Is “value capture” a wonderful untapped opportunity to fulfil all our infrastructure dreams? Or is it just a new way to sting the taxpayer? Our new report casts a cold, hard gaze over value capture, and finds that it’s a good tax in theory, but will prove very hard to put into practice.
Value capture is the name given to a policy whereby governments capture some of the increased value of land that results from building a new piece of infrastructure. Typically, the money the government “captures” is used to help fund the project.
At first glance, value capture seems marvellously fair, because it applies only to those who benefit from the particular project. So the people of western Sydney do not help fund a new railway station on the North Shore. But look a little closer: it also means that affluent inner-city residents don’t help fund a better railway station in Melbourne’s outer northern suburbs.
Federal ministers from the prime minister down are enthusiastic about value capture and are pushing the states to embrace it. Only last week, Urban Infrastructure Minister Paul Fletcher reiterated that the Commonwealth does not want to be “just an ATM” for the states. But if the federal ministers face up to some home truths, they may find value capture less to their liking.
Value capture is a tax
Home Truth No. 1 is that a value-capture scheme is a tax. That’s how it raises revenue. Politicians tend to shun the “T word”. They prefer to present value capture as an innovative financing mechanism. Sorry, it’s a tax.
Some advocates point to Hong Kong, where a private company builds and operates the rail lines, in return for cheap access to development rights around the new stations – a non-cash subsidy. Yes, integrating new infrastructure with rezoning and other planning changes is a great idea. But a similar model in Australia would have to be much smaller in scale.
That’s because in Hong Kong the government owns all the land. In addition, the city is dramatically denser than Australian cities: more than 7 million people live in a built-up area of around 285 square kilometres, compared with Sydney’s population of about 5 million in around 2,000 square kilometres. In a very dense city, good access to mass transit is highly valued.
Others in the value-capture camp point to tax increment financing (TIF) schemes. These have been used in the US with mixed success.
TIF schemes don’t involve a new tax, or indeed a funding source of any kind. Instead, they are financing schemes that earmark an expected increase in future revenue from existing taxes, such as land taxes, which can be attributed to a new piece of infrastructure. This increase is then used to repay special-purpose bonds.
But TIF schemes are of little value in the Australian context, since Australian governments have strong credit ratings and can borrow at extremely low rates of interest – more cheaply than private sector financiers can. Not only this, but TIF schemes generally do not offload project risk. They may instead come with a hidden government guarantee.
Family home would be captured
Which brings us to Home Truth No. 2: to raise a reasonable amount, a value-capture tax would need to include the family home. Owner-occupied housing accounts for around 65% of total land values in Australia, and increases in its value are taxed very lightly (see the chart below).
Authors: Marion Terrill, Transport Program Director, Grattan Institute