The Gillard Government’s Clean Energy Future plan signifies that the game is up for the free rider’s polluting our planet.

The Carbon Tax of $23 per tonne of carbon for July 1 2012 – June 30 2013 sends a clear message that polluters must pay. In this age of compromise politics, the industry lobbyists who seem to have won are the steel manufacturers. The ALP’s union links have been rewarded. The coal and mining lobby have lost out. But have no fear, Gina Reinhart has no doubt flown Lord Monckton to Australia to represent their interests.

Land Locked
Of immediate interest will be to see how land prices in sun drenched locations near major power transmission lines behave. If it is anything like California’s Mojave desert land rush, land prices there will sky rocket. Land speculators will get in first, with solar operators forced to pay more for land to meet their ransom price.

Rainforest land values
How will land prices for carbon sinks in the Pacific Islands react to this announcement? One expects there to be a gold rush of land grabbing for rainforests. Reports of cashed up mining companies hedging their bets has been prevalent for a number of years.

We remind you that these precious carbon sink resources, the lungs of the world, will only get more valuable in the future. Selling carbon permits off per annum is a much more sustainable solution for tribal elders. Then when carbon prices increase to $100 – $200 per annum, they get a share of the rising prices too.

Selling rainforest lands outright should be avoided at all costs.

Pressures on Housing
The exemption of petrol form the carbon tax means that sprawling home owners won’t be penalised. Some in the housing industry are complaining:

“Competing against imports from non-CO2-e taxing countries, Australian building product manufacturers face a cost collage as the carbon tax is passed on down the line into the inputs for each production and fabrication phase,” HIA Chief Executive Graham Wolfe said.

Construction costs have largely flat-lined during this land and house price boom. However, there is next to no commentary from the HIA on the role of land speculation in holding prime locations bare and forcing the rest of us to travel further to our work, our home.

Land speculation is an issue that will increase in importance as the drive to a more sustainable future becomes intrinsic to humanity’s survival. Listen to this recent podcast where second only to energy production was the importance of living in central locations (as the surest way to reduce our carbon footprint by 70%).

Some are complaining that Negative Gearers would be hurt by the rising of the tax free threshold from $6000 – $18,200. This will deter property investment/ speculation as there will be less of a tax write off for those hard working property flippers. This is a good thing. First home owners and the market in general continue to prefer established housing in centralised communities, rather than McMansions in ‘Master Planned Communities’.

Some commentators are concerned at the $4 billion budget hole over the next four years from the Clean Energy Future package. Compare that to some $24 billion we will be giving to negative gearers to both bid up existing house prices and support the building of unwanted McMansions in unwanted areas.

The Big Sell

Now we are set for a campaign like fever of salesmanship from both PM Gillard and Opposition leader Abbot. When will anyone in politics use the golden words ‘tax switch’ as a means of describing this momentous shift?

To see Abbot in his fluro vest working amongst the people, one wonders when a government MP will hit him over the Mining Tax. Abbot wants small business in manufacturing and services to pay the same company tax rate whilst miners benefit from record price gains for their products. That does not sound like a strategy towards lowest operating costs. It sounds like the end of the eastern seaboard manufacturing industry. The Liberal Party have become little more than a protectorate for monopolists, rather than the shepherds of efficient pricing systems.

Land Value Capture
Our aim for a sustainable society will not be maximised until we adopt a Geonomics system, where the earth’s scarce values are recycled back to the community. Page 7 of today’s AFR reported the high cost structure of the proposed high speed railway as one of its biggest hurdles to competing with discount airfares. Melb – Sydney is the world’s fourth busiest air route. A high speed train emits 1/4 of the greenhouse gases per person than what air travel does.

Land values along this train route would sky-rocket, especially at linking train stations. The $32 – 59 billion infrastructure price tag could be met if landowners paid back just 6% of the windfall land price gain they receive from this new service (over 20 years). Then train ticket prices could reflect the Marginal Operating Costs, keeping their price structure low.

That would certainly continue the positives.

Renegade Economists Podcast 188

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Professor Peter Newman (Curtin Uni) joins us for an in depth discussion on the peak oil era and the cities we will need. We examine the report he co-authored with Trubka and Bilsborough – Assessing the Costs of Alternative Development Paths in Australian Cities. (PDF 627 KB)

Points of note include how inner suburban living can save 4400 tonnes of greenhouse gases per 1000 homes (for more on this pls listen to the recent podcast with Dr Robert Crawford as per below). Some of the stats reeled off are from Table 4 of the report ie the additional cost of policing the sprawl is $388,416.

Prof Newman discusses how Land Value Capture is world’s best practice in financing infrastructure. How does it curb sprawl? Read about the Gold Coast Rapid Transport Corridor and the role LVC can play.

Listen to Prof Peter Newman
Listen to the recent show with Dr Robert Crawford discussing how location is the biggest determinant to our carbon footprint.

The above photo is of the bombsite opposite Melbourne’s Spencer St station. Vacant for over a decade, this picture is endemic of the game that land speculators play in undermining community and enforcing sprawl. The land value gains land bankers enjoy should be recycled back to the community, funding the new network of magnetic trains we so need.

An interesting report by the Fels Institute of Government (University of Pennsylvania) was quoted in Yes Magazine:

… [We] found that within 1/4 mile of one of Philadelphia’s 54 branches, the value of a home rose by $9,630. Overall, Philadelphia’s public libraries added $698 million to home values—which in turn generated an additional $18.5 million in property taxes to the City and School District each year. That benefit alone recouped more than half of the city’s investment.

More detail was found the Fels report:

Value to Homes and Neighborhoods

• Homes within ¼ mile of a Library are worth, on average, $9,630 more than homes more than ¼ mile from a Library. For homes between ¼ and ½ mile of a Library, the additional value is $650.
• Homes in Philadelphia are located, on average, about a half mile (.56 mile) from a Library; 95% of Philadelphia homes are within 1.13 miles of a branch, 75% of Philadelphia homes are within .73 miles, and 25% of Philadelphia homes are within .34 miles of a Library.
• Libraries are responsible for $698 million in home values in Philadelphia. That’s an increase in home values that homeowners can borrow against to finance education, home improvements and other types of spending.
• The additional home values generated by proximity to a Library produce an additional $18.5 million in property taxes to the City and School District each year. Under a scenario of accurate and timely assessments, this is how much property tax revenue could be lost per year if all libraries were closed.

The value of public works to the locational value of the home is undeniable. In our primer Land Value Capture for Infrastructure, we outline how public works often benefit the landowner many times over the cost of the project.

The new High Speed Rail 2 is a case in point. The UK’s Sunday TImes states:

Homeowners near these stations have cause to celebrate. Research by Savills shows that a one-minute reduction to a commuter rail journey adds £1,000 to the average value of a home.

People from all over the state/ nation are expected to pay for improvements that capitalise into higher land values in one particular location. In economics this is called leakage.

What have we done to deter such leakages?

On the contrary, with such windfall gains available, society has set up elaborate systems to promote them.

Infrastructure Australia, the peak body for public works funding by the Federal government, is one such organisation. Of the 18 person board, there is only one representative for the public interest – Mr John Fitzgerald, Victorian Department of Treasury and Finance, Commercial.

The 17 other members of the board have a vested interest to ignore the fact that public works deliver windfall gains to private owners of property.

From accountants specialising in infrastructure tax offsets, to heads of infrastructure companies to housing and construction heavyweights, one wonders how decisions are made at the Infrastructure Australia board level when so many must excuse themselves from voting with a conflict of interest over any given project.

Perhaps more public libraries will be built when similar reports are written in the Australian context…

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:

• Wheels of Fortune – Fred Harrison (available in our bookshop or free to download)
• Scottish governments LVC review
• Scottish list of global LVC report references
• Taken for a Ride (Jubilee Train line)
• Adequacy of Land Value Capture for the funding of infrastructure – Gavin Putland
• Betterment Levy – Steven Spadijer
• Wiki page on LVC
• Property Takes Us there
• Developers Map of Sydney

Frank toured Australia this time last year for the True Cost Economics Forum. He wrote this piece in lieu of exciting developments in Canada.

For the first time to my knowledge, Toronto will be collecting economic rent to pay for infrastructure — in this case to redevelop a section of a busy shopping street. (The wealth that accrues to locations is known as economic rent).

It was reported in the Globe and Mail as follows: “The city will borrow the money up front, to be paid off gradually by the businesses along the ritzy strip.”

Significantly, although the city has refused to pay for the street redevelopment out of property taxes, the adjacent businesses know the benefits to them will outweigh the costs, and are therefore willing to pay for it themselves. These Toronto businesses know that if infrastructure is warranted and beneficial it will raise the value of their land by more than the cost of that infrastructure. When redevelopment makes locations more desirable, more economic rent is attracted, over time, than the cost of the initial redevelopment.

This example is not at all unique; the economic theory is universal. The implication is that any infrastructure that increases land values should not be funded out of government tax revenue, but instead be paid for through the collection of the increased economic rent generated by the infrastructure, whether it is a hospital, school, sewer upgrade, park or transit system.

Normally the increased economic rent goes (untaxed) to the person or company that owns affected land, even though governments pay for the improvements out of the tax base. Taxpayers everywhere are unjustly expected to pay for improvements that only benefit the local land-owning minority.

The law of economic rent offers a model of how to finance more efficient transportation systems, reconstruct public infrastructure and green public buildings without bankrupting governments or raising taxes. Like this Toronto street redevelopment, all towns, cities, provincial and federal governments should collect the economic rent that migrates to land (and other finite assets like oil, aggregates, pollution) and use it to finance the greening of the country.

Scottish government: Developing a Methodology to Capture Land Value Uplift Around Transport Facilities

Wheels of Fortune: Self-Funding Infrastructure and the Free Market Case for a Land Tax: Fred Harrison

In the submission, the council says the capital being acquired by the private market when land is rezoned could be captured by the Government.

“Across Australia, communities are creating billions of dollars of value through their rationing of development rights,” the submission says.

“This value, or betterment, is currently flowing into the hands of a lucky few, rather than being effectively captured by the communities who created it. Sound public policy dictates that this inequity be addressed as a matter of urgency.”

The submission goes on to say the public acquisition of land would provide a substantial public funding source that could be used “to meet important housing and urban development objectives”.

Another similar adaption of the principal of capturing economic rent can be see in Community Land Trusts

The income from fares is usually insufficient to pay for both the capital costs and operating expenses of a modern mass transit system.

Public transportation managers strive to provide safe, efficient, affordable, reliable, comfortable, clean, and convenient journeys for passengers. The service provided not only enables millions of people to travel but also has wider economic, social, and environmental impacts on urban life.

When planning for new public transportation investments, wider economic benefits are usually cited as an important reason for governments to provide subsidies towards the costs of construction and maintenance.

Apart from people who use public transportation systems, international studies over many years have shown that there is an additional beneficiary who plays no direct part in contributing to transportation financing, but who gains a disproportionate share of the economic benefits arising from building and operating rail and bus lines.

Don Riley, a London property developer, has written a book Taken for a Ride in which he explores the impacts of the construction of the Jubilee Line Extension (JLE) Underground train line in London.

Don Riley visited the construction site in the mid-1990s and has since commented how these men digging the tunnel were sweating hard, risking their lives, not knowing where their next job was coming from, while at the same time he, himself, was making money while he slept as his adjacent property holdings considerably appreciated in value when the JLE became a reality.

This understanding of the land market inspired Don Riley to calculate the total land value increase that arose within a radius of only 1,000 yards of each of the new JLE stations. His startling conclusion is that these land values have increased by 13 billion British pounds (US$22.8 billion), while the construction costs of the JLE were 3.5 billion British pounds (US$6.1 billion). Don Riley suggests that some of this wealth should have been collected by the government in order to fund the project. An independent study carried out for Transport for London estimated that between 1992 and 2002, near two of the 11 new stations, Southwark and Canary Wharf, the JLE caused land values to rise by 2.8 billion British pounds (US$4.9 billion). This means that the UK government could have built the JLE at no cost to the public treasury if they had just chosen to collect less than one-third of the increased land values arising from the new transit line. Instead, with the exception of two modest private sector contributions, the funding for the JLE came from the government’s budget, drawing from income taxes and other traditional revenue sources.

It is no fault of the public transportation industry that governments choose to ignore private windfall property value gains generated by public investment. However, the findings of Don Riley and others mean that no longer should transportation planners go hat in hand to governments for subsidies to fund new projects or maintain and renew existing lines. As long as large numbers of people are riding the trains, then we now know that in addition to revenue from fares, the railway can generate its own finances from the increased land values.

If governments continue to only tax wages, trade, or goods and services to create new transportation opportunities, then they are choosing to give an unearned bonus to the owners of land and buildings.

If a government refuses permission to build new transportation improvements due to inadequate budget revenues, and the public officials do not want to increase existing taxes, then they are not only denying citizens travel opportunities. In addition, ironically, they are denying property owners the opportunity to share in rising values that will arise if the improvements are at least partly financed from the increase in property values.

In other words, financing new and improved transportation infrastructure from rising property values creates a virtuous economic cycle that provides a win-win situation for all stakeholders, including the private property owners who directly provide some of the funding. Assuming the project requires even 50 percent of the property value increases, property owners retain 50 percent of a large gain if the improvements are completed — rather than 100 percent of no increase if the transportation investments are not made at all.

How can governments collect this hidden subsidy that goes to certain very fortunate property owners, some of whom were already extremely wealthy. Denmark already collects a land tax for local expenditure. All the land is valued each year and a percentage tax applied. In Hong Kong a modest income tax is supplemented with substantial revenues from government land leases. In parts of North America, South Africa, Australia, and New Zealand property taxes contribute directly to public funds.

Of course transportation infrastructure is not the only factor raising property values. Population and employment growth, greater commercial productivity, higher incomes, good quality public and private services, and many other factors all contribute to the value of individual sites. Similarly, nature provides mineral deposits (oil, gold, diamonds, and even coal), fertile fields, beautiful views of rivers, lakes, seas, and the countryside — all of which can translate into higher land values.

A Location Benefit Levy can be applied to all sites which would be valued annually for their rental income based on their optimum permitted use, ignoring all building improvements. A tax rate could then be applied to this land value in order to produce an income for public funds. As the land value rises, so does the sum collected. This means, for example, that an empty site in a town or city center with permission to develop for an office building would pay the tax at the same rate as an identical site next door which already has a similar size office building developed. Unlike taxes on buildings, there would be no reduction in the estimated land value or amount of taxes owed for a deteriorated structure or for keeping the site empty. Similarly, there would be no increased tax liability for constructing or improving a building on the site.

Reduced Urban Sprawl

If a Location Benefit Levy were introduced, several benefits would begin to flow.

Not only is such a tax inexpensive to administer and collect, it is also quite difficult to avoid (land can not be moved to another jurisdiction or concealed like other forms of property, valuables, and money). More importantly, there would be an immediate incentive for landowners to improve their land and build upon it. Environmentally damaged brownfield sites would be cleaned up and used for homes, jobs, or public open spaces. Housing would become more affordable through increased supply, and whole neighborhoods could be revitalized. Urban regeneration would be in the best interests of landowners, especially in areas that have lost major industries.

With more sites available in towns and cities, small and medium sized enterprises (SMEs) would have lower lease costs and thus be able to expand their business or start new ones. More jobs would be created, claims for unemployment payments would be reduced, and the economy would grow faster.

With housing more affordable in towns and cities the urge for workers to move long distances from their work in order to purchase a less expensive house would be avoided. Urban sprawl into the countryside, encroaching into green belts, agricultural land, and open space would be diminished. Public transportation agencies would avoid the additional costs of building facilities and expanding services for suburban and exurban commuters.

Families would benefit as workers could spend more quality time at home rather than commuting for several hours daily.

With less urban sprawl not only would green spaces be saved but society would avoid the substantial expense of building new infrastructure and extending service delivery.

Compact, high-density towns and cities operate much more efficiently, and open space is released for better planning, perhaps following Sir Ebenezer Howard’s Garden City model.

‘The Smart Tax’

Another reason why some people call the Location Benefit Levy “The Smart Tax” is because although land values generally increase due to proximity to transportation improvements, values can also decline on sites adjacent to the railway lines because of excessive noise, pollution, unsightly views, environmental and health hazards, harsh smells, safety and security threats, and other physical and social intrusions. With the Location Benefit Levy there would be no need for disadvantaged landowners to apply for compensation, as with the next annual revaluation of all sites, their land values and corresponding tax contributions will be reduced.

Fred Harrison, the Director of the Land Research Trust has demonstrated in his new book Wheels of Fortune how the careful recording of land value changes over time can provide a very useful urban planning tool. When new mass transit is being planned the existing historical records of land value changes can be used to determine which route will provide the largest land value increases. There may be perfectly valid reasons for choosing an alternative route, but at least this decision can be taken with a clear indication of the total value that the community investment will generate through each potential transit alignment.

Dave Wetzel is Vice Chair of Transport for London in the UK, Chair of the Professional Land Reform Group, Chair of the Labor Land Campaign, and a member of the Advisory Board of Global Urban Development. He is a Fellow of the Chartered Institute of Logistics and Transport.