resolve to apply its laws, but it also has the ability to financially cripple the federal agencies which implement such laws. States rely on federal agencies such as the Environmental Protection Agency (EPA) for a broad range of services including financial and technical assistance, Research and Development (R&D), standard setting and identification of treatment techniques such Best Available Technology (BAT) and Best Available Affordable Technology (BAAT). Many believe that EPA does not currently have sufficient resources to carry out its many statutory responsibilities. Takings legislation would inevitably further deplete EPA resources to the detriment of the states and communities who rely on EPA for assistance.

One of the best ways to demonstrate how this legislation would hurt states is to provide some illustrations. For example:

Under H.R. 9, a decision to list a hazardous waste site on the Superfund National Priorities List (NPL) could result in property value diminution and EPA would have to pay the site owner for its decision to make the site a public health priority. The notion that EPA could have to pay a property value diminution claim for making the site a public health priority would have a chilling effect on EPA's willingness to list the site on the NPL. The losers in this scenario would be the state and the particular community who want the site NPL listed in order to have the site remediated faster with Superfund Trust Fund moneys. H.R. 9 has the potential to unduly influence state behavior and create litigation between states and the federal government. Under this legislation, the federal agency implementing a law pays compensation when there has been a taking, even if the taking was imposed by a state acting pursuant to federal authority. The problem posed is that federal laws authorize states to impose state standards which are stricter than federal standards. We believe that it is unlikely that takings "damages" imposed pursuant to these stricter state standards are going to be paid by federal agencies. In the absence of a federal payment, pressure will be brought on the states to either eliminate laws which are stricter than their federal counterparts or to open their treasuries to make similar entitlement payments to landowners. States do not want to find themselves being forced to do either. Even more probable, the issue will end up in court. Given the cost of litigation, we believe that state and federal moneys could be used more wisely.

States cannot afford to create a new entitlement program similar to the federal entitlement program being proposed under the current compensation-type takings legislation. One of our many concerns is that if the federal government is successful in creating a culture that government should pay for any restriction on a given parcel of property, even if an entire community's property values are preserved through such a restriction, then pressure will be brought upon states to mimic such an entitlement program. Furthermore, NCSL does not believe that the federal government presently has the resources to create such a new entitlement program. This is especially true given Congress' new attempts to balance the federal budget and gain control of federal spending.

Takings legislation will have the tendency to lock in the status quo by forcing the federal government to pay any perceived losers when there is a change in the way government conducts business. For instance, H.R. 9 would prevent any reallocation of water from federal water projects without paying the parties who have their water allocation diminished. In the arid southwest, agricultural and urban interests differ on how water should be allocated. If agricultural or city interests have water "taken" from them to benefit the other, they will be entitled to compensation under the legislation. It is foreseeable that less water, unaccompanied by conservation measures, could result in reduced crop yields and profits or restricted urban development in cities. The thought of paying billions in "takings" claims will prevent any change in the status quo. Once again, such a limitation on government's ability to respond to changing circumstances could very well be to the detriment of state authority over regional planning and land

use.

H.R. 9 delegates to a private arbitrator the authority to decide important questions of state law. Section 9002(a)(3) provides that an arbitrator appointed by a federal agency would determine whether a particular land use violates any provision of state statutory law or constitutes a nuisance under state common law. The arbitrator's ruling would be final without any avenue of appeal. NCSL believes that such questions are best decided by duly appointed judicial officers. Finally, states throughout this nation, including New Hampshire, are presently wrestling with the issue of private property rights. The results to date are that every state has rejected attempts to create compensation-type legislative schemes. The most recent example is Arizona, where voters soundly defeated a proposal that would have forced government to write a check every time it wanted to protect a

community, and their property values, through the application of intelligent land use planning.

States that have passed takings legislation have adopted the "property impact statement" approach. We in state government feel that federal lawmakers can learn much from state experiences. After all, under our system of federalism, it is the states who are the laboratories for change. As NCSL's takings policy indicates, the federal government should not attempt to legislate what a “takings" is and the issue should be left to the states.

FISCAL IMPACT

H.R. 9 and other "compensation-type" takings legislation would impose large and unknown new costs. As a fiscal conservative, I expect strong proof of need to justify an expensive new government program. The costs go far beyond compensation awards to persons claiming property value diminution. For the entitlement program conceived in H.R. 9 to work successfully, additional employees would be needed to process compensation claims, more lawyers would be needed to litigate arbitration proceedings, expert witnesses would be needed to testify at arbitration proceedings, arbitrators would have to be hired to conduct such proceedings and certified real estate appraisers would be needed to determine pre-regulation and post-regulation property values for computing the extent of property value diminution. No one has any clear idea of how much these transaction expenses will cost. However, as presently drafted, H.R. 9 applies to all permit renewals by the federal government as well as many other agency actions.

Beyond the creation of a larger federal beauracracy, increased processing and transaction costs, litigation fees, expert witness fees and the actual costs of awards under the entitlement program, H.R. 9 does not even adopt a fiscally responsible approach to quantifying the amount of compensation owed pursuant to a claim. As written, the law would allow compensation awards to be based on speculation without requiring the owner of the subject land to sell the property to prove his assertion of property value diminution. In essence, one does not even have to realize a loss under the legislation to be entitled to compensation. Rather, all one needs to do is demonstrate, on the basis of subjective expert testimony, that there could be property value diminution if a sale were to occur. Similarly, the law does not provide safeguards to prevent fraudulent claims by landowners who purchase property with full knowledge of existent land use restrictions.

The legislation could also have very unfair results for the federal taxpayer. An example which comes to mind is the landowner who is fortunate enough to have an interstate highway built on a contiguous parcel of land next to his own. Virtually overnight the landowners' property would skyrocket in value due to the federal government's construction of an interstate highway next to his land. However, pursuant to the Highway Beautification Act of 1965, the landowner would be prohibited from erecting commercial advertising signs within 660 feet of the federal right-of-way which are visible from the highway. Under H.R. 9, the landowner could receive compensation for a regulatory taking. In essence, the federal government would greatly enhance his property value while also paying damages for restricting his right to maximize his income earning potential on that portion of his land that falls within 660 feet of the highway. In total candor, this type of expenditure represents a waste of taxpayers' dollars. Similar examples exist with respect to other federal programs such as the National Flood Insurance Program. Suffice it to say that there are more constructive uses for federal taxpayers dollars.

An important fiscal implication of H.R. 9 is the financial impact it would have on land values of neighboring properties close to a parcel which is subject to a claim. It is estimated that there are approximately 60 million homeowners in America. It is this class of persons who truly deserve private property protection. Land use limitations on particular parcels of property often maintain the values of surrounding properties. Our country's land use system has long recognized that incompatible land uses strongly influence the value of property nearby. Furthermore, unrestricted and incompatible land use has never been a right. Therefore, it is important to remain mindful of the issue of property value diminution that could occur in surrounding properties if an individual is given the unfettered right to use his land as he deems fit.

CLOSING REMARKS

Mr. Chairman, I appreciate the opportunity to present the views of the National Conference of State Legislatures to your Subcommittee. I would like to reiterate my previous offer to work with you further on this issue. I will also be glad to respond to any questions.

OFFICIAL POLICY OF THE NATIONAL CONFERENCE OF STATE LEGISLATURES GOVERNMENT REGULATION AND "TAKINGS" UNDER THE FIFTH AMENDMENT OF THE UNITED STATES CONSTITUTION

The National Conference of State Legislatures strongly opposes any section of legislation or regulation at the national level that would: 1) attempt to define or categorize compensable "takings" under the Fifth Amendment to the United State Constitution; or 2) interfere with a state's ability to define and categorize regulatory takings requiring state compensation. Such questions of constitutional dimension should remain a matter for case by case determination in line with Fifth Amendment jurisprudence.

ADOPTED JULY 1994.

Mr. CANADY. I apologize, but this is my last warning for the vote so I will go over and vote.

The committee will stand in recess. As soon as the vote is concluded, the committee will resume.

[Recess]

Mr. INGLIS [presiding]. The subcommittee will come to order. Chairman Canady asked me to fill in for him. He is over on the floor. I know he wishes he could be here, but he is over dealing with a bill on the floor.

I think this is the third panel and our fifth witness.

Mr. Adler was about to begin, so we will proceed with you, Mr. Adler.

STATEMENT OF JONATHAN H. ADLER, ASSOCIATE DIRECTOR OF ENVIRONMENTAL STUDIES, THE COMPETITIVE ENTERPRISE INSTITUTE

Mr. ADLER. Thank you, Mr. Chairman, for the opportunity to present testimony before this committee today.

I am Jonathan Adler, associate director of environmental studies at the Competitive Enterprise Institute here in Washington.

CEI is a nonprofit, nonpartisan research and advocacy institute dedicated to the principles of free enterprise and limited government. CEI's work includes efforts to advance the public understanding of the hidden costs of government overregulation and to research and promote the development and promotion of free market approaches to environmental policy questions.

Much of the debate over property rights and whether the Federal Government should compensate the victims of regulatory takings is focused in the environmental arena. Therefore, in my testimony I will focus on issues of uncompensated regulatory takings as relate to the environmental policy. It is common to view property rights and environmental protection as conflicting ideals. In fact, properly understood, they are mutually reinforcing.

In addition to my prepared comments I am submitting several attachments to the hearing record for your information.

The strongest opposition to the protection of property rights comes from the Washington environmental lobbying organizations. These groups maintain that environmental protection and protection of property rights such as that contained in H.R. 9 are incompatible. The standard charge against paying compensation for regulatory takings is that this would involve paying polluters not to pollute and, therefore, undermine the protection of public health and safety.

This represents a fundamental misunderstanding of the nature of property rights and the proper role of government in protecting them, as well as the mischaracterization of the provisions in H.R. 9. Indeed, the current controversy over property rights is not about pollution control efforts or Federal protection of public health and safety. Most takings cases arise not when public health is at risk but when the rights of landowners are suppressed by the exercise of majoritarian power for nonessential, in some cases even aesthetic, reasons.

Under current policy, public goods such as military bases and highways are created by purchasing lands from private property owners. On the other hand, public goods like wetlands preserves and wildlife refuges are created by bureaucratic edicts that systematically deny property owners the use of their land.

This is not how it should be. If the public wants to protect the habitat of endangered species or protect an ancient stand of trees for some aesthetic or spiritual value the public should be willing to pay for it, just as it pays for other public goods. The costs should not be imposed on whoever is unfortunate enough to hold title to a coveted piece of land.

Given the fact that the Government does not pay for the costs of regulatory takings, it should be no surprise that the Government typically opts for coercive land use controls to achieve environmental goals, even when other approaches are available. For example, protecting wetlands, under the section 404 program can be orders of magnitude more expensive than other available alternatives, in some cases 300 times more expensive than protecting wetlands through other nonregulatory programs.

When institutional arrangements shield actors from the true costs of their actions, it distorts their behavior. Thus, for the same reasons governments will overregulate when there are no effective limits to their regulatory authority, so, too, will resource users overexploit resources where property rights are ill-defined or held in common.

This phenomenon is traditionally known as the tragedy of the commons and was first popularized by the ecologist Garrett Hardin. Under common ownership, it is in no one's interest to forgo using the resource as the benefits of such conservation measures. Moreover, there is no incentive to care for the effect on one's resource use on the other shareholders in the common property, and no incentive to care for future generations, as individual shareholders have no ability to ensure that that which they save can be passed on.

Given the incentive that common ownership creates, it is no wonder that the vast majority of environmental problems occur in the vast unowned commons of the world. Private ownership creates wholly different incentives and is far more compatible with sound environmental stewardship. It is the owner that bears the cost, both in terms of dollars and in terms of lost opportunities.

Conversely, the owner is the prime beneficiary of any improvements made to the property. Seeking a profit on the property or not, self-interest still provides a powerful incentive to preserve, if not enhance, the value of one's own private property.

Of course, private stewardship does not always require one always act in pursuit of profit. The principle of private ownership enables conservation groups-the Audubon Society, the Nature Conservancy, Ducks Unlimited, and many others to take those actions necessary to preserve resources. Those activities could not take place were it not for the institution of private property.

A private landowner is far more capable of instituting true resource preservation than any government entity, should that be the landowner's desire.

Now while private rights can play an essential role in environmental conservation, government infringement upon private property rights in the form of regulatory takings can have negative environmental impacts as well. If the specter of environmental regulation hangs over private land use decisions, private landowners will be less likely to invest in environmental improvements on their lands. Such stewardship actions will entail costs to the landowner with no reasonable expectation of receiving any future benefits.

One can understand this phenomenon if one thinks of the likely result were the Government to declare a policy protecting pretty houses by prohibiting families from living in any homes that met the Federal definition of pretty. Under such a regime, no rational homeowner would make improvements to his or her home that would make it more attractive lest it fall prey to government regulation that could result in their eviction. Rather than preserve the stock of pretty houses in America today, such a policy would likely prevent the construction or restoration of pretty homes ever again. Much the same is occurring under the Endangered Species Act. In fact, many environmental organizations and wildlife commissioners have recognized that the act often encourages the destruction of habitat more than it does its preservation.

It is important to recognize that environmental protection and compensation for regulatory takings can go hand in hand and that what is in H.R. 9 is essential for this country.

Mr. INGLIS. Thank you, Mr. Adler. I appreciate your testimony. [The prepared statement of Mr. Adler follows:]

PREPARED STATEMENT OF JONATHAN H. ADLER, ASSOCIATE DIRECTOR OF
ENVIRONMENTAL STUDIES, THE COMPETITIVE ENTERPRISE INSTITUTE

Thank you Mr. Chairman for the opportunity to present testimony before this Committee. My name is Jonathan Adler, and I am associate director of environmental studies at the Competitive Enterprise Institute in Washington, D.C. CEI is a non-profit, non-partisan research and advocacy institute dedicated to the principles of free enterprise and limited government. CEI's work includes efforts to advance the public understanding of the hidden costs of government overregulation and to research and promote free market approaches to policy issues.

CEI has long been involved in the property rights debate. CEI analysts have analyzed the impact of regulatory takings on private landowners, as well as the environmental implications of different property rights regimes. In January, CEI published a Property Rights Reader that collects essays by CEI staff on the subjects that this issue raises. CEI also engages in direct legal action where necessary, and has represented victims of regulatory takings before state and federal courts.

In my testimony I will focus on the issue of property rights and regulatory takings in the context of environmental policy. It is common to view property rights and environmental protection as conflicting ideals. I will argue that they are actually mutually reinforcing. With these written comments, I have included some attachments which elaborate on some of the points that I will raise.