Land Value Capture
Infrastructure vastly improves our quality of life and environment. It is one of the hallmarks of economic progress, and we all want more of it. Yet many governments have fallen short on their promises to deliver. Infrastructure funding in Australia continues to lack consistency and resilience, resulting in a growing backlog of unfunded and deferred projects.
What if we could make infrastructure pay for itself and ensure it remains accessible for all?
Land values are the barometer of an attractive community. Governments also add enormous value to land in prime locations. The biggest examples of value creation include investment in transit infrastructure and planning decisions. None of this value is created by landholders. These extra increases in land values (windfall gains) from new projects can deliver several times the cost of the infrastructure to surrounding properties.
There are many different mechanisms through which the government could capture the extra value it creates for landholders. These mechanisms primarily fall under the topic of Land Value Capture (LVC), which focuses on capturing windfall gains from public value creation.
LVC is the missing link in our economy that allows us to recycle a portion of the windfall gains landholders benefit from, into publicly funded infrastructure. Importantly, these windfalls are captured over the life-cycle of the infrastructure, such that one generation is not hit with the total infrastructure costs (i.e. as per the current preference for Developer Charges).
How it can work:
- Government bonds finance the infrastructure project.
- When the Infrastructure proposal is announced nearby landowners benefit from windfall gains.
- Yearly land valuations quantify the windfall gain.
- Land Value Capture taxes (collected from rising land values) ensures the public receives a share of the increase.
- LVC revenue repays the government bonds over time e.g. 20 years.
We can capture this value using a number of different solutions:
Land Value Tax (LVT)
The best form of land value capture is via a broad based land value tax. A change in the tax mix towards a land tax system enables windfall gains to be passively captured. This provides a clear pathway for community infrastructure funding in the future. This way, infrastructure pays for itself by expanding the tax pie without increasing taxes for ordinary citizens. If taken to its logical conclusion, revenue from land tax could be used to fund the abolition of payroll tax and stamp duties at the state level. This sort of tax reform would reduce the burden of infrastructure spending on the productive sector.
Fees for value added
When zoning and other entitlements such as air rights and height restrictions related to a piece of land changes, or nearby transit infrastructure is built, the value of that piece of land (usually) goes up. This extra value should be accounted for and taxed via what is called a “betterment levy”. This can take the form of an additional temporary land tax or capital gains tax levied on the extra value.
Betterment levies can have a defined land value catchment area (often called a Special Assessment District) to be determined around a new infrastructure development. Landholders within the catchment zone are asked to pay a higher charge on the land in return for the value added to their land.
One example is a levy of 0.2% of land value on the North and South shores of Sydney imposed to raise a third of the cost of Sydney Harbour Bridge (NSW).
The ACT has been taxing the increases in land values from rezoning decisions at 75% of the windfall gain since 1971, via its Lease Variation Charge. Similar measures implemented in other states could raise billions of dollars while curtailing land speculation. NSW also implemented a similar scheme from 1969-73.
Alternatively, creation/expansion of new property rights (e.g. development rights, air rights) could be auctioned off at market value to the highest bidder. This is done in São Paulo in Brazil to help fund infrastructure and social housing, as well as Hong Kong and Singapore alongside infrastructure delivery.
Public Urban Renewal Agencies
Many of these functions can be implemented through an effective Government agency which engages in master planning (value creation) and value capture. This is done in Singapore via its Urban Redevelopment Authority. In the ACT, the Environment, Planning and Sustainable Development Directorate controls and develops all the ACT’s land supply as a government-run developer monopolist – to the benefit of Canberra’s residents.
Direct property development and ownership
The most sure way of collecting 100% of the land rent is if the Government owns (and subsequently develops) land. In East Asia (e.g. Japan, Hong Kong) rail companies double as property developers and capture land value increases from their own rail investment through their property operations. MTR in Hong Kong operates profitably via government subsidies through retained land value windfall gains from government rezonings. This role could be taken up by the public sector.
To do so involves significant Government involvement in both development and ownership of land. To successfully engage in direct property value capture, government departments and statutory authorities must adopt a commercially oriented, land stewardship posture. This may require increased commercial capacity within relevant authorities, or strategic partnership with private sector expertise. At its core this means new thinking around public land retention and further land acquisitions, confronting the taboo of land nationalisation. Currently the Victorian statutory rail authority, VicTrack, owns and operates some direct property assets, but this could be leveraged to a far greater capacity as demonstrated overseas.