Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

February 24, 2007

How To Increase Tax Revenue While Reducing Eminent Domain

by Brad Warbiany

The question of what constitutes “just compensation” troubles everyone when it comes time for a city to condemn a property for eminent domain purposes. Invariably the property owner thinks it’s worth market value or above, and the city thinks it’s worth as close to nothing as they can get away with paying.

As a result, the question of how much it’s truly worth involves costly legal battles, as well as sometimes involving a jury to determine the worth. In the end, it’s quite likely that nobody walks away happy. So why don’t we change the process? I heard an idea quite a while ago, and nothing so far has made me think it’s a bad one.

Why don’t we allow property owners to set the valuation themselves, and their valuation is what the government needs to pay if they seize it?

“Aha!” you say, “they’ll value it far too high, and eminent domain will never occur!” And without one crucial step, you’d be right. We’ll also use that valuation for property tax purposes.

Think of it as insurance against eminent domain. Let’s say that you have a nice house worth $250K, which you love. You really don’t want to move out of the house unless you get an offer you can’t refuse. Often, the government would come to you with an offer of $150K and a gun, giving you an offer you truly can’t refuse. That’s no good. But when they come to you with the claim that they’ll be able to get more tax revenue if they put something else on the property, the courts will make sure that you accept the offer, as we learned in Kelo.

But what if I think the property is worth $300K to me? I.e. that I don’t want to move unless I get $300K for it, a $50K penalty to whoever wants to seize it? If I really think it’s worth $300K to me, I should feel comfortable paying property tax on $300K rather than $250K. It will cost me more money each year in taxes, but should the government attempt to seize it, I get a nice little windfall. And since the government is usually trying to seize the property to sell it to a developer for higher property taxes anyway, they don’t have an incentive to seize it unless it’s worth more than $300K to the new owner, because they’re already getting $300K’s worth of taxes, not $250K.

Of course, I can play with fire, and only value it at $100K. My house, for example, is situated on a hill, and the land is unsuitable for most commercial enterprises. Thus I wouldn’t expect a developer to come in and want to take my house away. But if I only think it’s worth $100K, the city could easily come in and seize it for that amount, sell it on the open market for $250K to another family, and make a $150K profit while increasing their tax base.

Thus, we have a situation where chosen valuation will truly reflect the worth of the property to its owner. As an owner, I have an incentive not to value the property too high, because the cost to me of paying for that “insurance” isn’t really worth it. I also have an incentive not to value it too low to reduce my tax burden, because the city can come in and snap it up for that low valuation. Thus, we will see a situation where chosen valuations will likely sit slightly higher than the value of the property in question (to cover the transaction costs of relocation should it be seized). Of course, some properties will have higher valuations to cover emotional attachment to the property, but as long as people are willing to pay for that higher valuation, it creates the disincentive towards seizure that they’re looking for while helping the tax base, which the city wants.

Nobody wants to have their property seized by the government, and particularly not for a pittance. But Kelo has shown that we can’t rely on the goodness of elected officials, or the protections enshrined in the Constitution, to insure against it. The best way for us to fight it is to make sure it’s not a financial boon for them to do so, and the only way I can see to do that fairly is to allow people to set their own “insurance” rate to protect their property.

Freedom is sexy, so share!Share on Facebook2Tweet about this on Twitter0Share on Google+0Share on Reddit1Digg thisShare on StumbleUpon0Share on LinkedIn0Pin on Pinterest0Email this to someone
TrackBack URI: http://www.thelibertypapers.org/2007/02/24/how-to-increase-tax-revenue-while-reducing-eminent-domain/trackback/
Read more posts from
• • •
  • Pingback: Tax Form » How To Increase Tax Revenue While Reducing Eminent Domain

  • http://www.tfsternsrantings.blogspot.com T F Stern

    Brad,

    Your idea has some merit; however, I would point out that property should be assigned value only twice, the first time is when it is purchased and the sale is recorded for tax purposes. That price was determined “fair” by both the seller and the purchaser and has nothing to do with what any governmental agency believes its value should be in order to exact taxes from the owner. The only other time property should be assessed value is when it is resold at which time the adjusted value, that which is determined by inflation, increased valued due to improvements or other transitory issues would be included. Again, the only determined value would be mutually agreed upon at the time of the sale by both the seller and the purchaser. That second transaction would be recorded for tax purposes at that time only, leaving the original assessment in force up until that sale, regardless of the duration of ownership and “assumed” value on the part of anyone other than the owner. Were this system to be in place, government would, out of necessity, have to budget based on fixed values and not have the ability to escalate values in order to satiate an uncontrolled appetite. Seniors in particular would not have to fear the loss of property long held in order to satisfy the next generations appetites.

  • http://www.thelibertypapers.org/2006/11/22/comrades-i-hereby-declare-the-revolution/ Adam Selene

    TF, that is what you have in California, it was part of the Prop 13 tax revolt led by Jarvis and Gann. The work around the politicians found is the Mello-Ruse Act. Newly built properties are assessed an additional tax for 12 years to provide for school construction. The second work around they found was to pass “school construction bonds”. They are paid for out of general fund taxes since property taxes can’t be raised by revaluing the property and it requires a 2/3 super majority to change the property tax rate.

    I think leaving the value of the home in the hands of the owner, allowing the owner to revalue it at any time, is the way to go.

  • http://unrepentantindividual.com/ Brad Warbiany

    TF,

    Also, in your scenario, that gives cities a huge incentive to seize something through eminent domain. I.e. if I buy my house for $100K, own it for 15 years to where it’s “worth” $250K, but I’m only paying taxes on $100K, the city will definitely want to find a way to force it to change hands.

  • http://www.thelibertypapers.org/2006/11/22/comrades-i-hereby-declare-the-revolution/ Adam Selene

    good point Brad. One has only to look at California, and its continuous use of eminent domain, to see this.

  • http://www.tfsternsrantings.blogspot.com T F Stern

    Regarding your additional assertion, “that gives cities a huge incentive to seize something through eminent domain.”

    I would remind you that I mentioned that the value of any property would be determined by both the seller and the buyer. In the event that any governmental agency set as its goal to confiscate property through eminent domain, there would exist that point in time when an agreement on that property’s value would of necessity require mutual recognition. In other words, the seller would continue to hold the bargaining power which the buyer, that being the governmental agency, would either have to meet or walk away from. Were this not so, and unfortunately this seem so to be the case which exists now, governmental agencies could and will confiscate with impunity whatever they desire.

    Our citizenry must stand up to government abuse, no different than those who stood up to the tyranny imposed by King George upon the colonists, a tyranny which could only be ended through a Declaration of Independence.

    “That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shown, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.”

  • http://unrepentantindividual.com/ Brad Warbiany

    TF,

    Don’t get me wrong, I’m not saying that our current eminent domain situation is acceptable. I would prefer, as you say, that the decision to sell was with the seller, and that they could set whatever price they want. I would even more prefer that eminent domain not exist at all.

    This was more of a real-world reform that I think a lot of voters could get behind, and which would make a significant improvement to the situation. Definitely not my ideal, but a heck of a lot better than where we are now.

  • http://www.thelibertypapers.org/2006/11/22/comrades-i-hereby-declare-the-revolution/ Adam Selene

    Actually, Robert Heinlein proposed Brad’s solution in “The Number of the Beast”. One of the additions he made was that any buyer could offer the asking price of the property and the seller had two choices:

    1. Accept the offer and sell the property.
    2. Immediately raise the value of the property and pay several years of back taxes.

    An interesting control on the abuse of the system by the owner that would otherwise be possible.

  • http://www.tfsternsrantings.blogspot.com T F Stern

    While that sounds interesting, Heilein being a favorite of mine as well; there is a major flaw in such thinking; the rights of ownership to property begin with the seller, not the buyer. This is what is at issue with eminent domain and the power of abuse which has included the assumption that an improved tax base is grounds for seizure. Members of a rational society have willingly acknowledged that in order to make room for an infrastructure capable of permitting their society to flourish, some powers of eminent domain could be used to obtain right of way for major thorough fares, utilities and other essential real property common interests. At no time was it envisioned by rational free thinking people that the word “essential” could be perverted to include “larger tax base” or to include bending over a barrel so that another citizen, one who had more influence in government or who simply had more money, could pressure another property owner to relinquish ownership rights. Any way you slice it, that comes up as tyranny and abuse.

    If we are to prostrate ourselves and give into the unreasonable seizure of property simply to increase the tax base by which our government exacts taxes from us, then we do not deserve the right to own property. We should be able to see the hideous threat which now is at our door step, one which the Supreme Court has given their blessing to. All those God given rights which so many have fought and died for are being dissolved, one SCOTUS ruling after another.

  • http://unrepentantindividual.com/ Brad Warbiany

    TF,

    Again, I agree with you. I don’t for a second agree that government should have the power to seize property in order to increase their tax base, and I think the Supreme Court is wiping their collective ass with the Constitution by allowing it.

    Short of finding some way to impeach the court, and short of armed rebellion, my suggestion will hopefully destroy most of the incentive for eminent domain, while allowing people to set the compensation they do receive when it must be exercised. I don’t think it’s right that property owners should have to “insure” themselves against having their property stolen by government, but I don’t see any other way, short of rebellion, to put a stop to it.

  • Andy P

    Brad

    Excellent thought experiment, and thanks to Adam for the Heinlein reference. Now consider the following, what if the city/state/nation (who has the incentive to cheat and put you in a higher bracket) would be forced to back it up by buying your property at that price? This would seem like an improvement on the property tax and LVT concepts, which both suffer from the same flaw that establishing a market price is next to impossible due to the absence of bids and offers. Of course, if we were still under a fiat money system you’d still be back to square one where the state could just print up some money and “buy” your property.

  • Tom F

    What you mention is the process in Mexico as well as some other countries. However you idea does have problems. First, the value of property in a condemnation does not necessarily have anything to do with true market value because the the value in condemantion is the value without regard to the project for which the property is being taken. Some projects enhance the value of nearby projects while others decrease the value of surrounding properties. When the government announces a project, the impact on properties within the project or near the project is immediate. Years later when the government gets around to buying property it is difficult to determine the true value without regard to the announcement of the project.

    The second problem with your proposal is that most condemnations are for street widenings and result in only a portion of the property being taken. While your proposal would solve the value of the entire property, it cannot address the issue of a partial taking. Those are the most difficult to value and since they occur most often, the problem is not solved.

Powered by: WordPress • Template by: Eric • Banner #1, #3, #4 by Stephen Macklin • Banner #2 by Mark RaynerXML