Big Differences for Small Governments: Local Governments and the Takings Clause

This Article argues that the Fifth Amendment’s Takings Clause should apply differently to local governments than to higher levels of government. The Takings Clause is at the heart of an increasingly contentious debate between property rights advocates and proponents of deference to government regulation. More often than not, the terms of the debate have focused on a traditional economic account of the Takings Clause. Property rights advocates argue that expanding the compensation requirement is necessary to force the government to internalize the costs of its actions, ensuring that regulations will occur only where benefits exceed costs. Others, however, argue that governments respond to political and not monetary costs, so that a compensation requirement will not influence government decisionmaking in any predictable way. Public choice theorists, in particular, argue that regulations are more likely to result from special interest group rent-seeking, while costs are passed on to taxpayers generally. Where the public choice theory critique applies, compensation will not serve as a meaningful check on regulatory incentives.
This Article argues that the strength of the public choice critique rises and falls with the level of government. Local governments are largely majoritarian and specifically responsive to local homeowners. Because local governments also receive most of their revenue from local property taxes, forcing local governments to compensate under the Takings Clause will, in fact, force them to internalize the costs of their actions. However, local governments’ regulatory incentives are subject to their own specific distortions. Local governments are risk averse, so the prospect of a large takings judgment may over-deter them from acting. Local government regulations also tend to impose significant positive and negative externalities on neighboring communities. This Article therefore proposes (1) ratcheting down compensation for takings by local governments to account for their risk aversion, and (2) creating
a form of intergovernmental liability to allow local governments to capture the positive externalities of their actions and to force them to pay for the negative externalities.