Prosper’s recent value capture submission answered pressing questions, an indication of how deeply the Department of Infrastructure is considering this vital funding mechanism. Read the department’s Value Capture discussion paper for an insight into their understanding.
Value Capture submission
Infrastructure Investment Division
Department of Infrastructure and Regional Development
Prosper Australia is a non-government think tank and tax reform lobby group inspired by economic efficiency and social justice. We advocate the fair distribution of land and natural resource rents.
The Department of Infrastructure and Regional Development’s probing of Value Capture has implications for Australia’s entire economic framework and narrative. We depart from the phrase ‘user pays’. Land value capture changes this to ‘beneficiary pays’.
No one likes paying tax. However, we do value the services of government, to do the things we cannot or will not do ourselves.
We all benefit from soundly based public investment. Wages rise, enterprise flourishes and land prices go up. However, if investment is funded from wage taxation, labour’s gains are sweated away. If funded by capital, it cannot replenish itself and will wither. If funded by land, no one is harmed for land cannot be moved or the charge passed on. The land springs eternal.
It will be argued any tax on property detracts from its market capitalisation. This overlooks the reality that land would be valueless without the water, sewerage, garbage, roads, education, police, welfare and defence (the list goes on) that service the land and those who live upon it. Land prices directly reflect the standard of these supports. In Australia, one of the richest countries in the world, they are very high quality indeed.
1. What factors would cause beneficiaries, in particular property owners, to see a value capture charge as ‘just another tax?’ How can these factors be overcome?
There are two paths to landholder acceptance. One is to tightly link a charge to a tangible project people can ‘see’ and actually derive a benefit from. This narrow approach can only fund concrete, proximate things. The other is to demonstrate the benefits of civic investment on holders’ land by charging with reference to its market price.
The first describes Land Value Capture, the second Land Value Tax.
Government can be proactive and imaginative in communicating the benefits of land value capture.
For example, geo-spatial data visualisation could demonstrate the benefits value capture brings. A yearly land price map highlighting infrastructure hot spots, the relevant value capture payments and the uplift enjoyed by landholders could usefully deflect self-serving arguments.
2. Are there examples of mechanisms currently being used in Australia or internationally which provide a clear nexus between payments and the benefits provided by the infrastructure?
Beyond the extensive list of value capture projects in the discussion paper, Japan and Hong Kong offer working examples of land value capture. Both countries’ rail networks are profitable and have had land value capture mechanisms in place for decades. Regular land payments to fund public services has become the cultural norm.
Perth’s Metropolitan Regional Improvement Tax is an interesting land value capture mechanism, but its restricted application to investor-held land is inequitable and limits its revenue raising capacity.
Melbourne’s Emergency Services Levy on municipal rates and Parks Levy on water bills are both proxy property charges with good acceptance. This sort of itemisation is hardly the way to fund all the services government provides.
3. Which mechanisms are currently being used which have weak links between payments and benefits?
Government needs to be bolder in linking the benefits of public infrastructure – and the land use changes it prompts – to the private gains that accrue to landholders. These connections are clearly demonstrated in the market value of affected land over time.
The Gold Coast’s Light Rail levy imposes a flat $117 fee on all nearby landholders – a mechanism with weak links between payments and benefits. This arbitrary administrative boundary makes no distinction between properties located within 500 metres of the line where the majority of gains accrue and those beyond walking distance.
There is no relationship between the locational benefits conferred by the light rail and the value captured. Poorly designed administrative boundaries undermines the link between landholder payments and the benefits enjoyed.
The same criticism can be aimed at the Parramatta Light Rail’s $200 per square metre charge. This has been targeted by the property lobby for the crude nature of the charge and rightly so. This particular criticism can be overcome by using a broad-based mechanism that is closely linked to regular market valuations. A land value tax would be ideal.
An interesting Australian example linking the public collection of economic rents with infrastructure spending is West Australia’s Royalties for Regions program. Prominent state-wide signage announces that resource rents fund public pools, roads and civic facilities. While the signs are politically motivated and the tax/spend connection hypothetical, there is considerable merit in this approach.
4. In providing funding to projects, should the Commonwealth set a condition that any contributions levied by state or local government on surrounding landowners are dedicated to the project?
Land value capture has an enduring thorny problem in hypothecation. We know all monies go into consolidated revenue and are spent from there. Attributing a charge to a particular expenditure is political theatre. In recent years, politicians publicly linked fuel taxes to road construction to deflect taxpayer complaints. This worked until money raised by fuel taxes exceeded road spending and the political veil fell away. The public outcry caused considerable political pain.
Linking revenues to particular civic projects is both a strength and a weakness. Yes, landholders know what the land value capture is paying for. Meanwhile, other beneficiaries enjoy a free ride. For example, Victoria’s level crossing removal has major congestion reduction benefits that accrue to travellers who may live and work many kilometres away. They should also contribute. They would do so if government used a broad-based land value tax instead of value capture.
Further, different tax bases motivate governments in different ways. The rail crossing removal may have taken the form of cut and cover tunnels rather than elevated rail if land value tax was part of the mix. The value uplift and taxable capacity of land newly adjoining linear parks would likely more than cover the additional cost.
5. How can governments accurately estimate the incremental value uplift generated by infrastructure projects as compared to uplift due to ordinary market growth?
Dr. Cameron Murray looked at the uplift surrounding the Gold Coast Light Rail. His method estimated net land value gains attributable to the GCLR using historical land valuation data, and created a regression model that accounts for the variation in land values at concentric 100m distance rings to each station, after controlling for a number of other locational factors. This method allows reasonably sensitive estimates of both the size of the catchment of affected land, and the change in the land value in that catchment.
6. When identifying beneficiaries, how should governments determine the geographical boundaries around new infrastructure assets? Should governments focus on all properties directly around the new assets, within the wider region or at a city-level?
Contemporary market behavior shows where benefits are expected to fall, however the economic benefits of major infrastructure investment are rarely constrained to their immediate vicinity. Large infrastructure projects confer benefits at the local, metropolitan and national levels.
Arbitrary value capture boundaries open the door to rent-seeking and land market distortion. Like Melbourne’s Urban Growth Boundary, an administrative boundary makes a clear distinction between winners and losers. Political gerrymandering of infrastructure project boundaries is a perpetual hazard. Again, Prosper recommends using market prices to discern the beneficiaries and the scale of their gains.
7. How can governments design processes which cause beneficiaries to reveal their willingness to pay?
Willingness to pay is accurately revealed in the market price of land. The announcement of civic projects is seized upon by landholders and real estate agents as a fresh selling point. Full capitalisation into land prices of the future value is immediately demanded – and usually paid by buyers.
Australia is in the fortunate position of having public and comprehensive land registers. Further, all states produce biennial valuations of land for municipal rating and State Land Tax.
The statistical techniques used to estimate land values are also subject to constant and rigorous improvement. Computer Assisted Mass Appraisal is now best practice. The Victorian Valuer-General has raised the CAMA standards required each year for a number of years and the level of detailed analyses of sales evidence is extremely good. Prosper understands the other states have also mandated similar improvements. Applying a percentage increase to each like-area identified in a valuation could be used to extrapolate CAMA valuations to yearly, but of itself, this is not a CAMA system, but rather an indexed update.
Prosper strongly urges government to upgrade to annual valuations of all land. This could be part funded by the efficiency gains from CAMA. Very frequent valuations are particularly helpful when land prices are rising or falling quickly as land taxes have an economically powerful automatic stabilizer function. This feature should be an intrinsic part of Australia’s economic toolkit.
Value capture has to guess who the beneficiaries are and how much they will gain. Extrapolating current estimates forward for many years is almost certain to diverge from reality. Undercharging creates a burden on consolidated revenue; overcharging will cause real private harm. As land value capture applies to large-scale multi-year projects, the potential for error in forward estimates is very high.
Further, the willingness to pay can be undermined by investor land holders. These stakeholders are often the most vocal, persistent and creative opponents of taxes they can’t avoid or pass on.
8. Could we adopt an approach in Australia of holding popular votes in relation to large infrastructure projects and their funding mechanism?
Prosper cautions this will be slow, expensive and exhausting, and open to manipulation by vested interests. Voting would have to be preceded by a comprehensive government education program.
The hard question is, who gets to vote? If it is only landholders in a land value capture catchment who may perceive (rightly or wrongly) they would paying for something benefitting others, the result would be utterly predictable. A resounding No vote could make progressing critical infrastructure impossible for decades.
9. Who would be best placed to organise such votes? Local councils? Transport authorities? Others?
Participatory planning may be a superior model.
Worthy of consideration is a system trialing in Berlin called Liquid Democracy. Specialists in particular fields are democratically chosen to represent the public on a particular issue. Those who do not want to hand over their policy vote can vote for themselves.
Melbourne City Council recently experimented with a participatory budgeting model, The Melbourne People’s Panel, consisting of 43 citizens selected at random. Over four months, this panel produced a series of recommendations for the Council’s 10 year financial plan.
10. Would the Commonwealth be justified in linking funding to evidence of popular support and willingness to pay?
The question presumes comprehensive civic engagement not normally seen in Australia. Suspicion of fresh or different tax imposts is easily aroused. Most taxpayers consider that reforms are at their direct cost. Contesting misguided views once established will consume real political capital. Do we really want to go there?
11. Are there examples of other successful approaches to seeking community acceptance for value capture mechanisms?
The literature around this question is very thin.
Land value capture enjoyed widespread community support in the past. It contributed to the construction of the Sydney Harbour Bridge and the Melbourne City Rail Loop. Very little is known about the role value capture played and the debates that surrounded their introduction.
Prosper recommends the Department commission economic histories of these two nation-building projects. This would be inexpensive and would add substantially to our knowledge.
These are local, visible examples – icons, actually – and would resonate as positive answers to the difficult question: how to build the critical things we cannot easily afford?
12. Should there be different approaches to obtaining proof for different beneficiaries?
Land value uplift is the simplest and most direct form of beneficial evidence. The market price tell us all we need to know. It provides the proof that land holders are treated equally and fairly – or not.
13. Are there examples where re-zoning, integrated planning and value capture funding have been well implemented? Are there examples of missed opportunities?
Japan includes a suite of land-related charges to meet rail development costs including land leases, betterment levies, air rights, land readjustments and Urban Redevelopment Schemes. Government oversight ensures that development, planning and finance are closely coordinated.
Victoria missed at least two opportunities in Fishermen’s Bend and Parkville. The rezoning of Fishermen’s Bend by the Napthine government gave massive windfalls to certain privy landholders. The current Andrews government’s recent announcement of a rezoning of Parkville also delivered windfall gains by failing to include any value capture measures.
14. Should the Australian Government place stronger conditions on Commonwealth funding to drive more efficient use of re-zoning and integrated planning? For example, should the Commonwealth tie funding for new passenger rail projects to a requirement for re-zoning around station locations? Australian context?
Only if that re-zoning had a value capture or betterment measure attached to it. Again, the cleanest, most honest way to ensure a civic return on public investment without harm is a broad-based land value tax.
Land value tax also has the benefit of driving land into use, so a new rail station is promptly surrounded by activity, not empty paddocks as landholders withhold it in the hope of a higher price later.
15. What is a realistic expectation for the funding contribution of value capture in the Australian context?
Australia should aspire to no less than 30 per cent of project cost at a bare minimum. This still leaves the bulk of funding as a charge on consolidated revenue and the majority of landholder benefits intact. As Japan proves, rising land values can pay for 100 per cent of the cost of infrastructure over time.
There is no reason land value capture charges cannot remain in place for decades. Melbourne’s underground levy was intended to last 53 years from 1963. It was ended in 1995.
16. How can governments best determine the fair proportion of the value uplift generated by a transport investment to capture?
See Q5 for the formula Dr Cameron Murray developed which can be adapted and built upon. The modelling assumptions and calculations can be made public in the interests of transparency – and to silence the critics.
17. To what extent can infrastructure-driven value uplift be expected in less densely populated areas?
Theoretically, value uplift occurs in any area where amenity is improved. For example, the Melbourne Metro Rail Project includes the Arden urban renewal precinct in North Melbourne. This locality has a proposed value capture mechanism. However, landholders in the suburbs and peri-urban areas as far out as Melton will enjoy faster commute times. These beneficiaries will not be required to contribute and land holders in Arden will subsidise the increased amenity of Melton.
A broader-based value capture mechanism, land value tax, overcomes these inequities – automatically.
Infrastructure improvements in rural areas remain a difficult question. Australia already heavily subsidises rural service provision using sophisticated data-driven analysis in the interests of equity. Prosper urges further empirical research on the impact of infrastructure on land values in less densely populated areas. This is pertinent given the long-standing and popular proposal for High Speed Rail up the Eastern seaboard.
18. At what point should value be captured from property value uplift? What practical ways exist to recover this value from property owners to coincide with the realisation of the benefit of property value uplift?
Uplifts are a function of our growing wealth and interconnectedness. They spurt when government changes the settings by rezoning or civic investment. Cameron Murray’s PhD thesis on the private capture of zoning windfall gains by politically connected entities in Brisbane is a sobering insight. Prosper commends it to the inquiry.
Municipal rate bases can contribute to land value capture. Councils strike a rate by determining their budget then dividing it across the rateable base. Where they use Site Value, plots advantaged by civic investment bear a greater proportion of the rates burden relative to inferior locations – based on the market value of the land.
Arguments about the merits of Site Value (land only), Capital Improved Value (land and buildings) and Net Annual Value (property rents) in municipal rating may seem outside the scope of this federal inquiry, yet here is a practical land value capture measure already available.
We urge the Department to take the initiative and use the Commonwealth powers to coerce the states to shift council rating to site value. Queensland uses SV throughout, though the vice of Minimum Rates undermines this virtue in local government areas like Hervey Bay.
19. How can Commonwealth financing support for major projects, such as loans or guarantees, be best structured to encourage wider use of value capture funding streams?
The single cheapest source of finance is Commonwealth bonds. However, these are a magnet for criticism from deficit hawks. An agency mechanism such as an Infrastructure Bond Borrowing Agency could overcome this political difficulty, with land value capture revenues hypothecated to debt repayment, while enjoying both the low interest cost and sovereign government guarantee Commonwealth bonds command.
State borrowing capacity is constrained by their balance sheets. The Commonwealth’s great borrowing advantage could fund states’ infrastructure investment simply by agreement.
Private finance would be prohibitively expensive – and actively resisted by landholders because of the extra costs it would impose upon them.
The bond market has an appetite for the very long dated Commonwealth bonds that would need to be part of the funding mix. It is the only borrowing instrument financiers would consider for durations longer than ten years. Interest rates are at historic lows; this is a very good time to borrow.
20. How else could the Australian Government leverage its role as a financier of infrastructure to support the wider uptake of value capture in Australia?
21. How can we design market processes to attract those who would benefit from an infrastructure project, and to arrive at a fair contribution from them?
Land value capture mechanisms meets the core requirements of taxation:
• efficiency – land based charges have the lowest deadweight costs
• equity – market valuation is the basis of fairness
• convenience – ensured with electronic payment
• certainty – predictable annual (or quarterly) payment
• incidence – the burden of taxation cannot be passed on
Land buyers will be more interested in the productive output of a location over possible future gains where these will shared with government.
The most transparent, equitable and market-friendly value capture mechanism is land value tax. This is widely acknowledged by economists. Land holders cannot object to market pricing based on what another would willingly pay for their land.
Holders can draw comfort from the certain knowledge that if infrastructure investment does not raise the market price of their land, no extra tax is payable. This downside protection makes land value tax a superior mechanism to a flat charge masquerading as land value capture. If value capture moves with market prices, and assessment districts are modelled on actual market activity over time, the equation changes again.
22. How can the Australian Government best encourage the private sector to come forward with proposals for value capture funded projects? What are the benefits and risks of doing so?
Government has a sorry record in this area. The private sector loves a project where others carry the risk and they collect the revenues. The extension of toll roads in Sydney and Melbourne on terms unnecessarily favourable to operators is merely one example.
The Entrepreneurial Rail Model is presented as a way to encourage greater private sector investment and is being actively promoted in America and now Australia. Its features and failings must be considered with care.
The CLARA proposal for High Speed Rail between Sydney and Melbourne raises many issues:
Where government and the private sector make unequal and asymmetrical contributions, how may we create durable rules on where the economic benefits go?
Government would make a major contribution in the form of land, rail corridor rights, protective regulation, zoning privileges and much more to a nation-changing civic project of this scale. The private proponent brings money, property expertise and an over-riding desire for out-sized returns.
Government cannot dictate expected returns but it should be aware of the super profits enabled by granting monopoly rights and public powers to private interests such as:
- Administration of value capture by a private entity
- The complete master planning of new towns
- Control of land supply in the hands of a single developer – an invitation to drip-feed their holdings onto the market
- Private parking fees around new rail stations – a stand-alone profit centre at privatised airports such as Tullamarine
- Rail fares based on marginal pricing that subvert universal access
- The terms and conditions of infrastructure connections such as water and electricity.
If the Government does grant the powers for a value capture scheme to a private entity, we suggest: the value to be captured over time, rather than as an upfront development levy on the first buyer. Also, that it be set at a flat percentage charge on land values, not as a flat fee.
23. What are the most efficient roles for government, the private sector and the community in open infrastructure investment markets?
Effective evaluation and ranking of projects by Infrastructure Australia can ensure they are funded on merit rather than political considerations. This analytical framework is already being cited in media criticism of funding unranked projects. Please persist and further develop this process. Efficient investment benefits us all.
The private sector is made of many players, who seek to influence outcomes in contradictory ways until consensus emerges. It shuns poorly conceived, planned or built infrastructure and civic projects. Closely observing private sector behavior and cycling the insights back into government decision making is a powerful corrective.
24. What are the major gaps between value capture assessment and implementation methodologies across Australia?
The concept of value capture is not widely or well understood. Public education will be needed to demonstrate the benefits to all of land charges financing infrastructure, instead of arbitrarily taxing labour and capital or applying discriminatory user charges.
The frequency of land valuations as discussed in Q7 is critical.
A charge based on a percentage of the market value of each land parcel is genuine value capture. Regressive flat charges as applied in the Gold Coast and Parramatta defeat the principles of beneficiary pays.
Third-party access to statistical data is vital. Academics, industry bodies and individuals need to be able to independently verify that government decisions made in the public interest actually serve that interest. In the land market, where poor decisions can cause real private harm, transparency protects everyone. There are tangible and serious access problems raised by the privatisation of land registries in NSW and SA and unit charging by contracting private administrators.
Prosper recommends the Department urge the use of the Commonwealth’s coercive powers to ensure third-party statistical access at the cost of production, plus a reasonable margin.
25. How can the Australian Government better facilitate the development of best practice in value capture across Australia?
Switch the tax base to land. Replacing inefficient taxes generates an economic dividend that can be shared with all stakeholders. For example, a 1% federal land tax could be offset with an efficiency dividend–A Land Tax Efficiency Dividend–perhaps with an accompanying reduction in company tax. A Land Tax Efficiency Dividend would quantify the value to economic growth , productivity and deadweight costs. Such a scheme borrows from the UK Government’s City Deals scheme.
26. Is there scope for the Australian Government to offer a loan or guarantee secured over an incremental tax revenue stream for value capture?
Prosper Australia supports a loan guarantee over the land value capture component only. The incremental tax revenue stream concerns land rents only.
Adopting Tax Increment Financing (TIF) is a regulatory burden and its assessment is poorly understood. Complexity brings loopholes and undermines the simplicity of the land value capture imperative: that those who benefit from public investment return some of the value of that benefit to the public purse.
Importantly, TIFs are a tax on the productive sector. TIFs muddy the principle of value capture. TIF’s are more accurately described as ‘revenue segregation’.
This question re-visits the debates about hypothecation discussed in Q4 and financing discussed in Q19.
27. How can the risk associated with value capture mechanisms – financial, economic and legal – be best allocated between the Australian Government, the state, territory and local government, and the private sector?
The reallocation of risk and reward is central to value capture. At the moment, with infrastructure funded entirely from consolidated revenue, advantaged landholders take no risk and enjoy valuable benefits. If this practical reality were understood the public outcry would be deafening.
While there is always cost and risk-shifting argy-bargy between the Commonwealth and the states, ultimately this makes little difference.
Sharing risk between government and the private sector is a different matter. Land holders will roundly criticise value capture where civic investment does not lift their land price, as discussed in Q21. Land value tax does not exhibit this flaw.
28. Are funding conditions or incentive payments the most effective and efficient mechanism to drive wider use of value capture?
Access to Commonwealth bonds – the cheapest and longest-term funding available – will be a honeypot to the states and territories. With it, the federal government can choose the projects it funds and set the terms. This is a kindly power that can demand rigorous analysis, re-test assumptions in state proposals and independently ensure all parties are dealt with fairly.
The states already have sketchy and sorely compromised land value uplift mechanism in municipal rates and state land tax. Prosper would like to think Infrastructure Australia’s value capture report will inspire the states to repair these bases so they can share in the revenue gains – and get rid of their most damaging taxes.
29. Do they place additional regulatory burdens on project proponents? If so, how could these be managed?
All governments perform cost-benefit analysis on major projects. Some are very good; others are clouded by assumptions. Obliging states to share and defend the calculations around projects will improve the quality and consistency of these estimates. This is hardly a regulatory burden. We all gain from better quality civic investment.
30. How can governments encourage market-led proposals? Are there other models of market-led value capture?
The risks around this are alluded to in Q22. Governments are always open to private sector investment proposals, and rightly so. Whether they are in the public interest can sometimes be difficult to determine, particularly where they involve co-investment.
Prosper expects the department to develop the institutional capacity to skillfully evaluate market-led proposals on behalf of government. Treasury evaluations tend to focus on the financial and economic parameters, overlooking the wider costs and benefits in their analysis.
31. How can governments ensure that proposals improve integrated planning outcomes?
Prosper Australia warmly welcomes government turning its attention to value capture to fund infrastructure.
While value capture is only one dimension in the development equation, the acceptance and application of its principles will introduce a more considered and respectful approach to the future growth of Australia, it’s towns and cities, and all who make their lives in these built forms.
It is important to clarify the difference between capturing land value and Tax Increment Financing. TIF is nothing more than revenue segregation. Any land value capture charge must be made on a percentage basis of market prices, avoiding flat fee charges.
There are lessons to be learned from windfall gains granted to private consortia, as in the example of Fishermans Bend in Melbourne. This would assist the public to see that this is not just another tax, but a transparently-administered repayment for services provided. This ensures that neither business nor worker taxes are contributing to the profits of rent-seekers.
Caution should apply to the ‘Entrepreneurial Rail Model’, lest it devolve into a ‘Robber Baron Mark II’ era.
The distribution of burdens and benefits should be fairly spread over time to ensure all generations pay their fair share. A well implemented land value capture program will not only do this, but will proactively fund infrastructure, potentially greatly assisting in the nation’s most pressing issue – to enable more affordable housing.
 Murray, C (2016)
 The Age (December 2, 2014), People’s Panel pitches in to advise MCC
 MTR presentation
 Australian Financial Review (April 7, 2016), Rent Struggle Erupts at Port of Melbourne