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Does Compensation Deter Takings? New (and Surprising) Evidence

Ronit Levine-Schnur & Gideon Parchomovsky, Is the Government Fiscally Blind? An Empirical Examination of the Effect of the Compensation Requirement on Eminent Domain Exercises, 45 J. Legal Stud. (forthcoming 2016), available at Penn Law: Legal Scholarship Repository Paper 1595 (Oct. 13, 2015).

This article delves into the issue of compensation, which looms large in debates about eminent domain for two reasons. The first reason is the concern that owners may be systematically undercompensated when property is taken by eminent domain because the constitutionally mandated “fair market value” measure of compensation, articulated in United States v. Miller (U.S. 1943), does not take account of subjective losses.

The second is the presumption, especially prevalent among law and economics scholars, that the compensation requirement cures the “fiscal illusion” problem (i.e., the fact that government actors presumably ignore costs that are not reflected in their budgets). According to this view, compensation ought to deter excessive takings by forcing “takers” to internalize the financial cost of their actions. This assumption is reflected in post-Kelo v. New London (U.S. 2004) state eminent domain reforms that mandate above-market compensation for certain categories of takings. It is also offered as a justification for compensating certain categories of “regulatory takings.”

Unfortunately, there is a dearth of scholarship empirically testing the fiscal illusion hypothesis. One particular challenge is disentangling the political and financial pressures influencing takings policies. For example, a handful of studies found that federally funded takings slowed following the enactment of the federal law mandating additional compensation for relocation assistance in the early 1970s.

These studies are cited for the proposition that heightened compensation deters the exercise of eminent domain. However, the relocation assistance mandate was itself a response to a mounting concern that the takings for urban renewal and interstate highway construction were excessive and unjust. Given the political pressure to reduce takings activity, the causal connection between the increased compensation mandate and the decline in the use of eminent domain that followed is difficult to establish. More recently, the post-Kelo backlash demonstrated the powerful effects of political pressure on governmental decisions whether or not to take property by eminent domain.

Drawing upon a novel data set from Israel, Ronit Levine-Schnur and Gideon Parchomovsky begin to fill the gap in our understanding about the connection between compensation and takings in their forthcoming article, Is the Government Fiscally Blind? An Empirical Examination of the Effect of the Compensation Requirement on Eminent Domain Exercises. In contrast to the United States, where compensation is constitutionally mandated whenever property is taken by eminent domain, Israeli law does not mandate compensation for all physical takings of real property. In fact, local governments are permitted to take up to 40% of a parcel of property for certain public uses without providing any compensation. Compensation is graduated when between 41% and 99% of a parcel is taken (e.g., if a local government takes 45% of a parcel, the compensation due is 5% of the parcel’s value; if it takes 75% of the parcel, the compensation due is 35%, etc.).

Moreover, in 2001, the Israeli Supreme Court—in a sharp departure from past practice—carved out an exception for total takings, requiring the government to pay full compensation whenever it takes the entirety of a parcel. (Prior to 2001, even total takings enjoyed the 40% compensation exemption.) This legal shift set up a perfect natural experiment, since the change presumably should have incentivized governments to avoid total takings after 2001.

Levine-Schnur and Parchomovsky analyzed all exercises of eminent domain by the City of Tel Aviv between 1990 and 2014 (a total of 3140 cases) to determine whether the takings behavior was influenced by these unique compensation rules. They expected to see two “notch points” in the City’s eminent domain behavior: First, they expected that takings would be bunched around the 40% compensation exemption; second, in the post-2001 period, they expected to find fewer total takings, which cause the government to lose the exemption. They found neither.

On the contrary, only 3% of takings fell in the 35 to 45% range, and most takings in the exempt category bunched around 25%. The only other discontinuity point was at 100% of the total parcel: nearly half of takings were total takings. Moreover, the rate of total takings increased after the 2001 legal change. That is to say, the Israeli Supreme Court’s decision that mandated full compensation for total takings had no observable effect on the City of Tel Aviv’s takings behavior.

At a minimum, these findings suggest that the compensation requirement is not the only factor influencing government takings behavior. As Levine-Schnur and Parchomovsky observe, “[O]ur findings refute the claim that without mandatory compensation, government officials will be oblivious to the private cost of their actions and will take the maximum percentage of every lot that they can possibly take without compensation.” Indeed, the following are most certainly true: The government might take parcels in their entirety for political reasons, since partial takings are not only incompletely compensated in Israel but may leave owners with dramatically devalued remnants of property. The government might also take entire parcels because it needs them (or believes that it needs them) in their entirety. And, the government might take less than the 40% safe harbor because it doesn’t need the excess land and doesn’t want the trouble of maintaining post-takings vacant property.

Unfortunately, the authors’ data set focuses on a major urban city situated in a specific cultural context, making it difficult to extrapolate the findings to other contexts (e.g., suburban U.S. localities). Indeed, this “anecdata” difficultly represents a persistent problem with all efforts to empirically measure eminent domain activity since, by definition, all real property is situated in specific places and cultural contexts. Still, Is the Government Fiscally Blind? represents a significant contribution to the literature on eminent domain. It also invites further investigation into the effects of graduated compensation requirements both domestically (in states that have increased compensation levels above the federal constitutional minimum) and internationally.

Cite as: Nicole Stelle Garnett, Does Compensation Deter Takings? New (and Surprising) Evidence, JOTWELL (September 28, 2016) (reviewing Ronit Levine-Schnur & Gideon Parchomovsky, Is the Government Fiscally Blind? An Empirical Examination of the Effect of the Compensation Requirement on Eminent Domain Exercises, 45 J. Legal Stud. (forthcoming 2016), available at Penn Law: Legal Scholarship Repository Paper 1595 (Oct. 13, 2015)),