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Financing infrastructure by value capture

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Financing infrastructure by value capture Rob Dossor, Economics

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 four types:

Tax increment financing (TIF)

TIF captures value through taxes levied on property value.

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 revenue.

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.

Key Issue 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.


Betterment tax

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.

The Henry 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 to Anastasia 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

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 residence).

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

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 bus line).