Gavin R. Putland,  BE PhD

Friday, February 03, 2017 (Comment)

‘Passive’ value capture is best

A submission on the Value Capture Discussion Paper

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?

Property owners will object to a value-capture charge as “just another tax” if it is imposed in addition to existing taxes. To avoid the objection, a value-capture charge should replace as many existing taxes — especially property taxes — as possible. It is easy for the same value-capture charge to replace existing taxes and pay for increased expenditure on infrastructure, because there are two separate mechanisms involved. Even if there is no increase in infrastructure spending, a new tax on land values or on uplifts in land values will generate a certain amount of revenue that can be used to replace old taxes. But such a new tax will also enable the government — and indeed incentivize the government — to spend more on infrastructure, because such expenditure expands the base of the tax. In summary, the replacement of existing tax revenue comes from applying the new tax at an appropriate rate on the existing base, while the funding of increased infrastructure spending comes from expansion of the base.

There are two basic ways to change the property-tax base so as to increase its effectiveness in capturing value conferred by infrastructure. One is to tax the land value (or site value) rather than the combined value of land and buildings (because values of buildings are fixed by construction costs, so that values due to location, e.g. proximity to infrastructure, must be expressed in land values). Examples of this approach include (at State level) replacing stamp duty by land tax, and (at local level) imposing rates on land values alone, rather than rating total property values or (worse) imposing fixed charges or “minimum general rates”. The other approach is to tax changes in values over time, rather than current values. Examples include replacing stamp duty by a capital-gains tax, or changing the land-tax base from the total land value to the increase in the value since a specified base date. In the terminology of the discussion paper, “passive” value capture can be highly efficient. (I leave it to others to debate the relative merits of these various options. I note in passing that, to the extent that any particular option depends on the States, the Commonwealth can enforce it through the conditional-grants power, or by imposing its own value-capture tax and making it fully rebatable against any State tax on the same base.)

Other State taxes that we might replace by a general value-capture charge include insurance taxes (which are largely de-facto property taxes) and payroll taxes (because we can!). Of course, replacing a wider range of existing taxes requires a higher tax rate on uplifts in land values, which in turn allows a wider range of infrastructure projects to become self-funding by expanding the tax base, so that a larger number of infrastructure projects proceed for the benefit of property owners!

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?

Excuse me for pointing out that the question refers to a double nexus: to benefits and to infrastructure. In practice, the double nexus will tend to be reduced to a single nexus. There are two ways to do this. The first is to impose a charge on uplifts in land values (“benefits”) regardless of whether the uplifts are caused by infrastructure. The second is to impose a charge on alleged beneficiaries of infrastructure without managing to apportion the charge to the benefit, because it is too difficult to quantify the benefit of the infrastructure as distinct from benefits due to other causes. The first way is preferable. (See Question 5.)

5.  How can governments accurately estimate the incremental value uplift generated by infrastructure projects as compared to uplift due to ordinary market growth?

They shouldn't try to separate the two causes. The uplift in the value of a property due to “ordinary market growth", like the uplift due to infrastructure, is not the owner's work, but rather the owner's appropriation of the fruits of other people's work. As both uplifts are unearned, the owner has no greater moral right to the one than to the other, and suffers no injustice if any part of either uplift is clawed back through the tax system. While the clawback of an uplift due to “ordinary market growth” (or, for that matter, rezoning) is not hypothecated on the provision of infrastructure, it is still a perfectly respectable method of raising general revenue for the purpose of replacing other taxes — especially taxes that penalize one's own productive efforts! — and is therefore a perfectly respectable component of a reform whose other beneficial effect is to solve the infrastructure-funding problem.

Moreover, if a project proceeds on the understanding that it will be funded by a subsequent levy on particular property owners, then those owners, as soon as the project is safely delivered, will start lobbying for the premature removal of the levy at other taxpayers' expense. But if the tax that captures land-value uplifts is applied “across the board” and also used for general revenue, it minimize the opportunity for such lobbying.

The difficulty of resolving uplifts into a component due to infrastructure and a component due to “ordinary market growth” is a red herring. It is the sort of argument that one would offer if one wanted to derail value capture while pretending to support it.

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?

See above!

Yours sincerely...

Dr. Gavin R. Putland.

(Disclosure: I am the former research officer of Prosper Australia, and still a member; but I make this submission in a personal capacity.)

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