Congratulations Prosper Australia!
In June of this year we posted an article from Prosper Australia making the case for a windfall tax that would attend the act of a local government up-zoning land for urban development. By imposing a tax on speculative gain the city of Melbourne could have financed the infrastructure needed for the Fisherman’s Bend development site which was up-zoned for redevelopment.
Now in mid-November the state of Victoria finally passed the Windfall Gains Tax. Fiona Patten, leader of the Reason Party and member of the legislative council, said during the debate on the tax proposal: “It is about sharing that sometimes absolute motza that people can make from a planning decision. This can be a win for the developers. I mean, the developers are the ones who actually do the hard work… Those that are possibly just speculating on the land, the cowboy rent seekers, now will not be able to take all the cream and leave the site with very little money… Rather than profits going to overseas companies, property share portfolios, those funds will be reinvested into roads, plumbing and the environment.”
Commenting on this aforementioned article, we cited a local case analogous to the Australian example. This case would address the land value uplift following rezoning along light rail lines for transit oriented development. Portland and Seattle are simply giving away windfalls in its rail corridors unless we adopt a value capture mechanism such as Transit Benefit Districts to appropriate a large share of the speculative gain. Funds from the special levy would be used to build infrastructure needed to support TOD.
Video about the tax:
Original post:
Landowners made overnight profits from the Fisherman’s Bend development approval, leaving Melbourne taxpayers the burden of financing infrastructure. Prosper Australia proposes a better idea we in Cascadia can replicate. Read on…
Rezoning Windfalls
Sharing the value of planning giveaways
Excerpts:
Our economy is a reflection of our combined enterprise and effort. When the government builds new roads or train lines, when people open businesses, when we work, create, and grow things it flows through to the demand for and price of land.
New zoning permissions often flow through to higher land prices.
For example, when industrial land is rezoned to enable commercial or residential uses, the market value of that land often increases. This is because the range of activities permitted in that location expands, resulting in increased profitability. The price of a parcel of land reflects its ‘highest and best’ use: the most profitable and intense use permitted by planning and demanded by the market.
The differential between the market price of land prior to rezoning and the price after rezoning is a windfall gain; a form of economic rent. The beneficiary is the landholder who now has permission to build high-rise apartments where there was once a mechanic’s shop. Rezoning windfalls have been described as a ‘honeypot’ for landowners seeking to capitalise on land use changes.
Putting a price on new development permissions can remove the ‘honeypot’.
If the public captures a portion of the rezoning windfall, we can use the revenue to fund public services. This public investment in turn supports private sector development activity, feeding a virtuous cycle of urban development.
For example, new transport access that reduces commuting times or opens up job-rich areas increases the value of land near stations. With more demand for housing and shops near stations, it makes sense to rezone for higher density uses. Intensified development entails further public investment in infrastructure and government services (such as parks and schools). Higher value activity on land, means higher land tax revenues, and around it goes. Our recent report, The Transit Transformation Australia Needs, highlights the potential of “value capture” to fund critical infrastructure.
Rezoning Windfall Gains Tax – FAQs
by Emily Sims | Jun 15, 2021 | Commentary, Talking Points
The property industry says that taxing rezoning windfalls will increase the cost of housing because the tax will be passed on. They also say that in response to the new tax developers will shut up shop, reducing the number of new lots and houses that are available to buy. Homebuyers might be wary of taxing rezoning windfalls because they worry it will increase the sticker price of housing. We unpack some of the frequently asked questions below.
Will a rezoning windfall gains tax deter development?
Sharing the windfall gains from rezonings is not a radical new policy. A rezoning windfall gains tax has existed in the ACT [Australian Capital Territory] since 1971 and Canberra continues to flourish.
Victoria’s Growth Area Infrastructure Contribution is a form of rezoning windfall gains tax – they just don’t call it that. The GAIC falls on landholders who made a windfall when their properties were brought inside the urban growth boundary; that’s why these areas are excluded from the new rezoning windfalls tax. Moreover, the GAIC is a critical source of infrastructure funding in these rapidly growing suburbs, enabling these council areas to provide recreation and sporting grounds, community facilities etc.
Will a rezoning windfall gains tax decrease the supply of housing?
Rezoning occurs as a result of strategic planning. Local councils and other state planning authorities prepare strategic plans to guide development and coordinate infrastructure delivery. Part of this planning effort involves ensuring a pipeline of land that is zoned for appropriate development.
There is no shortage of zoned housing land in Victoria. In the late 2000s the government ensured some 150,000 lots in the development pipeline. For nearly a decade, this pipeline has been more than doubled to ensure some 350,000 lots are available for development. The imposition of the GAIC (2010-11) made little impact on supply level.
Will rezoning windfall gains tax make housing more expensive?
It is naive to assume that rezoning windfalls are passed through as cheaper housing. For starters, the rezoning windfall goes to whoever owns the land at the time of rezoning. The landholder may or may not be a developer. Sellers and developers do not pass rezoning windfalls through to homebuyers when they receive them, and even if they did, the home buyer could simply take their ‘discount’ and on-sell at market rates. In this case, the home buyer would be the beneficiary of the windfall.
The key thing to remember is that developers and sellers are already charging the maximum the market will bear. Developers and sellers operate in a competitive market. They sell housing at the highest price home buyers are willing/able to pay. In the ACT, where rezoning windfalls have been taxed since 1971, there is no difference in prices between properties which have been developed with or without a rezoning windfall (called a “Lease Variation” in the ACT).
Why is the property industry so against taxing windfall gains?
The rezoning windfall gains tax is shaking up the land game. That’s exactly what it’s intended to do. The rules of the game have been unfair, so we’re changing them. Sophisticated players have quietly enjoyed rezoning giveaways for many years. Prosper calculated that on 2018-19 land rezoning, some $5.7 billion in rezoning windfalls was handed out in the state of Victoria alone. This is a lucrative source of profit for those working the interface between public decision making and private landholdings. To put it in perspective, that is just over one quarter of national banking profits.
Removing half the honeypot will affect some of the wealthiest players in the industry – those that simply buy land ‘in the path of development’ and wait. They wait for earnest developers to come knocking at their door wanting land at an affordable price. This kind of activity doesn’t add any value to the development process and it should be discouraged. We should not be surprised if property lobby groups fight hard to avoid such a loss. We’ve seen this pattern many times in Australia: small groups organising to protect their private interests against a reform that benefits many. It is totally predictable.
Why do economists support rezoning windfall gains taxes?
The taxation of windfall gains has long been supported by economists because it not only raises revenue but encourages better economic outcomes. Different taxes have different economic effects at the ‘whole of economy’ level. Marginal excess burden [‘deadweight loss’] measures the “economic cost” of a tax for every dollar of revenue. Taxes on economic rents, like rezoning windfalls, have the lowest marginal excess burden. In terms of budget repair, increasing taxes on rezoning windfalls is smarter than say, increasing payroll taxes.
A rezoning windfalls tax is transparent and can be administered relatively easily. Prices will not be impacted if implemented effectively. Importantly, taxing rezonings can build trust in the planning process and curtail corruption.
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Comments:
This report is a sequel to the previous blog piece on the Fisherman’s Bend development approval in Melbourne, citing a big windfall with little contribution to infrastructure and services.
Here, Prosper Australia makes the case for a windfall tax that attends the local government act of up-zoning. With this tax on speculative gain the city of Melbourne could have financed the infrastructure needed for the added population occupying this site.
Do you see some parallels with our circumstances here in Cascadia? If our property tax system would convert to a land value tax, we could achieve similar results without tying the tax directly to the zoning code. A more specific case would address the land value uplift following rezoning along light rail lines for transit oriented development. Portland and Seattle are simply giving away windfalls in its rail corridors unless we adopt a value capture mechanism such as Transit Benefit Districts.
You’ll also notice that Australia is ahead of the game when it comes to urban growth boundaries. As noted, Victoria’s Growth Area Infrastructure Contribution is a form of a rezoning windfall gains tax attending the extension of UGBs.
Is there any reason we cannot adopt the same policy here in Oregon? On November 17, 2005, the Metro Council passed a resolution approving a Council project led by Councilors Carl Hosticka and Robert Liberty to develop a proposal, The Givings Report, for the adoption of a “windfall tax” on the increase in value when land was brought into the urban growth boundary. We’ve waited over 15 years… it’s time to resurrect this idea and rectify the constitutional limitations on an urbanization windfall excise or tax on land value increments.
https://www.prosper.org.au/wp-content/uploads/2021/06/The-Rezoning-Honeypot_ProsperAustralia_final.pdf
