Rob Dossor, Economics
Land value capture is a method of financing investment in infrastructure.
Most recently, it is seen by its proponents as the key to developing the mega-project that is the east coast high speed rail. This is due, at least in part, to the Prime Minister’s ‘plans for a new approach to infrastructure funding’. Value capture features prominently in the Government’s Smart Cities Plan.
Value capture describes a range of financing mechanisms that ‘capture’ some of the increase in property values generated from transport infrastructure improvements, for the purpose of funding that investment.
Value capture as a financing method is not a new idea but its explicit use in Australia for large-scale government-sponsored projects appears set to become more common.
Improvements in transport infrastructure tend to
cause property prices to rise due to improvements in accessibility.
Value capture seeks to capture some of the increase
in value that would otherwise accrue to the (usually private) property
owner. By capturing some of this value, only those who directly benefit from
the infrastructure will contribute to it, rather than all taxpayers effectively
subsidising the value increase.
Value capture mechanisms
There are many commercial and legal arrangements that
can be characterised as value capture. The Bureau of
Infrastructure, Transport and Regional Economics (BITRE), however, identifies
Tax increment financing (TIF)
TIF captures value through taxes levied on property
Under this approach, a ‘TIF zone’ is established in
the vicinity of proposed infrastructure, where property values are expected to
rise. Pre-investment, or base
property values, in the zone are determined by the government, as is base tax
When property values rise in the TIF zone due to infrastructure
investment, the increased tax revenue above the base rate is directed to re-paying
loans used to finance the investment.
TIF was developed in the United States in the 1950s
as a policy mechanism to invigorate
depressed areas. It is now more widely used,
including for funding
infrastructure necessary for population growth.
In recent years, however, its use has slowed. Several
academic reviews have called into question its effectiveness. Some
state, for example, that growth in TIF zones often comes at a cost to
surrounding areas. Also, while generally generating a ‘solid and robust’
revenue base, TIF zones may not result in increased business activity or a rise
in property prices.
Betterment taxes, in their most common form, are
taxes on property owners considered to be direct beneficiaries of
infrastructure investment. They are usually based on unimproved capital value.
Tax Review said that betterment taxes must ‘isolate
the increase in value attributable to the zoning decision or the building of
infrastructure from general land price increases at the local level’. According
Roukouni and Francesca Medda of University College
London, ‘betterment tax is considered an equitable and efficient levy due to
the fact that it can recover the increased value on private land assets accrued
with transport investment’.
Betterment taxes have a long history in Australia. They
contributed to the funding of the Sydney Harbour Bridge, Melbourne’s City Loop
rail system and the Gold Coast Rapid Transit Light Rail.
Transaction taxes, such as capital gains tax (CGT)
and stamp duty, are an existing form of value capture. CGT, a
Commonwealth tax, is a tax on the difference in the price of a property and the
price received when it is sold (except when the property is the seller’s main
Stamp duty, on the other hand, is a state tax
levied on the purchase of certain assets, including property. Stamp duty has
been heavily criticised, with the Henry
Tax Review, for example, stating:
...stamp duties are poor taxes. As a tax on
transferring land, they discourage land from changing hands to its most
valuable use. Stamp duties are also an inequitable way of taxing land and
improvements, as the tax falls on those who need to move.
Joint development covers several kinds of arrangements
between government agencies and private firms. A common example is an
arrangement for the redevelopment of a train station under which the Government
grants a private firm the right to develop the site and surrounding land in
return for a contribution to the redevelopment of the train station.
Other things to consider
Not all investment in transport infrastructure
causes property prices to rise. Some relevant factors are:
- There may be a negative relationship if a transport line runs
through or near an industrial area.
- The closeness of a property to the actual line may reduce the
benefit (due to noise and disturbance).
- Properties in high crime areas may not see the growth in values
which may otherwise be associated with infrastructure provision.
- There may be little appreciation in prices if development does not
increase accessibility (for example, when a light rail line replaces a rapid
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