Property Owners Hit by Regulatory Takings Deserve Compensation

The most widely reported story regarding this year’s election results was the Democratic Party achieving majorities in both the U.S. House of Representatives and Senate. But while that story received the most coverage, it might not have been the most significant one. That status likely belongs to the success of a number of property rights ballot initiatives.

In all, 13 states had property rights initiatives on the ballot (including one that was on Louisiana’s primary ballot). Ten of them passed. Some of these 13 proposals dealt solely with physical takings and others dealt with both physical and regulatory takings.

Traditionally, a property owner has numerous rights regarding his or her property. These include, but are not limited to, the right to possess the land, to exclude others from the land, to use the land or to sell the land. Property lawyers often refer to these various rights as "a bundle of sticks." Physical takings occur when the government, after paying just compensation, takes physical possession of a piece of property and puts it to public use. In essence, the government takes all the sticks. Regulatory takings occur when the government enacts a regulation or law that diminishes the value of the property but does not take ownership. With regulatory takings, the government takes some, but not all, of the sticks.

Regulatory takings are an insidious way for a society to achieve its goals. With regulatory takings, the government generally does not have to pay for the property owner’s lost value unless the property’s value has been lowered to almost nothing. With physical takings, the government must pay the full value of the property when it wants to use it for a public use. In contrast, with regulatory takings, the government can limit the manner in which the owner can use the property (i.e. the government can take a stick or two) without having to pay for it. These limiting regulations are in effect free public uses, and the landowner pays a one-person tax.

A couple of examples may help illustrate the concepts. If the government takes property valued at $100,000 in order to build a road, then the government pays $100,000 to the former owner and the cost is dispersed to all of the government’s taxpayers. But if the government imposes a wetlands regulation that lowers the value of that property from $100,000 to $40,000, it is the landowner alone who absorbs the entire $60,000 loss. The government pays nothing and it thereby receives a $60,000 benefit for free.

In this election cycle, reformers took three courses. Some chose to present to the voters only physical takings reforms; every one of those measures, including Michigan’s Proposal 4, passed overwhelmingly. In Washington, reformers solely focused on regulatory takings and aggressively sought to compensate property owners for any regulation that came into effect since 1996. The Washington property rights advocates were severely outspent, and the initiative was defeated. Reformers in three states placed initiatives that combined physical takings reform and regulatory takings reform. In Idaho, a combined reform was defeated. In California, a combined initiative was narrowly defeated, but reformers are already looking to 2008 and might not be outspent by more than 3-to-1 again.

In the one state where the property rights advocates were not outspent, Arizona, a combined reform initiative passed with 65 percent of the vote. Arizona thus joins Oregon, which passed a regulatory takings measure in 2004, as a state that requires the government to either compensate an owner for the value lost due to the regulation or to not enforce the regulation against that owner.

Under the Michigan Supreme Court’s current controlling case law, regulatory takings are generally not compensable, though there is a possibility that the court could reexamine this issue in the right case. Regardless, given that slightly more than 80 percent of Michigan residents voted in favor of Proposal 4, it seems likely that either through the Legislature or a petition drive regulatory takings will need to be addressed. Joining the national trend, the people of Michigan expressed a clear desire to make sure that property owners are protected from governmental abuse. Requiring the government to pay for property that it devalues is the next logical step.

Patrick J. Wright is senior legal analyst at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.