How To Increase Tax Revenue While Reducing Eminent Domainby 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.