ECONOMIC DEVELOPMENT TOOLS
Tax abatement and eminent domain have generated more paper, debate and bad feeling, and produced more cost-benefit studies than any other ED tool. Eminent domain is linked to infrastructure strategy, and tax abatement to business attraction/retention. They both by definition involve private property, wherein lies the core problem— crossing a “fault line,” a policy no man’s land between Privatism and Progressivism. Progressivism is uncomfortable, to put it mildly, with assisting private business, preferring instead to provide tax abatement (think earned income tax credit and progressive income tax rates) to people—poor people. Policy analysts call it redistributive public policy—which, guess what, Privatists are seldom thrilled about.
In life, the core issue is qui bono (who benefits?): business, society or the disadvantaged. Everybody supports “their” tax abatement or eminent domain—not the other guy’s. During the pre-Civil War years, both ED tools were prominent, used pervasively—actually they were essential to the ED strategies pursued by states and jurisdictions. They were used by business corporations or hybrid public/private EDOs—either an experiment or a stupidity depending on how one views the concept of a “private” EDO. That is a point behind this section: to explain the Early Republic basis for tax abatement and eminent domain for the benefit of private enterprise. The conclusion that follows is “like it or not, it’s legal.” And it’s a part of our ED heritage. Here’s why.
Business Tax Abatement: Economic Development’s Oldest Tool
Tax abatement is as old as the hills, the Seven Hills of Rome for example. That is the first lesson our history teaches concerning tax breaks. How long have state/municipallevel tax differentials been used in America? The US Supreme Court in the 1871 Wilmington Railroad v. Reid decision traced tax incentives to a North Carolina 1790 exemption incorporated in the Dismal Swamp Canal Company charter. (We did not make this up.)3 Between 1812 and 1830 Vermont exempted local manufacturing firms from state/local taxes (Bruchey, 1968, p. 128)—so did most other states. In a later chapter an even earlier dates will be cited.
Another example involves our saintly Abraham Lincoln. In January 1856 Lincoln argued before the Illinois Supreme Court that the Illinois Central Railroad didn’t have to pay taxes to McLean County. He argued that the company charter limited the payment of taxes solely to the State of Illinois. Lincoln won the case.4 Tax abatement is apple pie America.
One might wonder if some constitutional clause stops tax abatements dead in their tracks. Obviously not! The power to grant tax abatements stems from the power to tax. If a jurisdiction can tax, then the jurisdiction can exempt from taxes. One power is inherent to the other. The federal Supreme Court decision Mobile and O.R.R. v. Tennessee (1894) sustained state tax exemption for a particular railroad by recognizing, first, the legislature’s constitutional authority to grant an exemption; and, second, “that such an exemption might confer either total or partial immunity from taxation, and extend for any length of time the legislature might deem proper” (Benjamin, 1980, p. 663). It has not yet been overturned.
Other articles of the Constitution might offer hope. Constitutional clauses requiring federal and state “uniformity” and the equal protection clause are regarded as the next best hopes to limit tax abatement. The uniformity clause provides that “all Duties, Imposts and Excises shall be uniform throughout the United States.” Most state constitutions mirror this language. Court decisions over the years, however, have created a distinction between direct and indirect taxes (duties, fees). The Supreme Court has consistently held that the uniformity clause does not apply to direct taxes.5 Property and sales taxes are direct taxes. Benjamin (1980, p. 663) observes that most state court decisions “apply the federal standard and require only that all tax laws apply generally throughout the state, subject to any exemptions which the legislature may deem necessary.”
For example, a 1978 Supreme Court, decision confirms the power of Congress to “pin-point spending in various localities of intense unemployment and underemployment so that it may choose to concentrate on urban poverty or rural poverty or that it may attack certain sources of poverty without challenging others,” and that “Congress must be free to provide tax incentives to businesses located in the poorest neighborhoods so long as those incentives do not violate the uniformity clause by being totally or partially unavailable to any qualified community.”6 How specific or narrow can an exemption be? Justice Cardozo ruled that abatements may be as “narrow as the mischief.”7
Next the equal protection clause (Fourteenth Amendment) applies only to the states and not to the federal government, which means that state/local tax exemptions could potentially be challenged under the equal protection clause. Precedence, however, allows state legislatures broad discretion, bordering on deference, in determining what is taxable or tax exempt. So long as “they and the classification upon which they are based be reasonable, not arbitrary, and apply to all persons similarly situated.” According to Wheeling Steel, Allied Stores v. Bowers, a state may grant exemptions primarily on the basis of residence when public policy factors are also present.8 As to whether non-exempted taxpayers’ (or business competitors’) equal rights are violated by tax abatement, courts have consistently struck down cases that pursued this argument.9
Tax Abatement in the Nineteenth Century
If the Supreme Court is correct, the first recorded tax exemption was allowed in Washington’s first year in office. Banks, insurance companies and railroads were the first recipients. Some were intended to launch startups, particularly finance companies and banks; railroads could obtain perpetual abatements. Some abatement was partial and others total. Most states used corporate charters to convey tax abatement. Once granted, it was hard to claw back; tax abatement was interpreted as a contract that could not be breached. Early Republic state-wide tax differentials favoring manufacturing firms were common throughout the nineteenth century. Manufacturers were the gazelles of the day. Post-Civil War economic developers wanted these fast-growing, job-creating firms—and they were willing to pay up to get them to locate in their state and city. New York, almost certainly not the first state, abated its capital stock tax for manufacturers starting in the 1880s. Pennsylvania, not keen to lose firms to New York, followed suit within a year. Cities played the game as well, Louisville Kentucky in 1913, for example, abated all local taxes for manufacturing firms for five years—then had to argue before a state appeals court as to how to define manufacturing (making popcorn at a movie theater was manufacturing in that case). Tax abatement, it seems, was woven into our national fabric long before the turn of the nineteenth century.
What’s Yours Is Mine: Delegation of Eminent Domain to Private Corporation
I am also interested in outlining the context in which eminent domain, despite its controversy, became a core tool in the profession; it did so due to its centrality in the development–redevelopment process. Eminent domain is not just another tool in the economic developer’s toolbox. Government taking of property for public purposes is one thing; but the taking of property from one individual/corporation and transfer of such property to another individual/corporation is a doubly serious matter. On its face government taking away one person’s private property and giving it to another private person is just wrong. The matter is thrice complicated when a private entity is permitted use of eminent domain to achieve its purposes, including profit.
Eminent domain, despite the Constitution’s Fifth Amendment forbidding federal/state government from taking private property without “just compensation,” has been, with rare exceptions, a matter of state law. Today there exist 51 separate processes (including federal government) with which to conduct eminent domain. Sub-state units of government can add their own provisions and strictures. Each state has constructed its own history, precedents and processes.
Eminent domain has never been restricted to government. Private entities have been delegated these powers by government. Historically, “natural monopolies” (water supply/distribution, inter-/intracity transportation, energy and communication networks) have exercised eminent domain subject to regulations and process required by government. They still do so today—although the “naturalness” of natural monopolies is increasingly questioned. Many “natural monopolies” are infrastructure and initial installation, and subsequent modernization of such infrastructure are long thought of as “legitimate” in ED. Delegation of eminent domain to private entities has been an important to urban infrastructure as well as urban development/redevelopment. Without eminent domain a road system, canal, railroad, streetcar, water pipe, sewer, electric cable or telephone wire “can’t get from here to there.”
In the nineteenth century infrastructure-based strategies were much-used ED strategies, and private entities were delegated eminent domain powers. This reality underscores one of our history’s themes: forge a hybrid EDO combining private resources/expertise with public powers/accountability. When, in this and future chapters, I refer to canals, railroads, “the tangle of pipes and wires,” streetcars, subways, water systems/filtration, electrification, street lights, and even roads and bridges, it implies that we are also including the use of eminent domain by a private entity. During the nineteenth century, private entities were delegated public powers, including eminent domain, by state and local government through charters and franchises (our hybrid EDOs): “The private companies built the infrastructure and supplied nondiscriminatory service in exchange for ‘the opportunity to earn a competitive return’” (Saxer, 2005, p. 61). By the first decades of the twentieth century this delegation of public powers exploded.
Western state constitutions, as they were initially approved, were especially aggressive in permitting eminent domain for the management and exploitation of natural resources. Water infrastructure and mining (oil and gas, forestry) were critical to Western development; and, if they required the taking of private land for the community’s greater good, then so goes it. Transportation infrastructure, the transcontinental railroads in particular, built cities, and railroads required control over the land on which they laid track. Hence the most outrageous aspect of eminent domain in these years was the widespread delegation by state governments of eminent domain authority to private entities—and it wasn’t only by western states.
Legislatures in many Eastern and Midwestern states delegated eminent domain authority to private transportation and manufacturing companies in order to promote economic expansion in a country with little surplus capital. State courts generally upheld this delegation on the grounds that the needs and wants of the community at that time were served by economic expansion. Thus the companies’ use of eminent domain was for a public rather than a private purpose … from a very early time in the Interior West, private natural resource development took on the mantle of public use … Courts in those states … recognized virtually no judicial authority to balance the purported needs of the private condemning authority against any countervailing economic, land use, or social concern. (Klass, 2008, pp. 21–2)
Federal court preference in eminent domain was to defer to states. When the federal courts conducted constitutional reviews of state actions relevant to eminent domain in private hands, both appeal courts and the Supreme Court gave deference to state delegation of eminent domain authority to private actors based on the courts’ acceptance that “different states had different economic needs based on their population, natural resources, and other economic drivers” (Klass, 2008, pp. 22–3).
Nineteenth-century tax abatement and delegation of eminent domain to private entities are excellent introductions not only to critically important ED tools but also to the predominant ED strategy of that time—it was the Age of Infrastructure. That strategy gained momentum as it became tied to the last of our Chapter 1 drivers of ED policy: competitive urban hierarchy. To make it all work, cities and states experimented to develop an effective and accountable EDO capable of implementing the ED infrastructure strategy.
Ron W. Coan 