Land Value Capture for Infrastructure

Karl FitzgeraldCommentary3 Comments

With the federal election campaign today seeing Opposition Leader Tony Abbot promoting Infrastructure bonds with a 10% tax concession for investors, there is an urgent need for better understanding of infrastructure financing.

Abbot’s plan should be written off as the interest rate spread between Australia and the rest of the world is significant enough not to need any incentives. Such a 3 – 4 % interest rate advantage does not require another handout to the top end. Our treasury bonds are attractive enough.

Presumably these same investors would also snap up land in prime locations and benefit two-fold.

The following is a document I prepared for a contact at Infrastructure Australia.

Land Value Capture
Infrastructure adds enormous value to land in prime locations according to proximity and serviceability.

Land Value Capture (LVC) is a simple technique to recycle the publicly funded windfall gains that accrue to land owners.

Importantly, these windfalls are captured over the life-cycle of the infrastructure, such that one generation is not hit with the total infrastructure costs (ie Developer charges).

How it works:
Macro:

  • Government bonds finance the infrastructure project.
  • Government bonds + infrastructure = windfall gains for nearby landowners
  • Yearly land valuations quantify the windfall gain.
  • Council Rates and Land Taxes capture a share of the increase.
  • Over time (20 years) this higher government income repays the government bonds.

Micro:

  • Fixed costs are covered by LVC.
  • Marginal costs are covered by marginal revenue (ie ticket sales on a train).

Political machinations:
A Metropolitan Regional Improvement Tax, similar to Perth’s, could be included in the Federal tax mix. However, it must be set at a higher rate than the 0.14% Perth has used to provide Australia’s most modern PT system.

Revenue from this Betterment Levy type charge could be used to fund the abolition of payroll tax and stamp duties at the state level. We propose a change in the tax mix so that future infrastructure pays for itself by expanding the tax base without increasing the tax burden. A number of submissions to the Henry Review have been made with this in focus.

Examples:

  • MTRC – Hong Kong: has returned dividends for the last decade, dispelling the myth that PT can never be profitable.
  • Japanese Railway East – the efficiencies of LVC have enhanced profitability such that ticket prices have remained at 1987 prices.

We should take stock of how past generations financed public transport:

  • Glen Waverly Station (Vic): How did they do it? Residents were asked and agreed to donate £30,000 worth of land (1925) to build the train station and rail line. Additionally, they were asked to pay a Betterment Levy of £10,000 per annum to cover the first five years operational costs.
  • Sydney Harbour Bridge – 30% financed by council rates on the land only component.

What we are asking:
Windfall gains from infrastructure add up to several times the cost of the infrastructure to surrounding properties. We propose that a sufficient contribution from this windfall be recycled back to the government so that other infrastructure projects can be funded without substantially burdening one generation over another.

At present land speculators baulk at paying barely 10% of the land bounty (windfall gain) back to the community via government’s Land Tax, Council Rates, Stamp Duties and Capital Gains. This abstinence from the public good is limiting government at all levels from funding infrastructure. The LVC rate can be set so that landowners still receive the majority of gains.

Consider:

Northbridge railway redevelopment in central Perth – 50,000 square metres of prime commercial land will be made available by the Rudd government’s recent Federal Budget infrastructure initiative (and local WA government efforts). At present it seems that the plan is to sell this prime location to private interests by moving the station underground. It would be in the community’s best interests if the government could lease the land so they capture the upkick in land values over future years.

For example, the Northbridge railway station tunnel development has a Federal budget of $236 million. Conservatively estimated at $3000 p/square metre, this would see the site worth $150m in today’s figures. With an average 6% growth rate in land values, this would see all such site holders pay the majority of the $236m back in just 7 years. Land values would no doubt have grown by more than 6% p.a since the infrastructure announcement.

Seven years is perhaps too much, over a 20 year lifetime the costs would be shared amongst multiple owners.

Bonds finance the initial investment. Land owners pay the community back for the new services over the lifetime of the asset.

Such an LVC would also keep a lid on land prices (the extent reliant upon the rate set at). With land comprising over 70% of a mortgage, the reduced land-based interest payments would assist the creative small business Perth needs to compete with Fremantle.

By widening the tax base, more Infrastructure Australia proposals could get off the ground.

Advantages:

  • Common sense: Those that benefit, pay
  • Can be revenue neutral
  • Cheaper public transport ticket prices
  • Widens tax base
  • Expands public transport and public services as financed with minimum leakage
  • Spreads load over the entire community, rather than slugging commerce (ie trucks on tollways)
  • Encourages walkable communities by providing a dis-incentive for land speculation
  • Can prevent future GFC’s by deterring land speculation

Resources:

3 Comments on “Land Value Capture for Infrastructure”

  1. ANDREW POPOVIC

    Your property taxation suggested scheme has several omissions. Property taxes are based on city/town budgets and to get mill rate budget is divided by total assessment (which is virtually pulled out of a hat by assessors who have not even seen the property and is based on sales and comparisons). Property taxes should be on frontage which reflects should reflect the amount services used ie sidewalk street, and any improvements street lights. Garbage, sewer, water is paid separately, user pays. Commercial properties will be slightly higher ie parking. To satisfy budget the number of properties will be divided get each entities taxes, thus, all residential properties of say 50 foot frontage will pay the same amount. This action will get away from our present regressive taxation by assessment which taxes so called improvements. The premise has been that the the homeowners’ income was based on the quality of improvements and thus affordability to pay. How dumb. Taking two equal income earners one who cares about his quality of improvements the other doesn’t, the latter will pay less taxes even though they both share 50 foot frontage and same services. how regressive!!!! This system will also capture unoccupied/undeveloped properties!!!

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