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Supreme Court Tramples Property Rights

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
June 28, 2005

IN THIS ISSUE:

1.  Property Rights In The Crosshairs

2.  Implications Of The “Kelo” Decision

3.  Is This What The Founding Fathers Intended?

4.  Could Your Church Be Condemned?

5.  Taxes And Other Liberal Justifications

Introduction

There are few things so dear to Americans as the right to privately own property.  Private property ownership has always allowed us the security of being able to live in our homes without fear of them being taken away by the whims of a totalitarian government.  At least, that was the case until last Thursday.

In a controversial 5-4 decision sure to send ripples far into the future, on June 23rd the Supreme Court greatly expanded the concept of “eminent domain,” much to the chagrin of conservatives, and in fact, even many liberals.  In the Kelo vs. City of New London, CT case, the Justices ruled that it is lawful for a governmental entity to condemn a neighborhood in order to make the land available to private developers for the purpose of building commercial facilities, office parks or even a condominium complex.

As a result of this monumental decision, the issue of property rights has been turned on its head.  While governmental entities have always had the right of eminent domain, the rule of law has been that it must be for a greater public good, which was generally understood to be something like roads, schools, fire or police stations, etc.  The significance of this latest ruling is that it has greatly expanded the definition of “public use” to the extent that virtually any property could be subject to condemnation proceedings by an aggressive governmental entity.

In this week’s E-Letter, I’m going to discuss the historical development of the concept of eminent domain, and how the Supreme Court’s latest ruling affects long-held legal traditions.  I will also relate how this ruling could eventually lead to ever more intrusive government at all levels, showing how important it is that strict constitutionalists be appointed to fill any vacancies in the Supreme Court.

The 5th Amendment

Whenever most of us think about the 5th Amendment to the Constitution, we usually relate it to the clause against self-incrimination, or “pleading the 5th” as we hear on the TV detective shows.   However, the 5th Amendment also contains something known as the “Takings Clause,” which restricts the government’s right to take private property.  The Takings Clause includes the following:

“…nor shall private property be taken for public use, without just compensation”

The right of a government to access private property for the public good has been an inherent right on the part of government since English common law.  Yet contrary to what many believe, the 5th Amendment doesn’t grant the right of eminent domain, it restricts it.  The 5th Amendment provides that eminent domain should not be abused by stating that the taking of private property must be for a legitimate public use, and the property owner must be adequately compensated.

As noted above, when most people think of the exercise of eminent domain, we usually think of such public purposes as roads, bridges, schools, police or fire stations, parks, etc. where title to the land moves from private ownership to a governmental entity, usually a municipality.  If you have ever been on a rural county road that zigzags back and forth (to follow the property lines), and you wondered why, this is an example of eminent domain in action.

This common-sense interpretation of public use began to change in 1954 when the Supreme Court ruled that “blighted” areas (read “slums”) could be torn down if a local government had a better public use for the land.  Soon afterwards, cities began to declare areas to be “blighted” left and right so that “urban renewal” could occur.  

At first, blighted areas were replaced with parks or other government-owned facilities the public could use.  Over time, however, local governments began to use eminent domain to condemn property in order to make it available to private developers.  In other words, land was seized from low-income individuals and sold to private developers who would not only clean up the perceived mess, but more importantly, would build a development with the promise of leading to significantly more tax revenue in the future for the local government. 

Thus, with the tax genie out of the bottle, it was only a matter of time before municipalities and other governmental entities started to condemn even non-blighted areas if they felt it would result in economic gain.  After all, residences only produce property tax revenue, while businesses usually produce property taxes and sales taxes.  So there is a great incentive for government to seize private property and sell it to developers.

How The Court Ruled

The 5-4 decision on Kelo came down as follows.  All four liberal-leaning justices – Stevens, Bryer, Souter and Ginsburg - voted in favor of New London and against the homeowners.  This may come as a surprise since the liberal judges have a reputation for voting in favor of the little guy and supporting civil rights.  In this case, the confiscated property will be handed over to developers who plan to build retail shops, restaurants, a hotel and condominiums.  Oh, and there will also be a new office tower which will be the new corporate headquarters for Pfizer, the pharmaceutical giant.

All three conservative-leaning justices – Rehnquist, Scalia and Thomas – voted against New London.  That left the two protean justices – O’Connor and Kennedy.  O’Connor voted against New London, and Kennedy voted against the homeowners, thus giving a 5-4 ruling in favor of New London.  As I will discuss below, the Kelo decision illustrates why it is so important to have strict constitutionalists (read: conservative) justices on the High Court.

In the majority opinion, Justice Stevens indicates that the Court’s decision simply extends its past interpretations of the “Takings Clause” over the years.  However, both Sandra Day O’Connor and Clarence Thomas issued dissenting opinions that express that the Court had gone too far in its interpretation, leaving the Takings Clause now open for abuse.  In a strict constitutionalist moment, Justice O’Connor wrote:

“Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random. The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms. As for the victims, the government now has license to transfer property from those with fewer resources to those with more. The founders cannot have intended this perverse result.”

Public Use Vs. Public Purpose

The key question presented to the Supreme Court Justices was whether the promise of jobs and an increase in tax revenue alone would justify the use of eminent domain.  As noted above, Kelo was not about roads or schools, but rather about retail and commercial development that will be privately owned.  The only “public” benefit that would be gained (assuming you don’t consider another Starbucks a public gain) would be an increase in tax revenue for the City of New London.

As noted above, the 5th Amendment relates to public use, which anyone would think means that land obtained by eminent domain would be owned by the governmental entity and used by the public.  However, beginning as early as 1896, the “public use” clause started to evolve into the current “public purpose” criterion.  Over the course of time, the Supreme Court has widened what is considered to be an allowable public purpose to the extent that, now with the Kelo decision, public purpose includes merely the promise of jobs and tax revenue.

In an eloquently worded dissent, Justice Thomas not only disagrees with the Kelo decision, but says that the Court should review the previous decisions that have led to a liberal definition of “public use.”   While he cites the cases that led to the Court’s liberalization of the Takings Clause, he also refers back to the intentions of the Framers of the Constitution, as well as other court cases where the sanctity of private property ownership was upheld.  He says:

“The Framers embodied that principle in the Constitution, allowing the government to take property not for ‘public necessity,’ but instead for ‘public use.’ Defying this understanding, the Court replaces the Public Use Clause with a ‘Public Purpose’ Clause, (or perhaps the ‘Diverse and Always Evolving Needs of Society’ Clause), a restriction that is satisfied, the Court instructs, so long as the purpose is ‘legitimate’ and the means ‘not irrational.’ This deferential shift in phraseology enables the Court to hold, against all common sense, that a costly urban-renewal project whose stated purpose is a vague promise of new jobs and increased tax revenue, but which is also suspiciously agreeable to the Pfizer Corporation, is for a ‘public use’.
I cannot agree. If such ‘economic development’ takings are for a ‘public use,’ any taking is, and the Court has erased the Public Use Clause from our Constitution, as Justice O’Connor powerfully argues in dissent. I do not believe that this Court can eliminate liberties expressly enumerated in the Constitution and therefore join her dissenting opinion. Regrettably, however, the Court’s error runs deeper than this. Today’s decision is simply the latest in a string of our cases construing the Public Use Clause to be a virtual nullity, without the slightest nod to its original meaning. In my view, the Public Use Clause, originally understood, is a meaningful limit on the government’s eminent domain power. Our cases have strayed from the Clause’s original meaning, and I would reconsider them.”

Justice Thomas went on to discuss how the Framers of the Constitution used the term “public use” rather than “general welfare,” which is used elsewhere in the document.  He argues that, had the Founding Fathers wanted a broad interpretation of the Takings Clause, they would have used the term “general welfare.”  Since they did not, he concludes that they must have intended the Takings Clause to only apply to property that would be converted to a legitimate public use.  Though I am no lawyer, a quick trip to the dictionary seems to be all you need to agree with Justice Thomas’ argument.

So, what we have is a choice between following past legal precedents that have liberalized the term “public use” without much consideration for the intentions of the Founding Fathers, or using common sense as well as other past legal precedents to uphold private property rights.  Unfortunately, the majority of the Justices chose the former over the latter. As a result, governmental entities will have no Constitutional restriction on their abilities to condemn property for no more than the promise of more money in their coffers in the future.

Property rights have therefore been trampled!

Potential Impact on Religious Organizations

It doesn’t take a rocket scientist to figure out that religious organizations and other tax-exempt entities could be severely impacted by this latest decision.  After all, tax-exempt entities do not result in any tax revenues for the local government, so any development erected in the place of a church would bring in more tax revenues, and thus fit the new definition of public use.

I personally know of a church here in a suburb of Austin that sits on one of the most prime pieces of real estate in the county.  Developers have been hounding the church for years to sell out, even offering to rebuild their facilities in another location.  The church body has held out primarily because there is a cemetery associated with the church on the land, so they don’t want to sell.

As a result of the Kelo decision, it might be possible for these developers to access this property by simply convincing the city government that they could make a lot more money with a strip mall than a church.  Of course, the church would have to be adequately compensated, but what about the cemetery?  Even if the cemetery didn’t exist, what about the right of the church to stay in the location it has held for over a century?

I can even envision that a city that does forego condemnation of the property of a religious organization might be sued for a violation of the separation of church and state.  The potential ripples from this decision are many, and I fear that the courts will be kept quite busy in the future as governmental entities seek to test their newly expanded powers.

States To The Rescue?

In an interesting twist that has not been picked up by a lot of the major media coverage, the majority opinion in the Supreme Court seemed to indicate an understanding of the dilemma it has now unleashed upon the American public.  In the final paragraph of the ruling, Justice Stevens included the following: 

“In affirming the City’s authority to take petitioners’ properties, we do not minimize the hardship that condemnations may entail, notwithstanding the payment of just compensation. We emphasize that nothing in our opinion precludes any State from placing further restrictions on its exercise of the takings power. Indeed, many States already impose ‘public use’ requirements that are stricter than the federal baseline.”

In other words, the Justices effectively made eminent domain a “states rights” issue by providing that each state may place whatever restrictions it pleases on the exercise of eminent domain by governmental entities within its borders. 

This is significant, not only because the Supreme Court included this language in the ruling, but also because delegating the decision making down to the state level could result in individuals having a greater say in how eminent domain is practiced in their local area.

So, is leaving the decisions to the states the silver lining of this opinion?   Maybe and maybe not.  At present, fewer than ten states restrict the use of eminent domain for solely economic development.  Yet, there are other states that expressly allow the use of eminent domain to take private property for economic development purposes, and others are silent on the subject.  The question is will state governments, already dealing with tight fiscal budgets, vote to restrict a potential source of new tax revenue?

It’s All About Taxes

I have gone on record many times in this E-Letter, as well as in other of my writings, as being opposed to increasing the amount of tax money politicians have at their disposal.  This applies equally to federal, state, county and local city governments.  Thus, it should come as no surprise to you that my opinion is that tax revenue alone is not enough of a justification for a municipality to condemn private property.  If tax revenues aren’t sufficient to cover expenditures, how about controlling spending?

Unfortunately, I fear the Supreme Court has opened up Pandora’s Box with this latest decision, in that a governmental entity could suddenly decide that virtually any piece of land could be put to better use.  And taxation isn’t necessarily the only reason a municipality may decide to use its right of eminent domain.  Here in Austin, Texas where I live and work, the environmental movement is very strong.  As a result, I could see our city government use eminent domain to take private land for the public use of limiting development and/or decreasing environmental damage.

And it’s not just the “public use” requirement of the Fifth Amendment that’s undermined by Kelo.  So too is the guarantee of “just compensation.”  Why?  Because there is no need to invoke eminent domain if developers are willing to pay what owners themselves consider just compensation.

Just compensation may differ substantially from so-called fair market value given the sentimental and other values many of us attach to our homes and other property.  Even eager sellers will be hurt by Kelo, since developers will have every incentive to lowball their bids now that they can freely threaten to invoke eminent domain.

In short, the Supreme Court’s decision throws the doors open so wide for governmental entities to define “public use” that I’m sure we are going to see many more court cases on this in the future.

Why Would Liberals Want This?

The dissenting opinions from justices Thomas and O’Connor pointed out that the negative impact of the Court’s decision will most likely fall on lower income and minority citizens.  Liberals claim to be the champions of the poor and downtrodden, so why would the four most liberal Justices side with the majority on this decision, especially when one of the big winners was a giant pharmaceutical corporation?

I think one answer is obvious - more tax revenue equals bigger government - a long-time goal of the liberal establishment.  In their skewed view of the world, maybe they believe that the increased tax revenues will eventually go to benefit those who were displaced.  Yeah, right!

In addition, the more socialist among the liberal elite do not hold fast to the idea that private property ownership is a good thing (except for their own properties, of course).  Thus, the more land the government owns or controls, the more they like it.  Just in case you’re wondering about government ownership of land in the US, a recent article I read stated that the federal government currently owns ⅓ of all land in the US, up from ¼ in the 1950s.

Another reason liberal Justices would embrace this decision is that it takes discretion of what areas should be developed away from the free market and gives it to local governments. After all, the government always knows what is best, right?  While you and I may argue this point, organizations like the American Planning Society would come down on the side of local governments.  One article I read stated that the American Planning Society argued before the Court in opposition to the homeowners, and espouses the view that “government, not the marketplace, should decide where growth occurs.”

Conclusion

While the above possible reasons liberals would embrace this decision may hold water, I am frankly at a loss as to why the most liberal Justices of the Supreme Court could come down on the side of states rights and big business, and against low-income and minority citizens.  Is this just a fluke where interpretation of the Constitution just happened to be split down the liberal/conservative line of the Supreme Court, or are other forces at hand?

Whatever the source of the decision, the reality is that property rights are potentially in peril as a result of the Kelo decision.  However, I think it is important to remember two related important things.  First, the process of condemnation under eminent domain is extremely unpopular.  It is usually not accomplished without court challenges and tons of media coverage (usually negative).  It is possible that politicians will be very wary of wielding this newly expanded power, even though doing so could mean big contributions from developers and corporations.

Another thing to remember is that the states do have the right to restrict the unlimited practice of eminent domain, as discussed above.  If you currently live in a state where eminent domain is liberally practiced, then make sure your voice is heard at your local and state government.  If you are lucky enough to live in a state that already restricts the use of eminent domain for economic purposes, you still need to be vigilant since this could change in the next legislative session.

I happen to personally believe that private property rights are important enough to be protected at the national level.  I also agree with Justice Thomas that the 5th Amendment to the Constitution did address this protection, only to be undermined by the courts in subsequent years.  Though the Kelo decision swung the doors open to a liberal interpretation of the Takings Clause, we at least have the right to slam it shut again at the state level.

It will be interesting to watch how many states move to restrict eminent domain in light of the Supreme Court’s latest decision.  Sadly, I predict, it won’t be many.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Supreme Court: No such thing as “home sweet home.”
http://www.chicagotribune.com/news/opinion/chi-0506270190jun27,0,4003233.story?coll=chi-newsopinioncommentary-hed

Supreme Court Splits On Commandments
http://www.washtimes.com/national/20050628-121200-5560r.htm

A Social Security victory for Bush
http://www.signonsandiego.com/uniontrib/20050628/news_lz1e28kemp.html

They Still Blame America First
http://www.weeklystandard.com/Content/Public/Articles/000/000/005/774oqxhi.asp


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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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