APPENDIX

QUESTIONS AND ANSWERS

RESPONSE TO QUESTION OF SENATOR DIANNE FEINSTEIN TO JONATHAN H. ADLER Question 1. In your examples of "victims" of regulatory takings, you mentioned only small landowners. This Administration is doing a lot to protect small landowners, and I urge it to do more.

But I think we need to recognize, in discussing takings issues, that land ownership in the U.S. is highly concentrated. The vast majority of private land is owned by a small percentage of landowners.

According to Professor C. Ford Runge, Agricultural Economist at the University of Minnesota, roughly 78 percent of private land in the U.S. is owned by less than 3 percent of landowners. According to USDA, of the 1,326 million acres of private land in the U.S., agriculture and timber interests occupy around 90 percent. According to Professor Runge, less than 5 percent of all farmers own a majority of all farmland, and less than 1 percent of all timber owners own nearly half of all U.S. timberland.

Small, residential property owners constitute about 75 percent of private landowners in the U.S., but only 3 percent of the land.

According to USDA, roughly 3 of U.S. private land is farmland. As a rule, large landowners have benefitted considerably from governmental actions (agricultural subsidies, water subsidies, highway construction, etc.)

Under a broad takings law, the government would increasingly be required to compensate landowners for any actions that decrease property values, while landowners are not required to compensate government for actions that increase their property values. (Any increase in property taxes is insignificant compared to benefits conferred by the government.)

I have a related point relating to size of landholdings-The Justice Department, in fact, has had very few ESA-related takings cases in its docket relative to takings cases in other areas. On most of the large farmland tracts, flyways can easily be preserved and endangered species protected. Furthermore, large landowners often have the ability to configure their physical structures in ways that can minimize impacts on wetlands or wildlife.

I would appreciate your response to these comments.

Answer 1. Senator Feinstein raises two salient points: (1) the relevance of the distribution of property ownership to takings compensation, and (2)the question of government conferred benefits to property owners.

(1) Who owns what amount of what land is simply irrelevant to the merits of S. 605 or any other takings compensation proposal. Whether the landowner is wealthy or destitute is irrelevant to the Constitutional and ethical issues of whether property rights deserve protection from excessive government regulation.

Any proposal that would provide different levels of protection to landowners with different amounts of land would be arbitrary. There is no basis to extend protections to a landowner with 9.8 acres, for instance, and not to one with 10.2 acres. An across-the-board protection of all property rights is a more equitable and appropriate response.

The Clinton Administration's efforts to reduce the impact of regulatory programs on small landowners may be well intentioned. However, they are ridden with loopholes and fail to provide small landowners with the sorts of protections that they need from excessive government regulation.

Senator Feinstein is absolutely correct to note that large landholders can often accommodate regulatory requirements with relative ease. This is why large land

owners and their representative trade associations-have been far less adamant about passing a strong property rights bill than the grass-roots organizations.

In this context it is wise to remember that the benefits of private property accrue not only to the owners of private property but to all that benefit from the workings of the free enterprise system. Private property rights lie at the cornerstone of a free society. As the Nobel Laureate economist F.A. Hayek pointed out: "The system of private property is the most important guaranty of freedom, not only for those who own property, but scarcely less for those who do not."

(2) It is certainly true that the government provides benefits to citizens by building roads and bridges, providing police and fire protection, and so on. These sorts of public goods are provided for at public expense, as they are paid for through taxes and user fees for government services. The public might well benefit from the creation of wildlife refuges, wetland reserves, and wilderness areas as well, and these should be provided at public expense as well.

There is a fundamental distinction between government actions that incidentally affect land values-positively or negatively-and those that affect property values because they are directed at particular properties. When a government builds a highway, properties near the highway are likely to increase in value, while those alongside older thoroughfares may decline in value. Such changes in value occur with all economic activity, government or otherwise, and should simply not be a factor in discussions of regulatory takings. S. 605 in no way requires compensation for "any action" that decrease property values, but rather only those actions that deprive landowners of reasonable use of their property.

For the record, I would also like to note that government programs that confer particular, directed benefits to particular land owners or interests, such as farm subsidies, are a different matter. Professor Runge is correct to note that such subsidies produce distortions. CEI has long opposed such programs, and believe that the federal government should observe and protect the rights of farmers and all landowners equally, and provide none of them with special rights or subsidies.

RESPONSES TO QUESTIONS FROM SENATOR SPENCER ABRAHAM TO JONATHAN H. ADLER

Questions 1. Mr. Adler, defenders of the status quo in environmental regulation would have you believe that most if not all regulations bring about some public good. But it appears that current law actually creates strong incentives for anti-environmental behavior on the part of the regulated community. To cite one example, the fact of the matter is that, under current law, the very worst thing that can hap pen to a property owner qua property owner is to have his land declared to be habitat for an endangered species. For, in that event, the landowner is severely punished with land-use restrictions. As a result, current law gives landowners a very strong incentive to make sure their property is unattractive to endangered species. The upshot, as I see it, is that we now discourage people from developing their land in a manner that reserves its value as habitat for these species. Mr. Adler, would you agree that these disincentives exist under current law? Are you aware of any real-world examples of this phenomenon?

In your opinion, how would S. 605 change those incentives?

In summary, then, what would the effect of this bill be upon the quantity and quality of endangered-species habitat?

Answer 1. It is certainly true that current land-use regulations, such as those under the Endangered Species Act, often provide incentives against the practice of sound conservation. This is illustrated by the case of Ben Cone, the owner of 8,000 acres of timberland in North Carolina. Over the years Ben Cone has deliberately managed much of his land in such a way so to attract wildlife to his property. Mr. Cone has actively and intentionally created wildlife habitat. Through selective logging, long rotation cycles, and understory management, Mr. Cone has been very suc cessful in these efforts, attracting many species to his land, from wild turkey and quail to black bear and deer.

Mr. Cone's good land stewardship has also provided habitat for the red-cockaded woodpecker, an endangered species. In response, the federal government has placed over 1,000 acres of his land off limits to logging, and the value of his land has been reduced by approximately $1.5 million. This has taught Mr. Cone a lesson: He should no longer manage his land in a way that attracts red-cockaded woodpeckers if he wants to be able to use it. Rather than allow trees to mature for at least 75 to 80 years before cutting them, as Mr. Cone used to, he now cuts them much earlier, as red-cockaded woodpeckers prefer older stands. Moreover, Mr. Cone has accelerated the rate of clearing on his land. It should also be noted that Mr. Cone re

cently filed a takings claim against the federal government. Even should this case be settled, the damage has been done. Mr. Cone cleared some of his land due to the ESA's punitive regulations, and his story serves as an example of the environmental harm that is often caused by regulatory takings.

Passage of S. 605 would remove many of the negative incentives faced by Mr. Cone and other landowners around the country.

It would be impossible to quantify the expected effect of S. 605 on the quantity and quality of endangered species habitat with any precision. However, one should note that the incentives against conservation produced by regulatory takings are significant. Consider the view of Dr. Larry McKinney, Director of Resource Protection for the Texas Parks and Wildlife Department, who recently wrote in a report published by Defenders of Wildlife that:

While I have no hard evidence to prove it, I am convinced that more habitat for the black-capped vireo, and especially the golden-cheeked warbler, has been lost in those areas of Texas since the listing of these birds than would have been lost without the ESA at all.

As a result of the Endangered Species Act, a law that is enforced on private land through regulatory takings, more habitat for these birds may have been destroyed than if the government had not acted to regulate private land use at all. Given the ESA's poor record in saving and recovering imperiled species (Fish and Wildlife Service claims of success notwithstanding) it is reasonable to conclude that regulatory takings are having a real negative impact on species conservation efforts.

Sound conservation practices will be better served in the long run through respect for private property rights and the use of positive government incentives than by the continued reliance upon punitive regulations.

Question 2. Mr. Adler, we both know that the takings impose costs and that the resources of our society are finite. It is critical, therefore, that we regulate efficiently, without regard to whether the costs of takings are borne by the general public or by a handful of unlucky landowners. But here again it seems that current law has the incentives all wrong. Take the Lucas case, for example. There, beachfront property purchased by David Lucas was rendered economically valueless when state regulators blocked him from building a home on it. After Lucas won his case in the Supreme Court, the State of South Carolina was forced to purchase his property. It promptly put the land up for sale. The State received a bid for $300,000 from a neighbor who wanted to leave the land undeveloped in order to preserve his view. But the State also received a bid for $375,000 from an individual who, like David Lucas, wanted to build a house on the land. Amazingly, to get the extra $75,000, the State chose to sell the land to the bidder who wanted to build a house on it. So while the State was willing to spend hundreds of thousands of dollars of David Lucas's money in order to get the benefits of the use restriction at issue in his case, those benefits were not worth even $75,000 to the State when it was forced to spend its own money in stead of someone else's. That indicates pretty clearly that, in the absence of a compensation requirement like that set forth in S. 605, governments will regulate land-uses in a manner that wastes the finite resources of our society. Mr. Adler, would you agree with this assertion? Has this sort of wasteful allocation of resources had adverse effects upon the environment?

Answer 2. There is no question that when government officials are not held accountable for the costs of their actions, they make poor decisions. As a result, finite resources are wasted, and agency priorities do not reflect common-sense. Forcing agencies to pay for the private property rights that they take through regulatory action will encourage them to examine non-regulatory approaches to achieving their statutory goals.

An example of this can be seen in the case of wetlands regulations, the primary means by which the federal government seeks to prevent the net loss of wetlands. As previously noted, the cost of protecting a single acre of wetlands can reach the hundreds of thousands of dollars due to the costly delays and legal conflicts that the regulatory process produces. However, other approaches to wetlands conservation, such as mitigation, restoration, and the purchase of conservation casements can preserve wetlands at a fraction of the cost. By focusing resources devoted to wetlands conservation on regulatory programs, the federal government is actually less able to achieve the environmental goals it has set out to achieve.

RESPONSES TO QUESTIONS FROM SENATOR ORRIN G. HATCH TO JONATHAN H. ADLER Question 1. As you know, the much criticized 1905 Supreme Court case of Lochner v. New York established a substantive due process standard for reviewing economic

legislation. Some critics of recent Supreme Court takings decisions, as well as of S. 605, claim that the cases and the bill are a throw back to the Lochner era. Please comment on this assertion.

Answer 1. There is really no relation between S. 605 and Lochner. Lochner deals with "substantive due process"-the doctrine that the Constitution's due process requirements can be violated not only by a lack of procedural due process, but also in some cases by the substance of what a contested law seeks to accomplish. In Lochner, regulation was invalidated on the grounds that it violated substantive due process.

Substantive due process is regarded by many scholars today as a constitutional doctrine that has been correctly abandoned; a few scholars believe it has merit. But regardless of where one stands on this issue, the question of compensation for takings is really a separate one. The compensation question involves not invalidating laws, but compensating property owners for the damage those laws have caused. In short, S. 605, and the Supreme Court precedents which it codifies, have nothing to do with substantive due process.

Moreover, the recent line of Supreme Court cases on property rights and takings are interpreting the explicit Constitutional guarantees contained in the Fifth Amendment's admonition “* * * nor shall private property be taken for public use without just compensation." Applying this limitation on government power to regulatory actions no more amounts to substantive due process than recognizing that the First Amendment places clear restrictions on the government's ability to regulate speech.

Whether one supports the Lochner decision or not (and most legal scholars today do not), the clear language contained in the Bill of Rights to the Constitution make explicit that there are limitations on government power over private citizens.

Question 2. At the hearing, it was argued that there exists a "police power" exception to the fifth amendment's compensation requirement. My understanding is that the Supreme Court in its recent Lucas case specifically rejected this contention. Would you please comment?

Answer 2. The Lucas Court held that a "police power" exception to the compensation requirement would allow for legislatures too much latitude in avoiding compensation for the taking of private property. This view is drawn from Justice Holmes opinion in Pennsylvania Coal Co. v. Mahon. As stated in Lucas:

it becomes self-evident that noxious-use logic cannot serve as a touchstone to distinguish regulatory 'takings'-which require compensation-from regulatory deprivations that do not require compensation. A fortiori the legislature's recitation of a noxious-use justification cannot be the basis for departing from our categorical rule that total regulatory takings must be compensated. If it were, departure would virtually always be allowed. The South Carolina Supreme Court's approach would essentially nullify Mahon's affirmation of limits to the noncompensable exercise of the police power. ***Where the State seeks to sustain regulation that deprives land of all economically beneficial use, we think it may resist compensation only if the logically antecedent inquiry into the nature of the owner's estate shows that the proscribed use interests were not part of his title to begin with.

The Court's explicit intent was to prevent legislatures from simply asserting that they are preventing noxious uses under the "police power" and are therefore exempt from any compensation requirement. S. 605 respects this principle.

Question 3. You stated that except for the 33 percent"partial" takings provisions, title II of the bill merely codifies existing case law. Please amplify your testimony and also point out what sections codify what cases.

Answer 3. That regulation can amount to a compensable taking under the Fifth Amendment has long been recognized. In 1922 the Court held in Pennsylvania Coal Co. v. Mahon that "if regulation goes to far it will be recognized as a taking." Title II of S. 605 should be seen largely as an effort to make explicit Congress' opinion as to what amounts to going "too far" and to codify existing Supreme Court precedents on this subject.

This intent is clearly observable in Section 204 of Title II, as this language, with the exception of the establishment of a 33 percent threshold, closely parallels that of Supreme Court jurisprudence as to what sorts of government actions entitle property owners to compensation from the government.

For instance, Section 204(a)(1) provides that landowners are due compensation when private property has been "physically invaded." In the case of Loretto v. Teleprompter Manhattan CATV Corp. [458 U.S. 419 (1982)], the Supreme Court held

that physical occupations of private property are per se takings that are compensable under the Fifth Amendment.

Section 204(a)(2)(A) provides for compensation when a government action that takes private property and "does not substantially advance the stated governmental interest to be achieved by the legislation or regulation on which the action is based." This standard is to be found in the case of Nollan v. California Coastal Commission [483 U.S. 825 (1987)].

The "rough proportionality" test in Section 204(a)(2)(B) mirrors the Court's ruling in Dolan v. City of Tigard [114 S. Ct. 2309 (1994)] that "a term such as 'rough proportionality' best encapsulates what we hold to be the requirement of the Fifth Amendment."

Section 204(a)(2)(C) draws from two cases. Providing for compensation when a government action deprives the landowner of "all or substantially all economically beneficial or productive use of the property" is essentially the standard adopted in Lucas v. South Carolina Coastal Council [112 S. Ct. 2886 (1992)]. The inclusion of government actions that do so only "temporarily" is based upon the Court's ruling in First English Evangelical Lutheran Church v. Los Angeles County [482 U.S. 304 (1987)].

S. 605 provides that compensation should be paid when a government action fails to meet the tests laid out in the aforementioned Supreme Court precedents or results in a devaluation of greater than 33 percent and does not fall under the nuisance exception laid out in Section 204(d)(1). As I pointed out in my written statement before the Committee, this nuisance exception language in Section 204(d)(1) clearly mirrors that of the Lucas court's determination that "no compensation is owed-in this setting as with all takings claims-if the State's affirmative decree simply makes explicit what already inheres in the title itself, in the restrictions that background principles of the State's law of property and nuisance already place upon land ownership."

In the Lucas decision the Court recognized that "Regrettably the rhetorical force of our 'deprivation of all economically feasible use' rule is greater than its precision, since the rule does not make clear the 'property interest' against which the loss of value is to be measured." The court explicitly acknowledged that less-than total devaluations can be considered compensable takings. Viewed in this light, S. 605's 33 percent devaluation standard is less than revolutionary. It is merely Congress providing guidance to the Court as to when government regulation goes "too far" in impacting private property.

For the record, CEI would prefer to see a de minimis standard. Such a standard would apply the Loretto rule for physical occupations to regulatory takings. However, a 33 percent threshold is an improvement over the status quo, both because it provides a "bright line" test and because it will allow more landowners who should receive compensation to actually get it.

RESPONSES TO QUESTIONS FROM SENATOR RUSSELL D. FEINGOLD TO JONATHAN H. ADLER

Question 1. You testified, in response to a question from the Ranking Minority Member, Sen. Biden, that in the case of a change to government water delivery under a bureau of Reclamation contract, the government should be concerned about breaching that contract and a cause of action exists under contract law. I am interested then in your perspective on the purpose of two definitions of property contained in Title II, section 5: "the right to use and receive water" (Section 5B) and section 5E, which includes contracts.

If contract law is sufficient to protect water quantity and quality under agreements with the federal government, what is the purpose of including these definitions in S. 605? and what types of "takings" would the inclusions of such definitions protect against?

Do you believe that a federal government subsidy deserves private property protections? Will the federal government have the ability to reduce subsidies that raise property values without creating a cause of action under S. 605?

Answer 1. I am not an expert on the intricacies of water law. However, it is my understanding that under certain jurisdictions access to water has been recognized as a property right by both state and federal governments. The aim of including water rights in S. 605 should be to recognize and protect these property rights, but it should not be to protect any existing federal water subsidies. Section 203(5)(B) would protect these water rights. Thus, insofar as a rancher owns a water right on public lands (distinct from whether that rancher purchases grazing permits) this section would prevent the government from taking this right without paying com