K-12 Tax, Spending & Referendum Climate: Will States Owe Businesses Just Compensation for Forced Closures When the COVID-19 Pandemic Is Over?

Ethan Lamb:

The spread of the coronavirus has prompted most states to issue orders mandating non-essential businesses to close and non-essential workers to stay home. These regulations, whether or not they are justified, will decimate small and large businesses alike (and indeed already are, in many areas). Loans are being made available to businesses, some containing a forgiveness option provided that the business spends the money in a specified way.

But when the dust settles after all of this, we could very well see a flood of lawsuits from business owners, destitute after the government’s loan money has run out and their firms are dried up. And these suits will likely be on the grounds of the Fifth Amendment. Commercial enterprises, some attorneys will say, were entitled to compensation from the government, not beheld to it for repayment of an emergency loan. The statewide regulations mandating business closure violated, they’ll insist, the takings clause of the Fifth—forcing them to close up shop was a regulatory taking.

A regulatory taking is when a regulation put forth by a governmental authority diminishes the value of one’s property, such that that property owner becomes entitled to compensation for it. But as to whether these aforementioned regulations constitute a regulatory taking? Well, it’s complicated.

There has been significant disagreement within the Supreme Court over the years, leaving a lot to be clarified. One of the key cases governing regulatory takings is Penn Central Transportation Co. v. City of New York (1978). This case, which dealt with an ordinance precluding Penn Central leasing airspace above Grand Central Terminal, lays out a three-pronged balancing test to guide the court. The three factors are: (1) the economic impact on the owner of the property; (2) the regulation’s interference with the owner’s reasonable investment-backed expectations; and (3) the character of the government action.