The Trump administration’s Legislative Outline for Rebuilding Infrastructure is promoting value capture financing for public transit projects. Really? Not really. Read on…
Prosper Australia
by Karl Fitzgerald
February 13, 2018
Excerpts:
The Trump administration has promoted the need to harness the windfall gains property owners enjoy when infrastructure is built in close proximity. The Legislative Outline for Rebuilding Infrastructure in America includes the following section:
C. Transit
1. Require Value Capture Financing as Condition of Receipt of Transit Funds for Capital Investment Grants.
(A) Federal programs for transit capital projects do not require value capture financing. Current law includes a broad definition of “value capture” to mean “recovering the increased property value to property located near public transportation resulting from investments in public transportation.” (49 U.S.C. 5302(24)). Value capture can include joint development, land value taxes, tax increment financing, special assessment districts, transportation utility fees, development impact fees, negotiated extractions, transit oriented development, and air rights.
(B) Failure of transit authorities to use value capture financing reduces funds available for transit capital projects.
(C) Amending the law to include value capture financing as a prerequisite for Section 5309 Capital Investment (Discretionary) Grants, excluding Small Starts projects, would increase resources available for transit capital projects and decrease dependence on Federal grant programs for continued development.
We draw your attention to the various forms of value capture listed in 1A. It is important for readers to recognise the differences inherent in the various forms of value capture.
The most concerning is Tax Increment Financing. TIFs lift the tax revenue take from the density dividend of infrastructure. TIFs are a tax upon the productive sector. Thus, the property lobby heavily support this form of value capture. US infrastructure financing expert Rick Rybeck calls this nothing more than a form of ‘revenue segregation’. [By way of contrast,] Land value capture ensures the ‘beneficiary pays’ principle is met. Landholders who benefit from windfall gains are required to repay the public according to their locational advantage. Infrastructure bonds could be sold to the market to finance the upfront costs. Over time the rise in land values is recouped via the land value capture mechanism to repay bondholders.
The Trump infrastructure proposal has been criticised for the large scaling back from a $1.5 trillion electioneering promise to a $200 billion spend. This implies the need to utilise land value capture to deliver the needed infrastructure outcome.
In further reading of Trump’s infrastructure proposal we notice a theme, a theme familiar to many Australians. The document sets the scene for an alternative funding stream – the large-scale privatisation of infrastructure. The ability to privatise airports has been increased. The removal of public funding priorities for state owned clean water facilities has been floated as an incentive for greater private investment. The public control of hydropower is also under question.
In short, the vague term ‘value capture’ is held out as an olive branch to counter the mass privatisations proposed. What future will America adopt – public land sales and privatised infrastructure or land value capture?
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Comment:
Upon first read, it is both encouraging and surprising that VALUE CAPTURE is included in the Trump administration’s legislative outline. Encouraging because this public financing tool provides local revenues which are currently escaping the city through site speculation. Surprising because many land owners including those pushing for private property rights often argue for retaining all value appreciation accumulated over a holding period. Value capture is government’s appropriation of unearned land value increments – if it is limited to land values. But this legislative outline does not.
Prosper rightly identifies the problem with the Trump administration’s view – the inclusion of a wide range of capture mechanisms including tax increment financing. TIF simply transfers tax revenue from one government agency to another. Take away revenues allocated for schools to fund transportation?
Other emerging approaches intended to fund transportation include income, payroll, employer, and, especially, sales taxes. Over the last decade, general fund revenues and specialized taxes have grown more rapidly than “traditional” transportation revenues, e.g., motor fuel taxes, vehicle taxes, tolls and fares (NCHRP, 2006).
This increasingly prevalent use of sales tax increments to finance local transportation in the U.S. poses a range of transportation- and regional-planning specific problems. Primarily, this trend pushes transportation finance further from user-fee pricing with its inherent efficiencies in assigning costs and rationing use of the transportation system (Hannay and Wachs, 2007). Furthermore, use of sales taxes leads to public finance-related distortions as the beneficiaries of transportation investments are subsidized by consumers of other goods and services (e.g., Zodrow, 2007).
Not only does the “(B) Failure of transit authorities to use [land] value capture financing reduce funds available for transit capital projects,” but it facilitates private windfalls. As more landowners withhold their land from the market, based on expectations of higher values in the future, an artificial scarcity of developable land is created that results in real increases in land rents and prices. Thus, land speculation can become somewhat of a self-fulfilling prophecy.
A true value capture tool would raise additional revenue through special assessment districts, and limit value captured to land within an area benefiting from the infrastructure improvements. Taxes on land values are a true “value-capture” tax because they return to the public wealth that is primarily created by public expenditures in the first place.
Reforming the regular ad valorum property tax can also help the public sector capture publicly-created land values that arise from transportation infrastructure investments. Changing to a land value tax (higher rate on land assessment, lower rate on building assessments) creates economic incentives to develop land adjacent to public transit infrastructure while curbing land speculation and reducing development pressures at sites farther away. This reform measure recognizes that the property tax is really two different taxes, each with very different economic consequences.
