By John C. Mozena
One of the most famous injustices ever perpetrated in the name of “economic development” happened 20 years ago when the U.S. Supreme Court allowed the city of New London, Conn. to use its eminent domain powers to seize Susette and Tim Kelo’s ‘little pink house’ to make way for private real estate developers. The current Supreme Court is now being asked to revisit and overturn that decision, and everything we’ve learned over the intervening two decades about the way state and local government officials use and abuse their economic development powers for political and personal gain says the Court should take this opportunity to correct its 2005 error.
The issue at stake in Kelo v. City of New London, Conn. was a plan by New London’s economic development corporation to revitalize the city’s depressed waterfront area with a massive project centered on a Pfizer Inc. pharmaceutical research facility and conference center. This plan required the city to acquire 115 privately owned properties within the plan’s footprint, effectively wiping out an existing blue-collar residential neighborhood in the process.
Most property owners sold to the city. But more than a dozen, including Susette Kelo, refused. She loved the house that she and her husband Tim had lovingly restored over the course of many years, painting it a cheerful “Dusty Rose” pink color. It was her dream home, and she didn’t want to move just because a corporation wanted to build something there.
Susette believed, as most Americans would, that her local government couldn’t just take her home away because they thought a different private owner could put it to more profitable use. She believed that she was protected by the Fifth Amendment’s requirement that private property only be taken for clearly public uses such as for the construction of freeways, railroads, dams, parks, military bases or other public infrastructure.
What Susette Kelo and her fellow New London holdouts didn’t expect was that Justice John Paul Stevens and four other justices would decide that the mere existence of a government “economic development plan” turned a private development project into public use, enabling the city government to use its eminent domain power to override private property rights.
“The City has carefully formulated an economic development plan that it believes will provide appreciable benefits to the community, including—but by no means limited to—new jobs and increased tax revenue,” wrote Stevens in the Court’s decision. “Because that plan unquestionably serves a public purpose, the takings challenged here satisfy the public use requirement of the Fifth Amendment.”
Stevens clarified that it was the existence of this government plan that turned what would be an impermissible taking into permissible public use. “[T]he City would no doubt be forbidden from taking petitioners’ land for the purpose of conferring a private benefit on a particular private party,” he wrote. “Nor would the City be allowed to take property under the mere pretext of a public purpose, when its actual purpose was to bestow a private benefit.”
This reliance on government planning and implicit assumption that those plans’ existence could and would result in their planned outcomes showed through in the language Stevens used to describe the future. His opinion referenced a hotel “that will include restaurants and shopping” and “will also have marinas for both recreational and commercial uses,” as well as another parcel that “will be the site of approximately 80 new residences organized into an urban neighborhood and linked by public walkway to the remainder of the development, including the state park.” [Emphasis added.]
Stevens was wrong in these assertions. Not only wrong morally and legally, but also wrong factually as there would never be a hotel, restaurants and shopping, 80 new residents or any of the other benefits whose existence he so confidently asserted. The “carefully formulated economic development plan” that justified seizing Susette’s home fell apart almost immediately, Pfizer left town and the land remained vacant for years, famously becoming home to a colony of feral cats instead of buildings full of pharmaceutical researchers. Today, there are finally plans to build a community recreation center on the site; one funded largely through government appropriations and that will not pay any of the property taxes that justified the Kelo decision.
Stevens relied again on the government’s development plan in allaying the “suspicion that a private purpose was afoot” in the Kelo’s case. Doing so, he noted, would be a violation of the ancient common-law principle that “the sovereign may not take the property of A for the sole purpose of transferring it to another private party B, even though A is paid just compensation.”
He wrote, “It is further argued that without a bright-line rule nothing would stop a city from transferring citizen A’s property to citizen B for the sole reason that citizen B will put the property to a more productive use and thus pay more taxes. Such a one-to-one transfer of property, executed outside the confines of an integrated development plan, is not presented in this case… While such an unusual exercise of government power would certainly raise a suspicion that a private purpose was afoot, the hypothetical cases posited by petitioners can be confronted if and when they arise. They do not warrant the crafting of an artificial restriction on the concept of public use.”
In effect, Stevens told local government officials that so long as they could produce an economic development plan, no matter how haphazard or farfetched it might be, that they were allowed to seize, transfer and otherwise rearrange private property virtually at will within their jurisdictions without fear that the courts would uphold the original owners’ property rights.
It’s not that Stevens and his fellow members of the Kelo majority couldn’t have possibly understood the implications of their decision for private property owners across the country. In her dissent to the Kelo decision, Justice Sandra Day O’Connor warned that “all private property is now vulnerable to being taken and transferred to another private owner, so long as it might be upgraded—i.e., given to an owner who will use it in a way that the legislature deems more beneficial to the public—in the process.”
Similarly, while Justice Anthony Kennedy voted with the Kelo majority he still felt the need to write a concurring opinion warning judges about taking governments’ assertions of “public use” at face value in the future. In a unfortunately rare Supreme Court example of treating property rights as worthy of the same protections as other civil rights, Kennedy wrote, “A court applying rational-basis review under the Public Use Clause should strike down a taking that, by a clear showing, is intended to favor a particular private party, with only incidental or pretextual public benefits, just as a court applying rational-basis review under the Equal Protection Clause must strike down a government classification that is clearly intended to injure a particular class of private parties, with only incidental or pretextual public justifications.”
Months later, Stevens would admit publicly that he regretted his role in the Kelo decision, saying he felt bound by the Court’s precedent. His colleague Justice Clarence Thomas did not share that feeling of restraint, as he viewed the precedential cases as incorrectly decided as well. “Today’s decision is simply the latest in a string of our cases construing the Public Use Clause to be a virtual nullity, without the slightest nod to its original meaning,” he wrote in his solo dissent. “In my view, the Public Use Clause, originally understood, is a meaningful limit on the government’s eminent domain power. Our cases have strayed from the Clause’s original meaning, and I would reconsider them.”
Justice Thomas may now have an opportunity to do so. The libertarian public-interest law firm Institute for Justice, which represented Susette Kelo in front of the Supreme Court, has another client whose private property rights have been egregiously violated in the name of “economic development.”
The Institute for Justice has filed a petition for certiorari with the Supreme Court in Bowers v. Oneida County Industrial Development Agency. Bowers Development LLC had purchased property in Utica, NY with the intention of building a medical office building on it. However, that property was seized by the government of Oneida County, NY under eminent domain and transferred to the owner of a rival neighboring medical office building for use as a parking lot. Bowers sued, but New York courts effectively applied the Kelo standard and ruled that “[w]hat qualifies as a public purpose or public use is broadly defined as encompassing virtually any project that may confer upon the public a benefit, utility, or advantage.”
While New York may be one of the worst states for private property owners in applying this vague a standard, it’s far from alone in allowing local governments wide leeway in defining “public use” for eminent domain takings that ultimately benefit private entities. Yes, the Kelo decision sparked a widespread public backlash that resulted in 34 states passing laws to limit their governments’ eminent domain power within the next two years. In total, 47 states have made eminent domain takings more difficult than the standard the Kelo decision set out whether through legislation, constitutional amendments or court decisions.
But despite these efforts, what happened to IJ’s client Bowers in Utica happens all the time across the country, in projects of all sizes. The famously disastrous $4.5 billion Foxconn project in Wisconsin relied on eminent domain. So too does the North Carolina factory project of Vietnamese electric vehicle manufacturer Vinfast, which will require the seizure of 27 homes, five businesses and a century-old church in Chatham County. The Barclays Center arena in New York City required the destruction of a neighborhood through use (or threat) of eminent domain, as have stadiums and arenas in Sacramento, Atlanta, Los Angeles, Newark, Arlington, TX, Washington, DC and other cities.
In the wake of Kelo, all of these uses of eminent domain involve private property owners having their rights overridden by the existence of government economic development plans asserting a future public benefit, with virtually no attention paid by courts to whether those plans are plausibly worth the paper on which they’re printed.
The evidence against the value and reliability of these plans was already mounting even before the Kelo decision. In 2004,the year before Kelo was decided, the Journal of the American Planning Association published a study by University of Iowa researchers Peter Fisher and Alan Peters titled “The Failures of Economic Development Incentives” that reached a blunt conclusion: “…the best case is that incentives work about 10% of the time, and are simply a waste of money the other 90%.”
More research followed to confirm and build on these results. In 2018, researcher Timothy Bartik at the W.E. Upjohn Institute for Employment Research published a landmark review of the academic research into the “but for” question of how much economic development agencies’ plans actually change what would have happened anyway without their involvement. What Bartik found was that “…typical incentives probably tip somewhere between 2 percent and 25 percent of incented firms toward making a decision favoring the location providing the incentive. In other words, for at least 75 percent of incented firms, the firm would have made a similar decision location/expansion/retention decision without the incentive.”
In other words, at least three-quarters of government economic development plans involving tax incentives are invalid and have no meaningful bearing on what happens in the real world. Yet these are the same plans the Kelo decision imbued with the virtually unquestionable power to override private property rights merely by existing.
That same year, researchers Mary Donegan of the University of Connecticut and T. William Lester and Nichola Lowe of the University of North Carolina at Chapel Hill published an assessment of states’ economic development programs. Despite governments’ optimistic plans and predictions, the authors concluded, “When we examine the overall effectiveness of state incentive grants on firm-level performance, we find little evidence that they generate new jobs or other direct economic benefits to the states that employ them.” In fact, they found that these agencies plans may well be leaving the business environment worse off than before, as “Overall, we find that incentivized establishments lead to lower employment gains than their nonincentivized peers.”
“This simple but direct finding—that incentives do not create jobs—should prove critical to policymakers,” they wrote, directly contradicting the Kelo decision’s core reliance on the plans behind those incentives in the name of “job creation.”
Most recently, economist James Hohman at Michigan’s Mackinac Center for Public Policy undertook a project to compare the headline-level “job creation” claims for economic development projects covered on the front page of the state’s largest newspaper between 2000 and 2020 with the actual real-world hiring results at the relevant companies. Hohman’s study found that just 9% of the planned jobs ever came to fruition, a success rate that yet again calls Kelo’s reliance on the plans behind those announcements into question.
While these and many other researchers were focused on quantifying the minimal (at best) economic impact of governments’ economic development plans, others were asking the next obvious question: If there’s so little economic value to these plans, then why do governments keep making them?
The answer, unsurprisingly, is ‘politics and personal gain.’
In 2018, researchers Daniel Aobdia of Penn State and Alison Koester and Reining Petacchi of Georgetown dug into the role of political connections in state governments’ economic development planning decisions and found clear evidence that contradicts the “public good” assumptions at the heart of Kelo. According to their research, “A firm is nearly four times more likely to receive an award, and the award is 63 percent larger, when the firm makes campaign contributions to state politicians.”
Similarly, in 2020 the American Economic Association’s Journal of Economic Perspectives published a study by professors Cailin Slattery at Columbia University and Owen Zidar at Princeton University that found that government economic development plans could have potential economic benefits, but that this outcome “relies on politicians picking winners on the basis of economic rather than political reasons.” However, they discovered that the political impetus for these deals was in fact so widespread that it was the electoral calendar and not economic conditions that drove them: “[P]er capita incentive spending increases by more than 20 percent in half of the cases in which it is an election year and the governor is up for reelection versus one-fifth of the cases otherwise.”
Other researchers have supported these results, finding that politicians who draw up plans for political rather than public-good reasons receive more in campaign donations and have higher margins of victory on Election Day; that governments’ plans for which industries to favor are driven by those industries’ lobbying and campaign donations; and that the boundaries of things like Opportunity Zones can be heavily influenced by the partisan affiliation of the local legislators.
In short, 20 years after the Supreme Court gave immense, virtually unquestioned deference to governments’ economic development plans we now have good evidence that those plans not only fail more often than they succeed, but also are pervasively influenced by private self-interest rather than the “legitimate public purpose” on which the Kelo decision relies.
Justice Stevens admitted in Kelo that “[T]he City would no doubt be forbidden from taking petitioners’ land for the purpose of conferring a private benefit on a particular private party.” If campaign donations and other forms of lobbying are having such a comprehensively distortionary impact on governments’ planning decisions, then the entire process should be rejected for being what Stevens called a “mere pretext of a public purpose, when its actual purpose was to bestow a private benefit.”
The Bowers v. Oneida County Industrial Development Agency petition for certiorari currently in front of the Supreme Court poses two questions for the Court to answer. The first is whether courts assessing eminent domain cases like these should use more than a fig-leaf “minimal rational basis review” of governments’ plans and motives and instead engage in the kind of meaningful inquiry into governments’ real motives endorsed by Justice Kennedy’s concurrence in Kelo.
The second question is simple: “Should Kelo be overturned?”
The justices on today’s Court should look at the evidence of the past two decades and answer that question correctly: Yes, it should.