The Illusion of Fiscal Illusion in Regulatory Takings
49 Pages Posted: 16 Apr 2016 Last revised: 12 Jan 2017
Date Written: November 1, 2016
In January 2016, the Supreme Court granted certiorari in Murr v. Wisconsin, the first regulatory takings case to be decided by the Roberts Court. Because regulatory takings doctrine has little direct support in constitutional text, history, or precedent, arguments to expand regulatory takings rest heavily on policy grounds. This Article argues that the central efficiency argument for expansion — often dubbed “fiscal illusion” — is based on a surprising mistake. Without compensation, the argument goes, governments operate under a fiscal illusion, because from their perspectives, 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 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 roughly 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 direct 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: Regulatory takings, taxation, land use, law and economics, Murr v. Wisconsin
Suggested Citation: Suggested Citation