The reason is:
(1) eminent domain isn't Constitutionally limited in purpose beyond that it must be a public purpose.
(2) State governments under the US Constitution have general police powers, so any purpose they aren't expressly Constitutionally forbidden to pursue is a valid public purpose, as distinct from the federal government being one of granted powers where there must be a specific Constitutional basis for it pursuing a purpose for it to be valid.
(3) Seeking revenue is not a thing prohibited to the states by the Federal Constitution.
(4) Under the federal Constitution, subordinate entities within states don't have distinct powers from states; if they are limited, that is a matter of state law, not the federal Constitution.
EDIT: Also, note also that some states do Constitutionally restrict the purposes of eminent domain, or have state laws limiting local use of it, some, IIRC, in Constitutional provisions that were proposed and passed directly in response to Kelo, so that what happened there would not be allowed.
> "[the decision eliminates] any distinction between private and public use of property—and thereby effectively delete[s] the words 'for public use' from the Takings Clause of the Fifth Amendment."
> "This deferential shift in phraseology enables the Court to hold, against all common sense, that a costly urban-renewal project whose stated purpose is a vague promise of new jobs and increased tax revenue, but which is also suspiciously agreeable to the Pfizer Corporation, is for a 'public use.'"
Because, as the Supreme Court has consistently held since interpreting the 14th Amendment’s Due Process Clause to apply the 5th Amendment’s protections against the states in the first place (without which, the issue would be moot since absent such application there would be no federal constraint at all) use in which the state action is pursuing a legitimate public purpose has been held to be a “public use”.
Which presumably you already know, because surely you read the majority opinion in Kelo in the course of locating and quoting (without attribution) O’Connor’s dissent.
1 - Guess who the land belonged to before the federal government? It wasn't the states. I reject your assertion that localities are even entitled to a say here beyond the federal democratic process. Almost all of the land in question was open to claim at one point - nobody did so and ownership was retained by the government.
2 - It's absolutely laughable to say that they "just stopped allowing anything on the land". In certain areas maybe but as a blanket statement that's absolutely incorrect. As a personal anecdote, one of my favorite spots to pick berries in western WA was clear cut just this past summer. I'll never visit that spot again in this lifetime. But hey, someone got paid a couple of bucks so I guess that's a net positive for the country. Don't even get me started about cattle ranchers and the damage they've done.
3 - Those jobs were based on extracting a resource that didn't belong to them and that takes decades to recover, if ever. Why should the rest of us let (in your words) some po-dunk town clear cut everything in sight when the rest of us can make our living without destroying everything from sea to shining sea?
4 - Should we help them out now that the economics have changed? Sure, absolutely, totally support that. However economies built on resource extraction have never been sustainable long-term, what's the point in doubling down on what already failed? I also disagree with your supposition that federal restrictions is what hollowed out these towns, the fundamental economics of resource extraction is why they've failed to be sustainable over the long term.
5 - I actually agree with you on one thing at least: put all it up for sale at a fair price. All national forests, all BLM land - everything that isn't wilderness or a national park. While the cattle ranchers, miners, and loggers will get a bit I can guarantee that conservationists will buy more. Leases are a sweetheart deal to extractors and always have been. Why should they buy what they can lease for basically nothing? The extractors would fight your proposal harder than anyone else.
2. Yes, they have completely stopped taking bids for timber harvest in my area. My country is screwed financially by this. Cattle ranchers existed as part of your arguement 1, so either you support argument one and are OK with cattle ranchers, or your argument in 1 is invalidated by your position on cattle ranchers.
3. Because the Federal government made this promise as the foundation of establishing these lands.
4. This is a lie. We have had no issues in my county with sustainable, you just made that up. The loggers definitely REQUIRE is be sustainable at this point to ensure employement, it's not 1800s wild west.
5. God I only say that being reactionary. I'm a hippie (even if my post doesn't show it), I love the national forests.
I must point out that a lot of your post feels written by a Native American. Their story is also about broken promises and land (and other deplorable things)