Saturday, July 15, 2006

"Takings": Eminent Domain and Iowa Values Fund

This morning's big local news (July 15) is the Iowa Legislature's dramatic override (41-8, Senate; 90-8, House) of Governor Vilsack's veto of the legislature's eminent domain bill (making it more difficult for the State or cities to seize citizens' private property -- farms and homes -- for "economic development" (that is, the personal profit of individual "developers"). Illustrative is The Gazette's page-one story, Rod Boshart and James Q. Lynch, "Lawmakers Override Vilsack Veto; By An Overwhelming Margin, Legislature Restores Limits on Property Condemnations," The Gazette, July 15, 2006, p. 1A. [The Register's report is Tim Higgins and Jonathan Roos, "Legislators Override Vilsack's Veto; Property Rights Question Could Head to Courts," Des Moines Register, July 15, 2006.] The Gazette reports this is the first time in 43 years an Iowa governor's veto has been overridden.

Joe Gerst, a member of the Linn County Farm Bureau, is quoted in the Gazette as saying, "We're not against libraries, schools and roads, but we don't want our property taken for private development."

Mr. Gerst has rather nicely captured the relevant distinction at play in Iowa's legislation and the recent Supreme Court case which provided the incentive for it, Kelo v. City of New London, ___ U.S. ___ (2006), decided June 23, 2006.

However one comes out on these issues (and legislators from my area (Iowa City; Johnson County) constituted a disproportionate number of those 8 dissenters in each body) most people would recognize distinctions in government functions (whether paid for through cash payments, tax forgiveness, or the use of eminent domain). (a) Use of the public treasury to perform functions traditionally those of government (e.g., military, and, as Mr. Gerst says, "libraries, schools and roads), (b) payment to private firms under contract to perform services for government (e.g., defense weapons contractors, transportation of troops and supplies, road building), (c) payments to identifiable groups of people similarly situated (e.g., student loan programs, food stamps -- programs often rationalized as necessitated by religious or humanitarian princples and the obligation, indeed definition, of a civilized society), and (d) transfers to a single individual (or small group), engaged in a for-profit commercial enterprise, where the gifts from the state are distributed to some and denied to others who are similarly situated. Use of eminent domain to transfer land from one private individual to another (in the name of "economic development") would be an example of this category.

But what baffles me is how legislators who bring such passion to being against the transfer of one individual's property to the private profit of another through the use of eminent domain -- with this near-unanimous, first veto override in 43 years -- can become so huffily hostile and defensive when asked to justify their enthusiasm for the Iowa Values Fund or TIFs.

What, exactly, is the difference? In one case the government takes property against the will of one citizen and gives it to another single citizen. In the other case the government takes the property of all the citizens against their will and gives it to a single citizen for his or her own private profit. On the face of it one would think it multiples more offensive to take from many than to take from one.

I find some hypocracy in the fact that among the greatest enthusiasts for these various forms of corporate welfare are the same folks who hold to a "marketplace regulation," "free private enterprise capitalism," "get the government off the backs of business," Republican ideology. In fact, I have yet to find anyone -- though I am sure such must exist -- willing to take this ideological position in opposition to corporate welfare.

Within the last couple days I have discussed some of these issues with five of my law professor colleagues and one practicing lawyer. Each recognizes the drawbacks to such programs, such as the difficulty of public officials knowing when the launch of a project really does turn on the availability of grants, their inability to predict (better than the market, with its venture capitalists and banks' loan officers) which ventures will prosper, often the failure to follow up and measure effectiveness (return on the public's investment), opportunities for pay back on campaign contributions, etc. But each seemed willing to evaluate each project separately on its facts, even if they predicted the number they would personally approve would be very few indeed.

For example, one said his position on the program generally would turn on the data obtained from a controlled study: find comparable businesses to those that are given grants or tax forgiveness. Record over, say, five years or so the expansion of each (physical plant, employees, sales, taxes paid, number of failures). Calculate the marginal increase in public benefits (if any) from the businesses that received the grants over the comparable businesses that did not, and the benefit-cost ratio this represents.

Meanwhile, I'd like to see the Iowa Legislature bring a consistent concern to all the ways in which government uses its power over citizens (taxation as well as eminent domain) to transfer wealth from one citizen to another.

See generally, Nicholas Johnson, "Values Fund May Not be so Valuable for Taxpayers," Des Moines Register, April 13, 2006.


John Neff said...

There are about 116,000 residents in Johnson County and my recollection is that Johnson County estimates that it has lost $3 miilion in tax revenues because of TIFF's which works out to be $25.86 per resident. If the residents gets that much in general benefits from the TIFFs (which I think is unlikely) one can argue that TIFFs are not a problem.

You appear to be taking the position that there are NO general benefits
from TIFFs. You need to support that position with some facts Nick.

Nicolai Brown said...

That's an insightful connection between eminent domain and the "values" fund, Nick. I hadn't considered it before!

Rexusnexus said...

I don't understand how being against eminent domain (when the property is given to private groups) is inconsistent with being supportive of TIFs. While the tone of your post is that corporate welfare is noxious in any form (a point with which I generally agree), the important distinction between eminent domain and TIFS, in the minds of those you criticize, has to do with who does the paying, not who gets paid. I think it is a perfectly consistent position to say that if the government is going to support corporate welfare it should do so in a way that spreads the cost out among its population instead of forcing single individuals to bear a disproportionate share. It is beyond my ken to provide any insight as to whether such programs help Iowans.

John Neff said...

You ask questions. So can I.

A lot of the TIFF advocates claim the benefits will be new jobs. Has anyone checked to see what type of new jobs were created? Do the new jobs generate sufficent new tax revenue so the TIFFs are revenue neutral?

Nick said...

Here are some replies to the comments from John Neff, Nicolai Brown, and Rexusnexus. (I screwed up the attempt to put them in a regular entry, so I'm reverting to play by the rules and put my comments about comments into comments.)

First Nicolai and Rexus, and then -- because of the length -- a separate one for John.

Nicolai: Thanks. But I'm not sure my comment holds water. See John's second comment. I just like to ask questions, play with ideas, and -- to borrow from Robert Kennedy -- "think of things that never were and ask why not." That means (a) I'm the first to acknowledge that 90% of what I come up with needs to be rejected out of hand. The challenge is to find the 10% (if there's any lying around at a given moment), and the even greater challenge to figure out how to get it implemented, and (b) I end up changing my mind a lot when "the error of my ways"/analysis is pointed out to me.

Rexus gives us a great "if-then" with which I almost entirely agree.

The threshold question is whether the State ought to be in the business of cash grants (or tax forgiveness -- which is the same thing once it hits the bottom line) to business (a) at all (because it is ideologically inconsistent with a system of private capitalism -- if one happens to hold that ideological view, or (b) in a given case (because the payout isn't there, or whatever).

Once that threshold is crossed (that is, if the government is going to get into the corporate welfare handouts business) then the question becomes: Where should the money come from?

Rexus says it's fairer for it to come from everyone (income and property taxes) than from a single individual or neighborhood of individuals (eminent domain). Fair point, I think; hard to argue with.

Except for one point: eminent domain seeks to accomplish something for which money is not fungible (i.e., your dollars are as good as mine). It seeks to use a particular piece of property for some, supposedly, public purpose. For that purpose property is not fungible; your farm near Kalona will not serve the purpose if the public purpose sought to be served is a high rise office and residential building in downtown Iowa City. Right? The only way to utilize that property is to take it from whoever now owns it.

But, then, Rexus can answer: "Ah, but at some point money is a fair substitute for real property." At which point we are, to quote George Bernard Shaw, "just haggling over price."

Replies to John later.

Nick said...

This is a response from Nick to some of John Neff's points.

1. If residents (who are paying extra property taxes to cover the waiver of taxes from TIF beneficiaries) get enough "general benefits" then "one can argue that TIFFs are not a problem." And "You appear to be taking the position that there are NO general benefits from TIFFs. You need to support that position with some facts Nick."

2. What kind of new jobs are created by TIFFs, does anybody know, and do they create enough additional tax revenue to make the cost of the TIFF "revenue neutral"?

Good questions, producing a number of responses.

(a) Bottom line: I'm quite willing to have my feeble understanding of economics, not to mention tax policy, and even mathematics, challenged. But it seems to me the question shouldn't be whether there are benefits; there will always be some kind of benefits when tax money is given to a lucky business person -- even if all they do with it is take another trip to Las Vegas. The answer to the question turns on both a but-for and a benefit-cost analysis; Is it truly the case that, but for the TIF, the project would not have been built? And, if yes, do the benefits so significantly exceed the costs (the lost taxes) that the public is getting a fair return on its money?

The but-for test is almost impossible to pass. As my mother used to say when I asked if a new medicine helped, "How would I know?" Even though one assumes developers are in business to develop, how could you ever be confident that a developer wouldn't choose to just sit on a potentially very valuable piece of property, losing more and more of that potential profit every year? It could happen. What is much more likely, however, is that he's hopeful if he pleads just a little longer maybe the government will hand over some of the taxpayers' money and make the development even more profitable.

However, on the assumption that the project would have been built without the TIF, intuitively it would seem obvious that there is no way the benefits will ever exceed the costs. That is, more taxes will be collected over this history of the undeveloped land becoming valuable property if the appropriate taxes are assessed and paid every year than if some of them are never collected, or significantly postponed.

(b) The ideological hypocracy is another matter of less significance. Frankly, government programs don't bother me. But consider those who believe that "marketplace regulation" is all that we need, that the government should keep its hands off what business wants to do, and that consumers and taxpayers are best served by competitive free private enterprise. Shouldn't they feel a little sheepish about holding their tin cup out for us taxpayers to fill?

(c) Jobs. I have never believed that the talk about "jobs programs" was ever anything more than that: talk. It's the blue smoke used to cover corporate welfare, because it sounds a lot better and is more politic than "just another further enrich the wealthy program."

See generally Nicholas Johnson, "Values Fund May Not Be So Valuable for Taxpayers," Des Moines Register, April 13, 2006.

The money goes, not to those hired, but to a CEO who decides (within some limits) how many and who to hire and what they'll be paid. It is, as I quote John Kenneth Galbraith's observation in the op ed above, that "if you feed the horse enough oats, something will pass through to the road for the sparrows."

As I also point out there, "If we really want to create jobs with taxes, let's do it directly. There were 50,000 Iowans among the 3 million in President Franklin Roosevelt's Civilian Conservation Corps. They built many of our state parks -- at a miniscule fraction of the Value Fund's $700 million."

But put those observations aside and assume for a moment that the purpose, or at least one purpose, of the Iowa Values Fund, and TIFs, is to create jobs. Shouldn't we, again, ask questions such as, "Would those jobs have been created anyway, without the aid of taxpayer money?" "Would there have been a more efficient, cost effective, way to provide that much employment?" And, as is so often the case, "To what extent were these 'newly created jobs' merely the result of moving jobs from one company, or county, to another?" "Created"? Yes; but not a net creation.

(Somewhere I saw (and probably have on the rain forest Web site) that the Coralridge Mall grosses something like $100 million a year in retail sales, but as a result the surrounding counties have suffered reductions in sales of almost as much. I suspect that many of the "new jobs" the Values Fund folks are citing are transferred rather than newly created.

John Neff said...

Your point about Coral Ride Mall moving jobs into Johnson County form nearby counties is interesting. If some of the these people move to Johnson County they will need housing.

So how much new housing will be needed to replace the $3 million of property tax revenue lost by Johnson County. I checked the Auditors web and they have a spread sheet that gives the City and rural levees. A rough estimate of the weighted mean by popilation is about $7 per $1000 of vaulation. This means we need about $430 million of new taxible value for the all Johnson County TIFFs to be revenue neutral. This could be spread over say five years of years.

I think that might not be that far off for total new value but it far exceeds anything that could be generated by the TIFFs.

I agree the jobs argument sounds like self serving BS.

Anonymous said...

You are confusing TIFs with Tax Abatement. Under tax abatement, a company can benefit financially by not having to pay taxes.

When a TIF is used, the company moving in doesn't necessarily get a monetary benefit. In most cases, the city or county uses TIF to build roads, water lines and other infrastructure in order to help facilitate the company's locating there. In my mind, it is much different than a cash payout.

Either way, the issue in question was whether or not the Legislature needed to pass a statewide ban on using TIF because somewhere between ONE and TWO percent of the city officials that were using TIF were abusing it.

In the end, legislators decided that local control was probably the way to go; that the countless communities that use TIF effectively to benefit their own taxpayers (by lowering taxes in the long run) should not be penalized because of a few morons, and that local citizens should vote out of office city officials who abuse TIF instead of running to Des Moines and asking for them to fix the whole state.

John Neff said...

They are not morons they have diverted tax revenues from the school district and the county to pay for projects in their cities. Why would their citizens vote them out of office?