The Illusion of Fiscal Illusion in Regulatory Takings
39 Pages Posted: 14 Nov 2015
Date Written: November 12, 2015
The central economic justification for compensating owners for losses from land-use restrictions is based on a surprising mistake. Compensation is said to make governments internalize the costs of their actions and therefore enact more efficient regulations. Without compensation, the argument goes, governments operate under a fiscal illusion, because from their perspective, their actions are costless.
The problem is that this argument makes no sense as a description of the actual costs to governments. Taxation is the main way governments get revenue, and most taxes depend on the value of property and its permissible uses. If governments restrict land use so as to reduce its value or the income produced by it, its residents, or its patrons, they generally already feel the loss in their budgets. If the restriction creates benefits, those too are reflected in tax revenues. While there are limitations to the accuracy and efficacy of the tax signal, efficient regulations should have a net positive effect on governmental revenues, while inefficient ones should have a net negative effect. Fully compensating owners, in contrast, does not lead the government to accurately internalize societal costs — it rather adds a new and much larger cost. Because this cost usually far exceeds revenue gains, governments may rationally forgo even efficient regulations. Owner compensation, in other words, does not correct fiscal illusion. It creates it.
Revealing the illusion of fiscal illusion leaves standing much older arguments that compensation is required as a matter of fairness. But by clearing away the main efficiency justification for one-to-one compensation, this Article permits clearer-eyed assessment of whether and to what extent fairness may require compensation, and prevents measures in the name of efficiency that in fact undermine it.
Keywords: Fiscal Illusion, Regulatory Takings, Land Use, Taxation
JEL Classification: D72, H20, H71, K10, K11, K34
Suggested Citation: Suggested Citation