3.10.1-6: Value Capture Can Easily Fund Infrastructure

Module 3, Section 10.1-6

Value Capture Can Easily Fund Infrastructure

10.1 In his book Taken for a Ride Don Riley explores the impact of the building of the Jubilee Line Extension (JLE) Underground line in London. He visited the tunneling site in the mid-1990s and has since commented how these men digging the tunnel were sweating hard, risking their lives, not knowing where their next job was coming from, while at the same time he, himself, was making money while he slept as his local land holdings appreciated in value as the line became a reality.

Riley calculated the total land value increase that arose within a radius of only 1,000 yards of each of the new JLE stations. He found out that land values increased by a staggering £13billion. The construction cost of the line itself was only £3.5billion.

10.2 “Some of this wealth should have been collected by the Government in order to fund the project,” says Riley.

10.3 An independent study carried out for Transport for London estimated that between 1992 and 2002 the JLE caused land values to rise by £2.8bn close to just 2 of the 11 new stations (Southwark and Canary Wharf). This means that the UK Government could have built the JLE at no cost to the public purse if they had just chosen to collect less than one third of the increased land values arising from the scheme.

10.4 “If Governments continue to only tax wages, trade or goods and services to create new transport opportunities then they are choosing to give an unearned bonus to the owners of land,” says London transport consultant Dave Wetzel in his paper on Innovative Ways of Funding Public Transport. “Funding new and improved transport infrastructure from land value gains creates a virtuous economic cycle that provides a win-win situation for all concerned, including the landowners who provide the finance.”

10.5 For those who are interested in further information on this topic here are two articles on Bonding/Funding of Transport through Land Values and Case Studies.
Also see The Nexus of Transportation, Economic Rent, and Land Use.

10.6 Optional Reading: Special Benefit Assessment Districts and Traffic Congestion Pricing

United States To finance public works, this country's states and smaller jurisdictions have at times used benefit assessment districts, with land value capture as the mechanism to pay for new or better public works projects. When a community petitioned for infrastructure benefits, such as paved streets, sidewalks, utilities extensions, or other amenities, a governing jurisdiction then designated a district embracing all benefitting properties. Costs were divided among properties according to each owners's "front footage." The length of lot lines facing a street provided a rough equivalent to the relative land values of the affected properties served by or adjacent to the facility.

A small number of such benefits districts remains, but most depart from the original design. Their taxes fall on total property value rather than on front, or land, value, and fully developed properties pay more. Such districts, therefore, now give a free ride to holders of vacant land or blighted properties. The original land value capture benefit assessments districts had the following advantages:

The approach worked and citizens found it fair. Those receiving benefits bore the costs; others, who did not benefit, were not expected to pay.
Orderly urban growth was fostered. Local government had more control over where infrastructure was to be extended.

Benefit districts tended to be democratic and efficient. Projects went forward only if affected owners approved. Waste was minimized because those who had to pay took pains to confirm that facilities would be worth their cost.

Examples include:

California: Local irrigation districts established in the early 20th century in the great Central Valley provide a lesson in the benefits of infrastructure funding by land value capture. State law enabled formation of local irrigation districts, with the capacity to issue bonds to finance irrigation works. These were paid from increased land values captured as a result of the improved water systems. Large ranch lands, now taxed at much higher values, were sold off in smaller tracts. Small farmers found land more affordable, and were able to farm more intensively because of expanded irrigation. This land value capture system brought prosperity and healthy, thriving communities. Town sites, too, whose values were enhanced by higher productivity of the surrounding farms, yielded higher taxes. Districts became multi-purpose, providing electric power, reclamation, and recreation, as well as water. Some five million acres turned green under this tax reform, which one analyst called “an extraordinarily potent engine for the creation of wealth.”

Ohio: After catastrophic floods in 1913, this state inaugurated a flood control system paid for by land value capture. Assessing the flood damage to each property approximated the land value beneath that would accrue to the owner, as a result of preventing future floods. Approximately 77,000 parcels along 110 miles of river valley were individually assessed within two years. Total calculated benefits to properties exceeded $100 million, more than three times the cost of the flood protection project. Such a cost/benefit ratio lends weight to the proposition that infrastructure can be self-supporting under a land value capture system, because it generates sufficient revenue. Pennsylvania: The Pittsburgh (second largest city) Improvement District, comprising 100 blocks of prime downtown land, is a successful example of a full land-only value capture special benefit district. This capture scheme pays for greater customer safety, better maintenance, and enhanced marketing to attract new businesses, [including many national corporate headquarters??], which both pay for and benefit by the additional assessment.

Traffic Congestion Pricing

Taxation of motor vehicle ownership and usage also involves land values, although this is often unrecognized. To the extent that road usage rights represent rights to use of a land-related resource, taxing that right is completely in line with land value capture policy.

Singapore: Motor vehicle taxation here is a form of regulatory capture related to land use. Road space is a valuable resource in this land-scarce city-State, and is priced accordingly for private motor vehicle owners and users. Road usage pricing has been implemented since 1975; as a result, traffic congestion is infrequent. Because of successful land value capture, revenue from land leasing and motor vehicle related charges are important sources of funding, and the Singapore budget has enjoyed healthy surpluses since 1968. At the same time, tax rates on income and productive enterprise have been steadily reduced.

United Kingdom: To avoid overcrowding and wasting fuel as vehicles idle in traffic jams, London has recently introduced a type of land value capture through traffic congestion pricing, also based on heavy or light use time of day. The City of London receives substantial revenue from vehicles fined for non-compliance, the number of vehicles in central London has been dramatically reduced and traffic flows far better than previously.