The Department of Infrastructure and Regional Development has released a discussion paper about value capture; an idea that the incremental gains to land values that arise from new public investment can be captured n some way to fund that investment.
I have made a very brief submission to this policy development process (reproduced below).
What is surprising is how far the debate about land value taxation has moved in the past 5 -10 years. Just a decade ago any talk of taxing land values was dismissed by 'very serious people' as the crazy idea of 19th century eccentric (yes, I'm referring to Henry George), and also argued to not be technically possible in reality (which was a bald-faced lie).
To capitalise on this new political climate of acceptance of taxing land, I have made the absolutely crucial point in this submission that we already have well-functioning system of land value taxes in every state, which automatically perform the function of capturing land value gains from public investment! However, these systems are clogged up with politically expedient exemptions. These exemptions could simply be closed in order to get a system that is a near perfect implementation of the idea of value capture.
So here's my submission, which responds to 13 question raised in the discussion paper in order.
How can we make better use of Value Capture?
Dr Cameron K. Murray
The University of Queensland
Tuesday, 24 January 2017
1. What factors would cause beneficiaries, in particular property owners, to see a value
capture charge as ‘just another tax?’ How can these factors be overcome?
Every loser from a tax change will whinge. The trick is perhaps to simply remove exemptions from existing land taxes and then sell it as ‘fixing loopholes’. There is no obvious reason why a special “value capture” tax should exist, when a tax on land values, which already exists in all States (with far too many exemptions) will automatically provide the funding mechanism sought by arbitrarily drawn “value capture districts” or other measures.
2. Are there examples of mechanisms currently being used in Australia or internationally which provide a clear nexus between payments and the benefits provided by the infrastructure?
The Gold Coast Infrastructure Levy is supposed to do that. But there is no good policy reason to do so, because the factors that determine land prices in an area are much more broad than the type of things that get categorised as infrastructure. And it is also the case that some infrastructure will have negative effects on nearby land prices due to noise and other externalities.
There is also no ability, even if governments promise it, to isolate and earmark certain revenues for certain expenses, given politicking and accounting trickery. Forget about it. Use it as a selling tool if you must, but don’t pretend it is the reality.
3. Which mechanisms are currently being used which have weak links between payments and benefits?
4. In providing funding to projects, should the Commonwealth set a condition that any contributions levied by state or local government on surrounding landowners are dedicated to the project?
Forcing the states to choose catchments affected by infrastructure is going to open up political battles that don’t need to be fought. There is no clear accepted method for determining catchment boundaries, and catchments are likely to vary project by project, depending on the pre-existing infrastructure, and type of activities occurring in the local area.
Certainly a less politically sensitive way to do this is to add a charge on new development only within an arbitrarily defined catchment, avoiding much of the blow-back from existing owners and residents.
5. How can governments accurately estimate the incremental value uplift generated by infrastructure projects as compared to uplift due to ordinary market growth?
Highly detailed data on property sales or land values is necessary. Even then, it is still very difficult to isolate the marginal value gains statistically, given the challenges of properly identifying the timing of value effects. I have recently undertaken such an analysis on the Gold Coast Light Rail.
6. When identifying beneficiaries, how should governments determine the geographical boundaries around new infrastructure assets? Should governments focus on all properties directly around the new assets, within the wider region or at a city-level?
Every time a boundary is drawn it will generate conflict near the boundary as some landowners win, and some miss out, financially. A better way is a city-wide levy, which makes sense for network-style infrastructure, such as rail, where expanding the network benefits people not only at the new station, but on the rest of the network who now have access to that new station.
7. How can governments design processes which cause beneficiaries to reveal their
willingness to pay?
This is unnecessary. Simply incrementing up the rate of land value taxes in general, and removing exemptions, will automatically capture incomes from land value gains which arise from public infrastructure investment of all types, and at levels which are perfectly in proportion to the willingness to pay of land market participants.
Additionally, there is an interaction on some modes, like rail, between ticket prices and the effect on land value. If trains were made free to ride, land values nearby would rise to reflect the reduced cost of living in that locations (and vice-versa).
A general recurring tax on land values automatically responds in both directions to any such effect, reducing tax burdens on those suffering negative effects, and increasing it on those who gains positive economic benefits.
8. Could we adopt an approach in Australia of holding popular votes in relation to large
infrastructure projects and their funding mechanism?
That would be possible only if there was already a system in place to generate a shortlist of viable candidate projects that could then be voted on.
9. Who would be best placed to organise such votes? Local councils? Transport
Given the large size of many new infrastructure projects, these seem a task for the States, though some large councils could independently conduct such a voting system. Although if it was a decision on funding by the Commonwealth to choose between alternatives generated by the State, the Commonwealth could run votes locally.
10. Would the Commonwealth be justified in linking funding to evidence of popular
support and willingness to pay?
This is difficult. Many people can’t think about how they will behave in the future, especially when infrastructure is a new mode that they are not yet familiar with. You are asking for trouble to justify funding on this basis of elicited willingness to pay from survey data based only on early proposals.
11. Are there examples of other successful approaches to seeking community
acceptance for value capture mechanisms?
12. Should there be different approaches to obtaining proof for different beneficiaries?
No. As above, broadly applied land value taxes automatically identify landowning beneficiaries. Obviously users benefit as well, and user changing is widely accepted in rail (tickets), road (tolls), and other transit infrastructure. However, it is a social and political choice as to whether users, or external beneficiaries, such as landowners, should pay more.
13. Are there examples where re-zoning, integrated planning and value capture funding have been well implemented? Are there examples of missed opportunities?
Australia has a great working example of land value taxation in the ACT, specifically a transition towards much higher rates of land value tax. The ACT also capture land value gains from rezoning in its lease variation charge, getting around 75% of the value gains from rezoning (in addition to 100% of the value gains from rezoning rural to urban uses through the functions of the Land Development Authority. See this paper for analysis of the ACT example
Sau Paulo, Brazil, also has regular auctions of rezoning rights used to fund local infrastructure, and has raised over $USD 2 billion in the past decade (see here).