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We note that the bill contains no definition of market value. The Dictionary of Real Estate Appraisal, second edition, incorporates the concepts that are most widely accepted, such as willing, able, and knowledgeable buyers and sellers who act prudently, and gives the appraiser a choice among three bases: all cash, terms equivalent to cash, or other precisely revealed terms. Accordingly, market value has been defined as:

The most probably price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self interest, and assuming that neither is under undue duress.

Both the American Society and the Appraisal Institute support and encourage real estate appraisal legislation and regulation designed to benefit the general public. We support the principle that individuals involved in real estate transactions deserve the fundamental protection provided by a skilled professional appraiser who is accountable, impartial, and required to observe industry standards.

We appreciate your willingness to hear our suggestions. We stand ready to provide additional information you may require as your process continues. We look forward to working with you on this and other matters of mutual concern.

Thank you.

PREPARED STATEMENT OF THE HERITAGE FOUNDATION

MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE: Thank you for inviting me to submit written testimony of my views on S. 605 and the issue of de facto taking of property through federal regulation, known popularly as "regulatory takings." submit this testimony in my own capacity and not as an employee or spokesperson for The Heritage Foundation.

Your efforts and consideration of the need to relieve property owners from increasingly intrusive and confiscatory federal governmental actions is welcome. Legislation is desperately needed to rectify the situation. While opponents of this legislation raise numerous concerns, an examination of their objections shows them to be without merit. In addition to stating why I believe this legislation is necessary, from both a modem and historical perspective, I will explain the flaws in the four main arguments of opponents of this bill. Specifically, their flawed arguments are that: (1) the Constitution requires "courts to balance important public needs against the legitimate rights of property owners;"

(2) the federal government cannot afford to pay property owners compensation for the rights taken from them;

(3) the law would constitute an entitlement and would be subject to the pay-asyou-go (PAYGO) budget rules; and

(4) compensation to property owners amounts to "paying people not to pollute." The federal government owns or controls about one out of every three acres in the nation, yet federal agencies in recent years have increased their use of regulation as a tool to obtain further control over private land because it imposes no cost on the government. But these regulations are not without substantial cost to others. The most unfair and burdensome hardship inflicted by regulatory takings typically is that property owners are not reimbursed for their loss. For instance, if an elderly couple spends a large portion of their retirement savings to buy property to build their dream home and that property is subsequently designated a wetland, the value of their property-and their savings is virtually gone. Unfortunately, tales of financial hardship caused by government designation of land as wetlands or endangered species habitat have become commonplace. To understand the enormity and the depth of the problem, I recommend you read The Heritage Foundation's recently released book, Red Tape in America: Stories From the Front Line. The instances of regulatory excess are so voluminous, the Foundation published a special abridged edition, Strangled by Red Tape.

Former Office of Management and Budget Director Leon Panetta, speaking on May 26, 1994 before the House Subcommittee on Water Resources and Environment, said paying compensation for regulating wetlands would be "an unnecessary and unwise use of taxpayer dollars" and a drain on the federal budget. Property owners, however, counter that regulatory takings are a drain on their family budget. If these regulations are so cost-ineffective so that it would not be in the governmental interest to regulate even if it were required to pay, then surely the same

action cannot be considered in the public interest when one citizen is saddled with the entire burden of providing for the "public good."

The Administration's objection to paying compensation for infringing of property rights, at its roots, seems based on a fundamental misconception of the relationship of the individual to the state. This misconception manifests itself in the widely held, but mistaken, belief that the Bill of Rights' fifth Amendment requires a balancing of interests. As current Office of Management and Budget Director Alice Rivlin stated in a June 7th letter to Senator Hatch, the Constitution,

has served us well for over 200 years by permitting courts to balance important public needs against the legitimate rights of property owners. S. 605, however, would go far beyond a reasonable balancing of interests, as required by the Constitution. It purports to entitle property owners to compensation *** without regard for the public interests being served by agency actions.

This statement demonstrates a profound misunderstanding of the Constitution. The Constitution's just compensation protection does not require courts to balance the respective interests of the government and property owners. Rather, the right to compensation for any action that qualifies as a taking is absolute. Perhaps there is some measure of balancing built into the common measures of what constitutes a taking of a right to property, but the “legitimate rights of property owners” are not and should not be balanced by important needs. Rather, compensation for a taking is the balance built into the Constitution. Implicitly, the government is given the right to seize property, but is constrained in this otherwise almost unconstrained power by the necessity to pay for what it takes. Compensation not only protects property owners from financial ruin, it protects them from excessive governmental appetite. It is unlikely that many governmental entities would not assert control of other's property if that use were free of cost. Relying on the beneficent character of each regulator is an unstable foundation for securing the protection of the people.

To understand why legislative protection for landowners is both important and appropriate, it is necessary to understand the broader issue of governmental taking of property. The fifth Amendment to the U.S. Constitution implicitly recognizes that the federal government may take private property for public use. This power was recognized by the Supreme Court as early as 1795 in Vanhorne's Lessee v. Dorrance when the court found that "the despotic power, as it has been aptly called by some writers, of taking private property, when state necessity requires it, exists in every government * government could not subsist without it."

**

The Fifth Amendment explicitly mandates, however, that government must pay the property owner for the property confiscated. This concept, embodied in the clause "nor shall private property be taken for public use, without just compensation," ensures that property taken for public use is paid by those who benefit-the public and not by the citizen unfortunate enough to own land the government wants. In its most basic sense, this is a fairness issue: Why should one American bear the entire burden of the government's pursuit of a national good?

The Founders well understood the positive economic consequences of protecting owners' investments in their property. If property is to be put to its best and most highly valued use, ownership must reside in the hands of those who value it for as much or more than the fair market value. If government had a free hand to take property without payment, its incentive to confiscate property that conferred only a small benefit on the public would be large; after all, even small benefits outweigh a zero cost. The problem is that costs are nonexistent only to the government. The actual costs, borne by someone else, often are substantial.

Another positive result of requiring just compensation is increased security. The founders well understood that protection of property restrained usurpation of other rights recognized by the Constitution. It is this relationship to which Supreme Court Justice Potter Stewart referred in Lynch v. Household Finance Co. Inc. in 1972 when he stated that there is a "fundamental interdependence *** between the personal right to liberty and the personal right to property.

Practically speaking, governments can control a wide spectrum of individuals' activities if they can control whether individuals remain financially secure or must surrender their property. The majority truly can tyrannize a disfavored minority if property rights are uncertain. As James Madison characterized the problem of individual rights in Federalist Paper No. 10, "it is that [pure] democracies [without constraints] have ever been spectacles of turbulence and contention; have ever been incompatible with personal security or the_rights of property." It was to restrict just such tyranny over individuals that the Framers put severe limits, such as the requirement of just compensation, on the unchecked will of the majority.

Although the framers were clear that a taking requires just compensation, the Supreme Court has been unclear in its interpretation of what constitutes a taking. That is why this legislation is necessary. Although it couldn't alter the Supreme Law of the land, legislation that defines a taking—and a less cumbersome recovery process would serve to protect the people against the problems and abuses of property envisioned by our founders.

The primary argument espoused against property rights legislation is that the government cannot afford it, but individual property owners can. This argument is specious. First, the argument is, again, based on the belief that a balancing of interests is appropriate. This belief is incompatible with the concept of property protection. The issue of legislative compensation should revolve around whether a property right has been infringed, not whether it serves an important public purpose. After all, one would assume the government always had an important public purpose whenever it deliberately infringed its citizens' rights to use their own property. A second problem with the argument is that it is simply unfair. In every specific instance, the question comes down to whether the government will finance the pursuit of a "national good," or whether it will be borne by a single property owner. How can the federal government, with its vast resources and access to additional revenues, not afford a single parcel that serves an important public purpose, yet some hapless property owner have resources to spare? Even if an owner did, why should he or she finance the "national good." If the public as a whole benefits, the public as a whole should bear the costs-period.

The third flaw in the opponents' argument that the federal government cannot afford to compensate for what it takes is that the argument assumes agency behavior would not change. Yet one of the primary purposes of the legislation, as Title I states, is "to restrain the Federal Government in its overzealous regulation of the private sector" and "the minimization, to the greatest extent possible, of the taking of private property by the Federal Government." This purpose, moreover, very likely would be achieved.

We know from environmental legislation, as well as many other areas of the law, that if we tax a behavior, we get less of it. If we subsidize the behavior, we get more of it. Currently, for instance, we force property owners to subsidize the federal government's preservation of wetlands and endangered species habitat, and regulatory intrusions have increased. By the same token, however, if we "taxed" government agencies' behavior by making them internalize the consequences of that behavior, we could confidently expect to see less of it. But that doesn't mean we would necessarily get less protection. It means merely that agencies would be required to prioritize what regulations would get the "biggest bang for the buck."

Crafted to encourage a change in agency behavior, the Administration nevertheless protests that regulation will continue at its current speed. Thus, this legislation will cost, according to Director Rivlin's June 7th letter to Senator Hatch, $84 billion or more over the next seven years, or $12 billion or more per year.

From a budgetary perspective, this claimed inability to change behavior rests largely on the assertion by the Administration that S. 605 would fall under the payas-you-go or PAYGO provisions of the Budget Enforcement Act, and thus possibly would cause a sequester of other mandatory programs." The Administration wrongly assumes that this particular bill falls under the pay as you go rule, which means it is a mandatory program and not an discretionary one. While increases in mandatory spending require either reductions in other mandatory programs or increases in taxes to offset these new permanent costs, the rule does not apply here. To fall under the PAYGO provisions, the rights to compensation must be considered an entitlement, and thus, awards would not be subject to discretionary appropriations. Yet S. 605 specifically states in section 204(f) that awards:

shall be promptly paid by the agency out of currently available appropriations supporting the activities giving rise to the claims for compensation. If insufficient funds are available to the agency in the fiscal year in which the award becomes final, the agency shall either pay the award from appropriations available in the next fiscal year or promptly seek additional appropriations for such purpose.

Another argument that opponents of property rights legislation assert is that a law requiring compensation would in effect force government agencies to pay polluters not to pollute. This argument is based on a fundamental misunderstanding of the nature of property rights legislation in general and S. 605 in particular. Requiring compensation for "regulatory" takings of property no more constitutes paying polluters not to pollute than requiring compensation for "physical" takings does. In both cases, the government infringes property owners' rights to use their property in a way that enriches their own lives in order to satisfy the public's desire to use

the property differently-yet I have never heard anyone claim that the Constitution as interpreted regarding "physical occupations" is anti-environmental or a windfall to polluters. The reason is straightforward. The government would only be required to compensate property owners when it interferes with their ability to use or develop their own property, not when it prohibits nuisance behavior such as dumping raw sewage into a stream. Indeed, such behavior is protected for neither partial takings under this legislation nor total takings under Lucas v. South Carolina, in which Justice Scalia explicitly noted that owners had no right to engage in nuisance behavior. Thus, the vivid and frightening images that government would be required to pay property owners not dump toxins into our air and water are divorced from reality. Rather, these scare stories are high blown rhetoric used to raise funds, scare the public, and confuse legislators.

Opponents implicitly argue that the mere act of development is pollution. Certainly actions such as building a house affect the environment, but most people would hesitate to label that behavior "pollution." After all, if all actions that changed nature were pollution, it would indict virtually all human activity and the charge would be meaningless. Rather, pollution is defined in Webster's Collegiate Dictionary as "environmental contamination with man-made waste." Under this definition, there is little substance to the charge that "polluters would be paid not to pollute." If, for instance, hazardous wastes were emitted into the air, dumped into the water, or migrated through the soil to groundwater, the waste could legitimately be deemed a "nuisance" and compensation would not be due.

In conclusion, the Administration seems to be grasping at straws to criticize this bill. It is obvious why America has demanded this legislation. The federal government's reach has stretched too far into the lives of honest, hard-working middle class property owners and they demand that it stop. This bill would be a solid step toward that goal.

PREPARED STATEMENT OF THE NATIONAL ASSOCIATION OF REALTORS

On behalf of the National Association of Realtors ® (NAR), we appreciate the opportunity to offer our comments on S. 605, the "Omnibus Property Rights Act of 1995," which seeks to address the issue of takings of private property through federal regulatory actions.

On the local, state and national level, NAR has worked for years to encourage a balanced approach to environmental protection that accommodates the important needs for both conservation as well as economic opportunity and vitality. To balance the efforts of government to serve the public's well-being by controlling pollution and protecting natural resources with the economic and property rights secured by the Constitution, we believe that the cost of the benefits to the general public achieved by such regulation should be borne by the beneficiaries-the general public. We oppose those aspects of environmental and natural resource legislation that amount to uncompensated condemnation of private property through government action. It is essential that the rights of private property owners be fully recognized in local, state, and federal programs and laws.

In recent years, as efforts to protect the environment have escalated, legislative and regulatory restrictions on the use of private property have become more stringent. While we do not disagree with the importance of protecting our natural environment, we feel that any such restrictions on the use of property should be balanced with the constitutional rights guaranteed to us under the 15th Amendment. Unfortunately, this balance has often tilted in favor of environmental protection, at the expense of property rights.

S. 605 will restore that balance. It allows property owners who, as a result of federal agency action, are deprived of thirty three percent or more of the value of property to seek compensation for such takings. Despite what the bill's opponents claim, S. 605 does not result in people who pollute being compensated by the government. S. 605 specifically bans compensation for any private action that would result in a nuisance or would be in violation of state laws.

S. 605 also requires federal regulatory agencies to perform a takings impact analysis prior to promulgating any regulation and to consider alternatives to taking federal property. We feel that this is a vital part of the legislation since it forces federal agencies to adopt a “look before you leap" approach to regulations which may impact property owners.

Over the past few years, the federal courts have increasingly recognized the validity of claimants who have argued that their property rights have been infringed by government regulation. In the recent Dolan v. City of Tigard case, the U.S. Supreme Court made it clear that it considers private property rights to be of equal impor

tance with environmental regulation. Writing for the Court, Chief Justice Rehnquist stated, "We see no reason why the Takings Clause of the Fifth Amendment, as much a part of the Bill of Rights as the First or Fourth Amendment, should be relegated to the status of a poor relation."

Opponent of this legislation point say that the protections for property owners already exist in the Constitution and that this legislation is duplicative and unnecessary. However, we do not feel that small property owners should be subjected to years of costly litigation to protect what are their basic constitutional rights. By providing alternative disputes resolution and expedited administrative appeal for property rights cases. S. 605 will level the playing field for property owners and place the burden for justifying takings back where it belongs, on the federal government. The National Association of Realtors® strongly support S. 605 and urges the Judiciary Committee to take action this year on this vital legislation.

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