darrow Clements of California wrote in a letter faxed to town officials in Weare on Tuesday.

CaptiousNut said...

It would be the perfect retort.

Anonymous said...

Let's face it, turning Souter's farmhouse into a hotel is a nice FANTASY. But it ain't gonna happen. It doesn't take a rocket scientist to see that. The hipocrits rule.
I agree with your description of politicians as financial illiterates. Very accurate. They have no imagination and the American public is oblivious, anyway.
Keep up your very good analysis. I enjoy it. You are very articulate.