Revisiting Kelo v. New London: The Tax Consequences of the Supreme Court’s Ruling

In Kelo v. New London, the U.S. Supreme Court ruled that that Takings Clause of the U.S. Constitution did not bar the city of New London, CT, from using its eminent domain power to transfer ownership of land from homeowners to economic developers so long as the transfer furthered a valid “public purpose.” The Court accepted the argument of New London that transferring the property from the current homeowners to private developers would increase the number of jobs in New London and increase the tax revenues available to the city. This, in the Court’s mind, was enough to satisfy the “Public Use” requirement of the Takings Clause.

The Kelo ruling adds an interesting twist to the concept of tax neutrality. Public finance theory (as well as our own principles of tax policy) dictates that taxes should be neutral to investment decisions. Thus, taxes on property should only seek to raise revenue and not distort the way in which the property is used. The Kelo decision, however, gives carte blanche to government redistribution of land to those taxpayers that will generate the most tax revenues.

The Kelo decision also creates an interesting, if not ironic, twist on the Sixth Circuit’s ruling in Cuno v. DaimlerChrysler. In that case, the Sixth Circuit ruled that Ohio’s investment tax credit, taken by DaimlerChrysler for building a plant in Ohio, discriminated against interstate commerce because other Ohio corporations that invested outside Ohio were not eligible for the credit. In the decision, though, the Sixth Circuit gave its blessing to the use of property tax abatements, finding no constitutional infirmity.

Thus, reading Kelo and Cuno together, the Constitution is no bar to transferring property from one private owner to another, so long as the subsequent owner generates higher tax revenues from investment on the property, but giving the new owner a corporate tax credit for investment on the seized property is unconstitutional because it discriminates against interstate commerce.

As Justice Thomas said in his Kelo dissent, “[s]omething has gone seriously awry with” our “…interpretation of the Constitution.” Were Cuno to become the law of the land, expect more states and localities to seek to attract new investment through the use of eminent domain instead of tax credits. Thus, we would trade a system where corporations are allowed to keep more of their tax dollars for a system where they are given other people’s property. Both systems are imperfect but the tax credit system is far preferable in a society that values freedom and democracy.