What is the best way to invest an inheritance so that its value can grow? Doug answers this question as well as giving tips on how to save money by automating your savings.
And today’s guest is legal expert Timothy Sandefur. Find out what the status of “eminent domain” is and if local governments are abusing the power they have to confiscate land and property. Should you invest in real estate if the government could take it away?
Follow Timothy Sandefur’s work at the Goldwater Institute here – http://goldwaterinstitute.org/en/
Read his book, Cornerstone of Liberty: Property Rights in 21st Century America.
Read the Transcript
Interview with Timothy Sandefur
Legal expert Timothy Sandefur discusses abusive local government regulations. What is “eminent domain,” and should you invest in real estate if the government could take it away from you?
Douglas Goldstein: Tim Sandefur is a principal attorney at the Pacific Legal Foundation. He works to protect businesses against abusive government regulation. He has actually written a number of books, one of which is Cornerstone of Liberty: Property Rights in 21st Century America.
Douglas Goldstein: In the book, you gave some fascinating examples about how the government has abused its power of eminent domain, which is the power the government has literally to take people’s property. In reading your book, I was really frightened and I felt the courts were supporting the government. I felt like the little guy has no chance. On the other hand, it does seem as though there is a time when the government should be able to step in. Take an extreme example like an unused barn that’s stopping the construction of a major highway. How can society deal with those grey areas?
Timothy Sandefur: I think the way society has come up with to deal with those grey areas is precisely the constitutional method of giving just compensation to people when it takes their property and taking their property only when necessary for a public use as opposed to a private use. So the typical example is if you are building a highway or something and a person who owns a house in the path of the projected highway says “Well, okay you can have my land but only for a billion dollars” because he knows that if he holds out for a really high price that he can force people to compensate him unreasonably. And the purpose of eminent domain is to prevent that hold out problem by allowing the government to say “No, we are going to take your property because it’s necessary but in exchange for that, we are not going to exploit our monopoly advantage as the government since you know there are no competing buyers when the government is taking your property. We are going to prevent the abuse of that power by first ensuring that the taking is actually for the use of the public and secondly by ensuring that a court oversees the adequate compensation amount.”
Douglas Goldstein: From your own book, neither of those systems seem to work very well. The first one in, reverse order, is that the courts seem to side with the government and just take whatever they want. Secondly, is this concept of public use as in fact one of the examples you gave. The government just said “Well, we’re going to take the property from 2,500 Michigan residents and give it to General Motors. Then we’ll be able to collect more tax revenues which of course is good for the public. So I don’t see how you solve this problem. It’s easy to talk about but at the end of the day, how does the constitution really deal with this?
Timothy Sandefur: That decision in the Michigan case in the 1980s was plainly contrary to the constitution. What happened was that, of course, when I say you won, there was a very severe recession that hit the auto industry particularly hard in Michigan and so General Motors went to the City of Detroit and said, “Well, if you condemn this large section of this neighborhood called Poletown because of the large number of Polish immigrants who lived there and give it to us, we’ll build a GM car factory there. We’ll make Cadillacs and make a whole bunch of money and the government will enjoy more tax revenue out of that.” Well that’s not what the constitution means when it uses the phrase “public use.” It means used by the public. It doesn’t mean whatever benefits the government in some abstract or indirect way because of course everything can be said to benefit the government in some abstract, indirect way. If tax revenue to the government is a public use then the government should take my house and replace it with a Ritz Carlton hotel because that would increase tax revenue to the government. So that’s not what public use means and the Michigan Supreme Court got it wrong when it said that GM could indeed take this property and the Michigan Supreme Court has acknowledged as much about 20 years later. The court came back and said “You know we got it wrong in that Pol town case. Public use doesn’t mean public benefit”. Those two things don’t mean the same thing. So the way that the constitution can protect people is by being obeyed. Unfortunately, you know, the constitution is only words written on paper. It’s a promise and it’s only as valid as the people who either abide by that promise or break that promise.
Douglas Goldstein: I want to touch on something you said a minute ago, which was you brought up this concept of taxes. First we spoke about eminent domain as something that says that government is allowed to take property if it’s for public use. Do taxes basically fit into that? Is taxation a legitimate form of property confiscation?
Is Taxation a Legitimate Form of Property Confiscation?
Timothy Sandefur: That’s actually a very deep and interesting question because taxes are considered --philosophically speaking-- if you go back to the roots of the American constitution, taxes are considered very different than eminent domain. Eminent domain is part of the government’s power to require public service of people and so it’s basically like the military draft and in fact some state constitutions in the United States still use the same terminology. I know for instance the State of Tennessee-- its constitution says that a government cannot require a person’s property or personal services without just compensation and the reason why is because the power to seize property through eminent domain and the power to draft people into the military-- those were considered part of this deep power of sovereignty that the government has. That’s different than the power of taxation which is a power to require everybody to pay money to the government for the costs of security and safety. When you pay taxes to the government, you are getting a service in exchange for that which is the service of a lawful society. When you have your property taken through eminent domain though, you are suffering a unique injury that your neighbors aren’t suffering because they aren’t losing their property and so the government has to ensure that it justly compensates you for that take. They are actually considered two different aspects of government power.
Now, more recently all of these philosophical understandings have broken down largely as a result of progressive era thinkers and other justices on the Supreme Court in the 1900s who said, “No, these distinctions don’t make any difference. It’s just whether the government can take your stuff. That’s all that matters.” For example, when it comes to regulations, the government can regulate your property as much as it wants to. It’s just that at some point or other it kind of crosses the line and then government has to compensate you because it has taken away the value of your property. This fuzzy, blurry distinction, this lack of intellectual rigor, that’s just why we have this problem with eminent domain today. The lawyers and judges aren’t thinking in this clear philosophical categories anymore.
Douglas Goldstein: Based on a lot of your writing and a lot of the topics you are bringing up today, I find it frightening for people who consider investing in things like cheap houses, or they go into neighborhoods where they can, you know, literally pick up a house that’s in default because they think that their main risk is about investment or that the house will go down in value, or if you get tenants, they won’t pay. But, I’m getting the feeling that there’s really a government risk that one day the government could just come in and say “We’ve decided to give the rights to this land to a real estate developer to build a mall and so we are taking it away from you.” Should people worry about that when they do investing or is it just a one in a million chance so don’t worry about it.
What Is a Blighted Neighborhood?
Timothy Sandefur: No, they certainly should worry about it although I understand that some insurance policies will cover you in the event of an eminent domain problem. But an even broader problem is, for example, when a city is going to take away somebody’s property through eminent domain, very often it does it, not for roads or highways, but for these government redevelopment projects. We mentioned the Michigan General Motors case in the 1980s for example, and these redevelopment projects, the way they work in a lot of places is the local government will declare a neighborhood to be blighted-- and the term “blight” again, it’s one of these fuzzy, hard to define terms. It basically means whatever the government says it means. “Blight” means that the neighborhood isn’t performing up to an economic standard that the government would prefer.
So, for example, California Law says that a neighborhood is blighted if it has, among other things insufficient parking. Well what neighborhood does it right? And once the government declares a neighborhood to be blighted, it can then come along and use eminent domain as part of a redevelopment project to take away all the land in that neighborhood and give it to a developer to build a shopping mall or what have you. Even if your property is not blighted, if your neighbor’s property is, then the entire neighborhood can be declared blighted and your property can be taken away. Now it gets even worse because when the government declares a neighborhood to be blighted, that designation can sit on the books basically indefinitely. Some states require that they be renewed every few decades but nevertheless they remain on the books indefinitely.
So it’s very possible for an investor to come along who’s not familiar with this system and see, wow look at this. Here’s a really affordable nice piece of land. I’m going to buy that and fix it up and everything. But, if it’s been declared blighted, you have the spectre of eminent domain hanging over your head that entire time and what happens investors know this? They don’t invest in those neighborhoods which does what? It causes further blight because of course you are not going to have economic development in an area that has a blight designation which is basically a sword of Damocles. Hanging over your head that can fall on you at any time. So there are some states where this problem has become so severe, for instance Missouri. In Missouri, the Missouri Supreme Court recently declared that if the government declares a neighborhood blighted and they then just leave that designation in place for too long, that itself can qualify as the taking away of your private property. That’s a very good decision. It’s terrible that these bureaucrats can declare a neighborhood blighted and thereby threaten them with eminent domain and then sit back and do nothing, destroying the possibility that investors could come in and fix up the neighborhood you know. But a lot of times the reason they do that is because with that blight designation sitting there, the property values fall and then the government can come in and acquire the land cheaper. It’s a really nasty trick but a lot of governments do that.
Douglas Goldstein: How can people follow you and follow your work?
Timothy Sandefur: The Goldwater Institute can be found at www.goldwaterinstitute.org. We’re based in Phoenix, but we work across the nation to protect property rights, economic liberty and other important constitutional values and, of course, my book is available on Amazon, Barnes and Noble, and Cato Institute, which published it.