The Fiscal Illusion Zombie: The Undead Theory of Government Regulatory Incentives

By Serkin, Christopher | American University Law Review, January 1, 2017 | Go to article overview

The Fiscal Illusion Zombie: The Undead Theory of Government Regulatory Incentives


Serkin, Christopher, American University Law Review


INTRODUCTION

In her recent Article, The Illusion of Fiscal Illusion in Regulatory Takings, Professor Bethany R. Berger takes aim at fiscal illusion as a justification for regulatory takings.1 It should be an easy target; people have shot at it before and hit it repeatedly.2 And yet it somehow does not die. The concept of fiscal illusion is based on an alluring intuition that governments should internalize the costs of their actions, and that failing to require compensation for regulatory burdens will lead to over-regulation.3 As many critics have pointed out, however, the intuition does not seem to withstand close scrutiny.4 Governments do not internalize costs the way private actors do, and the fit between compensation and regulatory incentives is so imprecise as to be meaningless.

Professor Berger adds a new criticism, attacking fiscal illusion on its own terms. She points out that property taxes are, in essence, a mechanism by which local governments internalize both costs and benefits and that a requirement to pay compensation will distort any calibration between the two, putting a heavy thumb on the scale against government action.5 This is a good point and builds nicely upon claims in the existing literature. But fiscal illusion is an undead theory, and in the face of its persistence, it is important to consider other ways in which the legal system can respond to the overdeterrence of compensation. These include a more robust form of municipal insurance or, absent that, an offsetting compensation requirement for regulatory inaction that balances out the threat of traditional takings liability.6

Part I of this Response canvasses the critiques of fiscal illusion. Professor Berger does some of this work herself, but it is useful to see the full arsenal arrayed against this zombie theory. Part I is divided between external and internal critiques, and Professor Berger's falls into the latter category. Part II looks at potential responses to the problem of over-deterring government action. Building on my own prior work, it proposes both takings for regulatory inaction and insurance as ways of addressing the problem of under-regulation and under-enforcement of existing regulations.

I. THE ASSAULT ON FISCAL ILLUSION

According to Professor Berger's succinct summary, the use of the term "fiscal illusion" in takings literature dates back to a seminal article by Lawrence Blume and Daniel Rubinfeld, although the concept is older.7 The phrase is invoked for the idea that "the government does not take into account the societal costs of governmental actions unless the government itself pays for them."8 It therefore reflects the familiar economic intuition that the law should force people-or organizations-to internalize the costs of their actions in order to induce efficient decision making.9 Externalized harms will tend to encourage too much of an activity relative to its overall impact, whereas externalized benefits will result in too little of an activity.10 When it comes to private law-property and nuisance law, for example-this idea is intuitive and powerful.11 Applied to the Takings Clause,12 it suggests that the government should bear the costs of its actions and that forcing the government to pay compensation for the regulatory harms it imposes will induce efficient regulatory incentives.13 The fiscal illusion theory has had enormous influence on takings theory.14 However, it is not at all clear that forcing the government to pay compensation will, in fact, force it to bear the costs of its actions in any meaningful sense.15 Moreover, the theory of fiscal illusion misses important additional dynamics affecting both regulatory and investment incentives. Broadly, these can be grouped into external critiques that challenge the assumptions and implications of fiscal illusion and internal critiques that challenge fiscal illusion on its own terms. These critiques are introduced below.

External critiques of fiscal illusion challenge the assumptions and implications of the theory and include, for example, invoking public choice theory, focusing on the heterogeneous sources of revenue for paying compensation, and problematizing the resulting investment incentives. …

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