Here's the latest from William W. Wade, Ph.D., a resource economist with the firm Energy and Water Economics (Franklin, Tennessee). Bill is a frequent author and speaker on the regulatory takings issue, and he's brought much needed clarification to an often confusing issue about how to apply the Penn Central test. He has authored several guest posts for the blog, and we're glad to have him back with a short piece on regulatory takings.Here, he responds to a recently-published article on the "economic impact" prong of the Penn Central test for a regulatory taking.
A Note on Economic Impacts and Average Reciprocity of Advantage
William W. Wade, Ph. D.Daniel L. Siegel, Supervising Deputy Attorney General, California Department of Justice, published an article, Evaluating Economic Impact in Regulatory Takings Cases in the summer 2013 West Northwest Journal of Environmental Law & Policy. Perhaps a brief rejoinder by an economist is suitable because the article is about economic impacts and the journal encompasses policy, which is the domain of economists. Mr. Siegel calls for "rules [in regulatory takings cases that limit just compensation] to extreme situations, requiring, among other things, a showing that a regulation's economic impact on property is severe, counting direct benefits that the owner receives as part of the impact calculation, and evaluating that impact by including potential future uses of the property (the parcel as a whole)."
I will ignore the value judgment of Mr. Siegel’s "extreme situation" criterion, which Penn Central never had an in mind, its emphasis throughout being on "reasonable returns." His compound requirement invokes both the measurement of benefits to offset the burdens of the regulatory constraint at issue and the Tahoe-Sierra parcel as a temporal whole economic error. I will gloss over the Tahoe-Sierra error to focus on the benefits and burdens phrase invoked in the article, which arises in Penn Central cases.
This note draws from the author’s 2007 article about average reciprocity of advantage cited in footnote 2.
1. Tahoe-Sierra provides no theortetical support for measuring severity of economic impact.
The Tahoe-Sierra decision expanded Penn Central’s geographic parcel-as-a-whole to include a temporal dimension to deny a regulatory taking. The temporal parcel included "the remaining life of the property." Tahoe-Sierra rests on a basic misunderstanding of economic theory: time values of money are at the heart of people’s investment decisions. Income lost in time is not restored as if by magic at the end of a temporary taking. Time values of money differentiate temporal segmentation of the parcel as a whole per Tahoe-Sierra from physical segmentation. Returning the use of the property after some taking period does not return the income flow that was lost in time.
2. Severity of economic impact is measured by interference with investment backed expectations.
The gist of Mr. Siegel’s economic error that catapults his argument to the average reciprocity of advantage (ARA) element of the Penn Central test arises from misconstruing language from Rose Acre Farms. ". . . [F]or an economic impact to be so onerous that it is similar to eliminating a core property interest, the impact has to be huge. As the Federal Circuit has explained, a 'severe economic deprivation' is therefore required by "the very nature of a regulatory takings claim." The meaning of the actual language from the decision is different in context and relates to prior discussion and the remand instructions: "First, as noted above, courts have traditionally rejected takings claims in the absence of severe economic deprivation. This hesitation stems from the very nature of a regulatory takings claim."
The appellate court’s correct “hesitation” to confirm the trial court’s award of damages was that the trial court reached a decision for the plaintiff with no basis to evaluate severity of economic impact. The plaintiff’s expert economist demonstrated substantial revenue losses, but never benchmarked the losses to any denominator value. The necessary comparison to evaluate severity of economic impact involves calculating the extent of frustration of investment-backed expectations. The Federal Circuit cited to both the plaintiff’s and government’s testimony on losses, and determined succinctly: “This analysis was insufficient. . . . [N]either the testimony nor the economic data cited by the trial court appropriately gauge the severity of the economic impact of the regulations on Rose Acre.” “[W]e remand for reconsideration of the severity of the economic impact wrought by the relevant . . . restrictions on Rose Acre, and for consideration of the significance of that impact in light of . . . the regulations' interference with Rose Acre's reasonable investment-backed expectations.”
Severity of economic impact consistently has been evaluated in a comparative context in takings cases over the last 25 years. Mr. Siegel’s vague absolute standard to justify compensation in a taking claim is rhetoric without legal or economic meaning. It facilitates the heart of his argument. Requiring a huge economic impact justifies Mr. Siegel’s claim that government restrictions and other actions benefit property as well as burden it. Quantifying the increased value of individual properties due to these benefits, however, is generally very difficult. Therefore, a huge diminution requirement accounts for the uncertain nature of the economic evaluation of these benefits.
This requirement makes no more economic sense than going into court with a tort claim for damages of a certain amount plus some vague additive amount to account for other losses and disappointments experienced in life. With millions of dollars and people’s plans and aspirations at stake, hard economic evidence of regulatory benefits and burdens should be presented to courts instead of legal argument—or political beliefs. Estimating the distribution of the benefits and burdens of any regulatory imposition is the bailiwick of economics. Economists are qualified to estimate whether “some public program [merely adjusts] the benefits and burdens of economic life to promote the common good,” or disproportionately slams selected few property owners. Hard evidence of regulatory impacts is as relevant to a court’s discerning whether reciprocal benefits govern the legal decision as benefits and costs are to state and federal agencies guided by E.O. 12,866.
3. Reciprocal benefits are measured in concrete terms from their first appearance in takings cases.
The reciprocal benefits element of regulations in takings law has required concrete evaluations from their first appearance. The article cited at footnote 2 revealed that the notion of offsetting plaintiff’s losses with benefits imbued by the same regulatory constraint originally was based on concrete facts. Specific benefits to the claimants were identified in two early cases – Plymouth Coal & Jackman – related to mutual boundary walls that enhanced safety and provided other specific services to each property. Jackman involved maintenance of a common wall between two properties to the mutual benefit of both due to safety and the economic advantage of sharing the wall to support both buildings. Justice Holmes created the phrase, average reciprocity of advantage in Jackman referring back to the “pillar of coal to the left along the line of adjoining property, . . . [in Plymouth Coal as] a barrier sufficient for the safety of the employees of either mine . . . [which] secured an average reciprocity of advantage . . . .” for the plaintiff. The burden was deemed less than the benefit of requiring the mutual walls and the rulings went against the claimants.
4. Penn Central invoked a broader concept of reciprocity.
The phrase “average reciprocity of advantage” next appears half a century later in Justice Rehnquist’s Penn Central dissent. Rehnquist’s argument was consistent with the earlier decisions, Plymouth Coal and Jackman, which required reciprocity to be evaluated narrowly with direct benefits to the regulated parties. He specifically argued that reciprocity of advantage is not satisfied where the benefits flow to the general public.
The Penn Central majority ruled otherwise:[T]he application of New York City's Landmarks Law has not effected a "taking" of appellants' property. The restrictions imposed are substantially related to the promotion of the general welfare and not only permit reasonable beneficial use of the landmark site but also afford appellants further opportunities to enhance . . . the Terminal. . . .The decision found “that the preservation of landmarks benefits all New York citizens and all structures, both economically and by improving the quality of life in the city as a whole. . . conclud[ing] that the owners of the Terminal have . . . benefited by the Landmarks Law.” The focus on broad benefits to the general public allows subjective results, perhaps influenced by politics.
5. The Federal Circuit directed Florida Rock in Federal Claims Court to evaluate direct compensating benefits.
Reciprocity surfaced as an important element in the Florida Rock line of cases in Florida Rock IV and V. The Federal Circuit Court emphasized the narrow alignment of benefits and burdens and the Court of Federal Claims carefully analyzed reciprocal benefits and Florida Rock’s burden. In Florida Rock IV, the appellate court directed the trial court on remand to deal with reciprocity in the original sense of evaluating whether direct compensating benefits to the property offset the requirement to compensate the property owner.
In addition, then, to a demonstration of loss of economic use to the property owner as a result of the regulatory imposition . . . the trial court must consider: are there direct compensating benefits accruing to the property, and others similarly situated, flowing from the regulatory environment? Or are benefits, if any, general and widely shared through the community and the society, while the costs are focused on a few?
Federal Claims Judge Loren Smith wrote the watershed Florida Rock V decision. Evaluating the evidence within the economic impact prong of the Penn Central test, he specifically contrasted “diminution in value” with “reciprocity of advantage” as two parts of the economic impact prong. The decision threads its way through both the Penn Central language dealing with benefits to the community and the original formulation of average reciprocity, which dealt exclusively with “direct offsetting benefits” of the regulation required to avoid payment of compensation.
Here, the surrounding community benefits from the wetland's filtering action, stabilizing effect, and provision of habitat for flora and fauna. Florida Rock benefits from being a member of a community which has the potential for a better environment. But there can be no question that Florida Rock has been singled out to bear a much heavier burden than its neighbors, without reciprocal advantages. . . . The court finds that Florida Rock's disproportionately heavy burden was not offset by any reciprocity of advantage.
6. Economic rigor will improve considerations of average reciprocity of advantage.
I have briefly described the ARA debate in takings law between the broader consideration of societal benefits from the regulation at issue and the narrow consideration of directly offsetting benefits sufficient to deny compensation. In either situation, case law has invoked concrete measurable issues, which various courts have evaluated with greater or lesser understanding. Apparently with a view of the vagaries of the range of understanding and estimation of the reciprocal benefits, Mr. Siegel dismisses any attempt to identify the exact offsetting benefits at issue and concludes that because they are “difficult to measure, therefore [they should be] accounted for by the major diminution in value requirement.” Of course, this vague standard would allow defendant counsel and the judiciary to opine to suit themselves about “how huge is huge enough.”
Infusing economic rigor into “average reciprocity of advantage” may reduce part of the vexation with the concept. An economist can interpret reciprocity under takings case law to discover if positive externalities of the regulation benefit the owner’s remaining uses of the property sufficiently to offset instant losses. Following the Federal Circuit’s reciprocity of advantage test: the economist would evaluate whether “direct compensating benefits accruing to the property, and others similarly situated, flow from the regulatory environment,” or whether the “benefits [are] general and widely shared through the community . . . while the costs are focused on a few.”
The dismal profession has been involved in measuring benefits and costs of government policies for decades; clearly economic expertise exists to support government counsel’s presentation of direct offsetting benefits to mitigate or overcome plaintiff’s demand for compensation. Economic methods to estimate these offsetting benefits are available and should overwhelm Mr. Siegel’s belief that these estimates are “generally very difficult . . . [and] therefore best captured by simply requiring the plaintiff to establish a large economic impact.” This nonsense would further confound regulatory takings’ already confused economic underpinnings.
 19 Hastings W.-N.W. J. Env. L. & Pol'y 373.
 The author has testified as an economic expert in regulatory takings cases, lectured at CLE seminars and written numerous articles about the economic underpinnings of the Penn Central test, including one article directly on-point to answer Mr. Siegel’s extrapolation of the phrase, “average reciprocity of advantage,” which is the heart of his article. (See “Average Reciprocity of Advantage: ‘Magic Words or Economic Reality: Lessons from Palazzolo," 39 Urban Law 319, 2007. The author testified as a financial expert for Mr. Palazzolo in the remand Wakefield RI trial, estimating the reciprocal benefits as part of his testimony. (Palazzolo v. State, 2005 WL 1645974 (R.I. Super. Jul 05, 2005) (No. WM 88-0297).)
 Siegel @ 374.
 Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 124 (1978); i.e., a taking is less likely to be found “when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good.” Id.)
Tahoe-Sierra Preservation Council v. Tahoe Reg’l Planning Agency, 535 U.S. 302, 32 ELR 20627 (2002). The temporal whole notion actually arose in the U.S. Court of Appeals for the Ninth Circuit. Circuit Judge Stephen Reinhardt in TSPC IV shifted the focus of the Tahoe dispute from the impact of TRPA’s moratorium during its effective period to its impact over the entire useful life of the subject properties. (Tahoe-Sierra Preservation Council, Inc. v. Tahoe Reg’l Planning Agency (TSPC IV), 216 F.3d 764, (9th Cir. 2000).)
 Penn Central at 130.
 The interested reader can learn more about the economic failings of Tahoe-Sierra’s “temporal whole” and its progeny in the Federal Circuit Court in the author’s article, “Temporary Takings, Tahoe-Sierra and The Denominator Problem,” 43 Env’l L. Rep. 10189, February 2013. Tahoe Sierra’s temporal parcel confounded the U.S. Court of Appeals for the Federal Circuit temporary takings decisions in ways at odds with standard economic theory and practice. (Cienega Gardens v. United States (Cienega X), 503 F.3d 1266 (Fed. Cir. 2007); CCA Associates v. United States, No. 2007-5094 (Fed. Cir. July 21, 2008); CCA Associates v. United States, 667 F.3d 1239 (Fed. Cir. 2011) (pet. cert. May 2012, cert. denied Oct. 10, 2012).)
 Siegel at 377 citing to Rose Acre Farms v. United States, 373 F.3d 1177, 1195 (2004). (Emphasis added.)
 Rose Acre Farms, 373 F.3d at 1185.
 Id. At ~1199.
 Although comparisons based on the percent diminution of tangible asset values in temporary takings cases have been at odds with standard economic practice. (Keystone Bituminous Coal Assn. v. Debenedictis, 480 U.S. 470, (1987).) See Wade 2013 at fn 7 for the correct economic notion of the taking fraction to evaluate frustration of investment backed expectations.
 Siegel at 382.
 Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124 (1978).
 Executive Order 12,866 – Regulatory Planning and Review, Federal Register 58, 190, Oct 4, 1993.
 Jackman v. Rosenbaum Co, 260 U.S. 22 (1922).
 Id. at 32.
 Id. at 30. Penn Cent., 438 U.S. at 140 (Rehnquist, J., dissenting).
 Id. at 148-49. “The benefits that appellees believe will flow from preservation of the Grand Central Terminal will accrue to all the citizens of New York City. [A]ppellees would impose the entire cost of several million dollars per year on Penn Central. But it is precisely this sort of discrimination that the Fifth Amendment prohibits.”
 Penn Cent., 438 U.S. at 138 (emphasis added). Given that Penn Central ceased to exist as a railroad in 1976 and was being operated as Conrail under federal bankruptcy protection at the time of the 1978 decision, I wonder what funds the Court imagined might be used for these further enhancements. Ironically, Grand Central Terminal was eventually restored at public expense. This factual outcome speaks more about the lack of economic insight in the Penn Central decision than thousands of words since in erudite journals.
 Id. at 134-35, reaching that conclusion with no evidence.
 Political considerations are beyond the author’s expertise. For more on politics, see Gideon Kanner, Making Laws and Sausages: A Quarter Century Retrospective on Pen Central Tranportation Co. v. City of New York, 13 Wm & Mary Bill Rts. J. 653 (2005).
 Florida Rock Industries v. United States, Florida Rock IV, 18 F.3d 1560 (1994); Florida Rock V, 45 Fed. Cl. 21 (1999).
 The decision was path-breaking in its application of the Penn Central test to a partial taking and correction of the denominator value in the takings fraction to be the owner’s equity or investment in the property, not the “value before” as mistakenly advanced at (Keystone Bituminous Coal Assn. v. Debenedictis, 480 U.S. 470, 497 (1987).)
 Florida Rock V, 45 Fed. Cl. at 36-37.
 Siegel at 385.
 Seems like I heard a variant of that phrase long ago in a place far away. (Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922).)
 Florida Rock IV, 18 F.3d at 1571 (emphasis added).
 Siegel at 382.