Vanishing Automobile update #38

Penn Central: The Supreme Court's Big Mistake that Led to Smart Growth

June 20, 2003

This month's issue of Planning magazine, published by the American Planning Association, celebrates the twenty-fifth anniversary of the Supreme Court's decision in Penn Central vs. New York City -- but this should be a cause for mourning for supporters of the American dream. In that case, the Penn Central Railroad wanted to build a skyscraper above Grand Central Terminal, the much-admired Manhattan passenger train station. Historic preservationists, upset over the recent destruction of Pennsylvania Station, Manhattan's other classic train station, convinced the city to deny the railroad a permit to build the skyscraper.

Penn Central sued, claiming this was a taking of property and required compensation under the fifth amendment to the Constitution. The skyscraper would have returned millions of dollars per year to the railroad and would not have significantly changed the appearance of the terminal. In fact, the terminal was originally designed to have a skyscraper-hotel built on top of it.

The case began in 1965 when the Penn Central was one of the nation's largest companies. By the time the Supreme Court made its decision, thirteen years later, the railroad had suffered the largest bankruptcy in the nation's history up to that point, a bankruptcy that could have been averted if the railroad had not had to suffer the kind of regulation exemplified by the Grand Central Terminal case. (Railroad deregulation in 1980 led to railroad prosperity that had not been seen since railroad regulation in 1907.)

In a six-to-three decision, the Supreme Court held that New York had the right to preserve the character and aesthetic features of the city. Moreover, no compensation was required because the railroad was still able to earn a profit from managing Grand Central Terminal as a train station. As University of Chicago law professor Richard Epstein points out, this reasoning is absurd: What if the railroad had sold the right to build a skyscraper to someone else? Then the historic preservation law would take 100 percent of the value of that right. Why would compensation be justified in that case but not in the actual case?

In considering the Penn Central decision, Planning magazine claims that it had "very little" effect on the definition of private property. After all, the magazine reasons, it is merely a restatement of the Supreme Court's 1926 Euclid decision, which authorized zoning.

In fact, Penn Central was vastly different from Euclid. In early zoning laws such as that contested by Euclid, neighborhoods of single-family homes sought to protect themselves and their property values from nuisances such as industrial, commercial, or multi-family developments. No one ever questioned the right of cities to control nuisances. If in a residential neighborhood you have a factory that emits a vile odor, or a vacant lot that you turn into a junkyard filled with old cars and refrigerators, your actions represent a nuisance to your neighbors and the city can force you to clean up.

When the village of Euclid, Ohio, enacted a zoning law in 1922, a local realtor objected that the ordinance zoned land as residential that he wanted to sell for industrial use. As in the Penn Central case, the attorney for Euclid argued that zoning was needed to preserve the character of the village. But the Supreme Court of 1926 was not impressed by this argument. The Court instead supported the argument of an early land-use plannng attorney, Alfred Bettman, who filed an amicus brief arguing that zoning was a valid form of nuisance control. In a six-to-three decision, the Court supported that view.

Euclid was about maintaining property values by controlling nuisances. Penn Central was not. No one ever maintained that one more skyscraper in Manhattan would reduce the value of adjacent properties. No one ever maintained that a skyscraper was a nuisance. They just said, "Penn Central has something we want, and we want to make them pay for it while we get the benefit."

Penn Central attorneys made this point, saying that Euclid turned on protecting "health, safety, morals, and general welfare," while the Penn Central case was based solely on aesthetics, which are in the eyes of the beholders. But Justice Brennan dismissed this, not because he felt aesthetics were critical to health and safety but because Penn Central had failed to challenge the law when New York declared the terminal to be a historic landmark. Instead, they waited until New York turned down their permit for the skyscraper.

If Penn Central had challenged immediately, would Brennan's decision have been different? Probably not, because Brennan also makes the curious argument that to accept appellant's view would "invalidate not just New York City's law, but all comparable landmark legislation in the Nation." Does this mean that any time a lot of cities pass unconstitutional laws, they suddenly become constitutional?

Finally, Brennan argued that Penn Central doesn't lose anything because it was still allowed to make a profit on the terminal as a passenger station. You don't have to have hindsight to know that Penn Central was losing money on its passenger trains in 1965. By 1978, when Brennan wrote his decision, the railroad was bankrupt and out of business, and the high cost of its passenger trains was an important reason for its demise. More fundamentally, where in the constitution do landowners give up the right to use their land for anything but its original use, even if that original use no longer makes economic sense, unless granted the government's permission?

Penn Central opened the door for downzoning such as that found in rural Oregon, where no one is allowed to build a house on their own land unless they own 160 acres and, if it is farm land, actually earn (depending on soil productivity) $40,000 to $80,000 a year farming it. Penn Central opened the door for upzoning, such as zoning to transform a neighborhood of single-family homes into apartments by requiring, among other things, that if your house burns down you must rebuild it as an apartment.

Where the purpose of zoning under Euclid was to protect local property values, the purpose of zoning under Penn Central was to reduce local property values. Where Euclid allowed zoning to prevent nuisances in neighborhoods, Penn Central transmogrified zoning into a way to impose nuisances on neighborhoods. In short, without Penn Central in 1978, we would not have smart growth today.

One of the dissenters from the Penn Central case was then-Associate Justice William Rehnquist. Since he became Chief Justice in 1986, several cases have chipped away at Penn Central, but most have been five-to-four decisions. Let's hope that a larger majority of the Supreme Court sees fit to completely overturn Penn Central before its thirtieth anniversary.

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