Distinguishing Taxes from Takings: A Belated Look at the Koontz Case

By Mike Dorf

In the excitement of the Supreme Court's end-of-Term decisions regarding affirmative action, same-sex marriage and voting rights last month, I did not have occasion to read all of its opinions in the somewhat lower-profile cases.  I am now reading some of those cases, partly simply to keep up and partly in preparation for my annual appearance later this month on the Practicing Law Institute's Supreme Court Review session in NYC.  One case I'll be discussing is Koontz v. St. Johns River Water Management Dist.,which did not get much media attention because it was handed down the same day that the Court invalidated Section 4 of the Voting Rights Act.  But Koontz is an important and interesting case.

The Takings Clause of the Fifth Amendment (as incorporated against states and their subdivisions by the Fourteenth Amendment) requires government to pay just compensation to property owners whose property the government takes using the power of eminent domain.  What if, instead of taking title to private property, the government simply regulates how a property owner may use his or her property?  Is that a taking?  As Justice Oliver W. Holmes, Jr. famously but unhelpfully said in the 1922 case of Penn Coal Co. v. Mahon, "while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking."  Since the Supreme Court's retreat from aggressive review of economic regulation under the Due Process Clauses in the late 1930s, the Supreme Court has generally been quite permissive: Government can go quite far in regulating without going too far.

However, the Rehnquist Court developed an important exception to deferential review under the Takings Clause.  In a pair of cases with names that, conveniently enough, rhyme with one another--the Nollan case and the Dolan case--the Court established a tougher rule for a certain kind of regulation:  Where the government conditions a land-use permit on a property owner ceding some property interest (for example, by granting a public easement or forgoing the right to develop some sub-plot of land), that condition is invalid, and thus the property owner is entitled to just compensation, unless the required exaction has a "nexus" to the permitted use and is "roughly proportionate" to the harm from the land use that the government seeks to mitigate.

The Koontz case presented two issues: First, whether the Nollan/Dolan rule applies to circumstances in which, in the face of a demand for some property interest as a condition on development, the property owner refuses rather than accedes to the demand?  And second, whether the Nollan/Dolan rule applies where the government gives the property owner the option of paying a sum of money instead of ceding the property interest.  The Court unanimously agreed that the answer to the first question is yes: It's the government demand that creates the potential constitutional violation, regardless of whether the property owner accedes to it.  But the Court divided 5-4 on ideological grounds with respect to the second question: The conservative majority (in an opinion by Justice Alito) said that a monetary exaction triggers Nollan/Dolan, whereas the liberals (in a dissent by Justice Kagan) thought that money is different from real property.

Who's right?  Well, there are slippery slopes down both sides of the mountain.  Justice Alito and the majority rightly worry that if the government can avoid the Nollan/Dolan requirements of nexus and rough proportionality simply by offering the property owner the option of paying a fee for development, then by pricing the fee high enough, the Nollan/Dolan rule will cease to be effective at all.  But Justice Kagan and the dissent are also right that--as the majority reaffirms--taxes and fees are not Takings subject to Nollan/Dolan; and, the dissent goes on, the majority offers no test for distinguishing permissible taxes and fees from monetary exactions in lieu of property demands that trigger Nollan/Dolan.

The majority responds with the contention that the dissent's worry is more theoretical than real--that in reality governments do not attempt to disguise exactions as taxes or fees.  The dissent in turn contends that the lower court cases the majority cites actually show considerable disagreement over how to draw this particular line.  And so on.

The real problem, in my view, is traceable to the Takings Clause itself, which cannot encompass most taxes. If a tax is a taking, then it is ineffective as a tax, for a taking requires just compensation, which would mean that the government could only collect the tax if it then gave back the money it collected.  Yet there must be some category of government appropriations that are outside of the taxing power in order for the Takings Clause to have any bite.  How to draw a line?

One possibility--suggested by some of the commentary on the Affordable Care Act last year--is that the political process will sort this out.  Politicians, in this view, will be extremely reluctant to vote for anything called a tax and thus, will not attempt to disguise Takings as taxes.  But given the fact that "fees" are also not considered Takings and the fact that courts tend to adopt a functional approach to what counts as a tax, it's not clear to me that politics alone will police the line that the majority in Koontz necessitates.

Moreover, it is often argued that the Takings Clause serves a kind of equality principle: Government can tax people but it must do so through even-handed laws of general applicability; it cannot single out particular individuals as revenue sources on an ad hoc basis.  Interestingly, the dissent points to some state court decisions that apply Nollan and Dolan "only to permitting fees that are imposed ad hoc, and not to fees that are generally applicable."  Given the underlying rationale for the Takings Clause, I would not be surprised to see a future majority opinion adopt this line as a matter of federal law.