Eliminating the Federal Subsidy in Kelo: Restricting the Availability of Tax-Exempt Financing for Redevelopment Projects

Georgetown Law Journal, Jun 2006 by Knepper, Daniel

"Nissan gets the land, taxpayers get the bill and the people get the boot . . . ."1

"The specter of condemnation hangs over all property. Nothing is to prevent the State from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory."2

"A computer search of state budgets and special acts since 1988 shows no direct appropriations to the [New London Development Corporation]. . . . A search of the bond allocation databases maintained by the Office of Fiscal Analysis (OFA) and the Office of State Comptroller shows $82,355,000 in total bond allocations directly to the NLDC through the Office of Policy and Management and the Department of Economic and Community Development (DECD)."3

INTRODUCTION

The Supreme Court's decision in Kelo v. City of New London allows the condemnation and seizure of property from one private party in order to deliver it to another private party solely for economic development.4 Nothing need be wrong with the property: the parcel need not be blighted, be in a blighted neighborhood, or be the site of a future school or road. Rather, the parcel, in the eyes of the legislature, only needs to be worth more when put to a different use.5

The decision generated outrage.6 A poll conducted in July, only a month after the decision, by Quinnipiac University in Connecticut found eighty-nine percent of the state's voters favored laws limiting the use of eminent domain.7 The force of the backlash to the decision has already been compared to the backlash generated by Roe v. Wade* The decision became an issue in the confirmation hearings for Chief Justice John Roberts.9 Even the author of Kelo, Justice Stevens, viewed the legal outcome as "unwise."10

Currently, legislatures are debating new laws intended to curb the use of eminent domain for economic development. At congressional hearings held only three months after the decision was handed down. Democratic Representative Maxine Waters proposed legislation to prevent states that seize property for private use from receiving Community Development Block Grants.11 Republican Senator John Cornyn called for eliminating federal funding for any Kelo-like project.12 While eliminating federal funding for projects using eminent domain for economic development may "make state and local governments think twice" before using eminent domain,13 spending is not the only federal subsidy states may utilize for such projects.

States and municipalities may fund redevelopment projects through taxexempt bonds. Despite congressional efforts to curtail the use of tax-exempt bonds for private uses, the Internal Revenue Code (Code) not only allows projects like the one in New London to receive tax-exempt financing, but it also creates a windfall for the developer.14 In order to use tax-exempt bonds, cities, municipalities, states or redevelopment agencies are compelled to transfer the land to the developer of the project at well below market value. In the process, issuers thwart Congress's intent for the use of bonds: Congress has established specific guidelines and limits under which tax-exempt bonds may be issued for blight removal, for example, but by transferring land at well below market value, cities are still able to issue bonds for projects failing to meet these criteria.

This Note suggests a change in the Code whereby property transferred to developers for redevelopment projects must be valued at its fair market value for tax purposes. Part I explores the Supreme Court's decision in Kelo v. City of New London, focusing on the treatment of eminent domain for economic development and blight removal. Part II provides an overview of the municipal bond market and the utilization of various municipal bond exemptions by cities and states. Part III explores the intricacies of the Code, fleshing out the bizarre incentive that encourages states and municipalities to transfer land at a fraction of its value in order to benefit from the Code's subsidy for projects like the one in New London. In addition, special attention is paid to the "qualified redevelopment bond," a rarely-used provision of the Code allowing tax-exempt bonds to be issued for blight clearance. Part IV considers two projects, both of which utilize tax-exempt financing, to illustrate how the Code works. The fifth and final Part of the Note proposes a solution to these inconsistencies by requiring properties to be valued at market value for tax purposes.

I. EMINENT DOMAIN FOR ECONOMIC DEVELOPMENT: KELO V. CITY OF NEW LONDON

In June 2005, the United States Supreme Court held that the Constitution does not bar the seizure of land for economic development.15 This decision is examined below, with a special emphasis on the conditions under which the land was condemned and the Court's discussion on eminent domain for economic development and blight removal. Moreover, the discussion highlights the relationship between the city of New London and the developer of the seized properties.

Because of high unemployment and a declining population, Connecticut's Office of Policy and Management declared the city of New London to be a distressed community.16 In order to revive the town, the New London Development Corporation (NLDC) approved a development plan which included the condemnation and redevelopment of about ninety acres of a neighborhood on the Fort Trumbull peninsula; the Fort Trumbull neighborhood was to be replaced with a mixed-use development including a state park, restaurants, research and development office space, and marina or parking services.17 The development contract included a ninety-nine year lease to Corcoran Jennison, a developer, at a rent of one dollar per year.18