Our Georgist colleagues in California respond to Prop 13 and the need for value capture in transit corridors. See the parallels to our experience in Oregon…
California Voters May Opt for Value Capture to Save Transit From the Pandemic
by Mark Mollineaux / RSF Digest /October 5, 2020
Addressing a conference on urban issues held in San Francisco, the British author and economist Barbara Ward (famous for several best-selling books on international equity and developmental economics) explained a key challenge afoot in the Bay Area. The year was 1967, and the locals were anticipating the launch of its ambitious regional subway, BART (Bay Area Rapid Transit).
“I have seen estimates that the windfall gain to property owners around the Bay Area Rapid Transit Scheme’s thirty stations will be nearly a billion dollars,” said Ward. Warning that, at a time in which America’s urban areas were paying more in taxes than they were receiving in federal receipts, the region absolutely could not afford to see public investment seep out to private hands.
Ward noted that the Erie Canal recouped much of its costs through taxes on the lands it enhanced, and said that the Bay Area could do much the same sort of value capture today. “Has the city the courage of the old builders of the Erie Canal?” As it turned out, the city, and in fact the entire state of California, did not have this courage. Financing for BART fell mainly upon regressive sales taxes.
Meanwhile, as the 1970s stretched on, amidst worsening stagflation a homeowner-driven tax revolt resulted in enactment of Proposition 13 in 1978. By amending the California State Constitution to impose strict restrictions on ad valorem taxation, homeowners got what they wanted: reduced property tax obligations. Property tax is capped at 1% of the assessed value, which is frozen for each landowner; assessments cannot increase more than 2% each year.
The impact was dramatic; by severing the direct means of recouping land value uplift, California kicked off cycles of ever-more expensive real estate with increasing austerity. School funding in California dropped from 7th-highest in the nation before Prop 13 to 41st by the mid-2010s. Transit agencies had to re-up on sales tax measures in order merely to preserve declining service frequencies.
Now, this election year of 2020 brings for the first time the opportunity to peel back these restrictions in the state Constitution. Prop 15 is on the ballot this November, and if enacted will strip away a large amount of Prop 13’s impact: assessments will be restored to current fair-market value for all commercial landowners. The initiative, pushed by a coalition of public employee and teacher unions, would create dedicated pipelines to restore this revenue (overall on the scale of $10 billion/year) to school districts, transit agencies, and other sources of public infrastructure.
And it couldn’t have come at a more necessary time: the pandemic of 2020 has been devastating to transit. Declines in ridership of 90% or more have been seen on the commuter-heavy lines. For agencies such as BART, funded 65% by fares, the shortfalls have been enormous: a projection of $78 million decrease in revenues in 2020, $177 million decrease in 2021.
California’s transit woes are a reflection of how different tax policies result in different levels of robustness in this pandemic. Sales tax revenue is expected to decline statewide by 30%, whereas property tax is expected to be robust even in the face of a pandemic.
Interestingly, clawing back value capture from Prop 13 via constitutional amendment isn’t the only way that California has to restore value capture. Even though ad valorem taxes are restricted and gummed-up, there are certain workarounds that allow some more imperfect methods of recapture. An interesting opportunity is being explored with Land Value Increment Taxation districts.
Such a district would impose a progressive capital gains tax on real estate sales within a Transit Value Capture District, which could be defined as a radius from a fixed-rail station or high-frequency bus stop, of 0.25 to 1 mile. The imperfection would be that imputed rents would be left alone, and value recaptured only upon each sale, but in the long run, this offers some interesting potential. The regional transit planning organization for the Bay Area, MTC, listed LVIT (which they dubbed a “windfall tax”) as a potential source for future revenue, as part of its recent housing study.
Even if it is decades removed from Barbara Ward’s original warnings, it’s reassuring to see transit officials now exploring the potential of value capture. BART director Rebecca Saltzman recently noted on Twitter, “….If BART had captured a small portion of the massive amount of wealth generated by the first Transbay Tube, that could have funded BART operations ongoing. Fares could be much cheaper. We would not be playing catch up on infrastructure investment. We can’t let this opportunity pass again.”
Comment:
We now see how Oregon replicated California’s two big failures – (1) to let a property tax revolt push through these ill-conceived tax initiatives – Prop 13 and Measure 50; (2) to let private land holders in new rail transit corridors reap windfall gains. Voters in both states have the opportunity to learn from past mistakes.
Unfortunately Prop 15 in California failed, not by a large margin. Now it’s our turn in Oregon to take the lead. An LVT study bill will be introduced in the state legislature this next session in January 2020. The proposal will authorize local jurisdictions to opt for the phase-in of a land value tax. This will exempt them from Measure 50 limitations; assessments will be restored to current fair-market value for all landowners.
Common Ground OR-WA is proposing a value capture mechanism not unlike California’s idea of a progressive capital gains tax on real estate sales within a Transit Value Capture District. We would like to see Transit Benefit Districts replace the outdated use of tax increment financing in the planned Southwest transit corridor. Betterment levies will be levied on all private properties within a TBD on an annual basis. We shall see how both of these efforts progress.
