WASHINGTON —  The Supreme Court (search) agreed Tuesday to decide when governments may seize people's homes and businesses for economic development projects, a key question as cash-strapped cities seek ways to generate tax revenue.

At issue is the scope of the Fifth Amendment (search), which allows governments to take private property through eminent domain (search), provided the owner is given "just compensation" and the land is for "public use."

Susette Kelo and several other homeowners in a working-class neighborhood in New London, Conn., filed a lawsuit after city officials announced plans to raze their homes to clear the way for a riverfront hotel, health club and offices. The residents refused to budge, arguing it was an unjustified taking of their property.

They argued the taking would be proper only if it served to revitalize slums or blighted areas dangerous to the public.

New London contends the condemnations are proper because the development plans serving a "public purpose" — such as boosting economic growth — are valid "public use" projects that outweigh the property rights of the homeowners.

The Connecticut Supreme Court (search) agreed with New London, ruling 4-3 in March that the mere promise of additional tax revenue justified the condemnation.

Nationwide, more than 1,000 properties were threatened or condemned between 1998 and 2002, according to the Institute for Justice (search), a Washington public interest law firm representing the New London homeowners.

In many cases, according to the group, cities are pushing the limits of their power to accommodate wealthy developers. Courts, meanwhile, are divided over the extent of city power, with seven states saying economic development can justify a taking and eight states allowing a taking only if it eliminates blight.

In New London, city officials envision replacing a stagnant enclave with commercial development that would attract tourists to the Thames riverfront, complementing an adjoining Pfizer Corp. (search) research center and a proposed Coast Guard museum.

"The record is clear that New London was a city desperate for economic rejuvenation," the city's legal filing states, in asking the high court to defer to local governments in deciding what constitutes "public use."

According to the residents' filing, the seven states that allow condemnations for private business development alone are Connecticut, Kansas, Maryland, Michigan, Minnesota, New York and North Dakota.

Eight states forbid the use of eminent domain when the economic purpose is not to eliminate blight; they are Arkansas, Florida, Illinois, Kentucky, Maine, Montana, South Carolina and Washington.

Another three — Delaware, New Hampshire and Massachusetts — have indicated they probably will find condemnations for economic development alone unconstitutional, while the remaining states have not addressed or spoken clearly to the question.

The case is Kelo et al v. City of New London (search), 04-108.