The Fifth Amendment to the U.S. Constitution requires paying just compensation when any private property is taken for public use. Some property-rights militants argue that any government action that diminishes the value of private property constitutes a “taking” for which owners should be paid. But few of these militants ever address the phenomenon of government actions that increase the value of specific private properties.
A local example is the dramatic increase in the value of real estate along University Avenue in St. Paul. Prices of many commercial properties have tripled in three years. Some of this appreciation can be attributed to simple economic growth or the long-term cyclical swings of business vitality in a given neighborhood.
A large part, however, is driven by expectations that a light-rail line, which will link downtown St. Paul to downtown Minneapolis, will be built on University Avenue. This line would cause a dramatic increase in the number of people traveling down this corridor and would improve access to any businesses along it. A feeding frenzy is going on right now as national retailers and local developers jockey for ownership of key properties.
The value of some storefronts has increased by $100,000. A fast-food stand appreciated $125,000. Increases for sites like Sears’ are in the millions of dollars.
This isn’t necessarily good news for businesses along University. Many rent their properties and face being pushed out by buyers with deeper pockets. As British economist David Ricardo observed 200 years ago, increases in the profitability of a business accrue to the owners of the most limited resource -– usually owners of land — and not necessarily to those running the store.
While some government actions — building a freeway through a residential area, for example — can decrease values of adjacent properties, other actions like a new transit line bring windfalls for others.
One can see the same phenomenon along Minnesota 60 in southwest Minnesota. Over the last three decades the highway has been routed around towns like Mountain Lake, St. James and Madelia. Gas stations on Main Streets that were once coveted property now stand empty. Large gas stations and convenience stores stand where corn grew a decade ago. Main Street owners lost out. Farmers who owned land adjacent to a new interchange gained.
Historically, we only paid for land actually taken for constructing a commuter rail line or highway bypass. We have not compensated other landowners whose property changed in value as a direct result of such projects. That probably is the right course of action.
Let’s not be naive, however, about the side effects of government activity. Direct taxes and subsidies are not the only things government can do that decrease or increase the wealth of private individuals. Decisions about when or where to build critical infrastructure give wealth as well as take it.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.