Land Value Capture and Market-Based Transportation Funding

I’ve thought for a while that “value capture”–taxing the increase in property value due to public investment in infrastructure–should be used more widely as an alternative to using income taxes, sales taxes, or other general forms of taxation to fund transportation infrastructure. Property taxes achieve this to some degree, but real value capture would ensure only the properties that directly benefit from the spending actually pay for it; it would minimize redistribution of income to subsidize spending on the project. So, in theory at least, value capture retains the basic principles of a user fee, although a more appropriate term would be beneficiary fee.

I also believe that value capture, as an alternative to tapping into general taxes, has the benefit of creating more transparency and accountability in selecting and managing public projects. If spending has tangible benefits, then private property owners and investors would step up to the plate and voluntarily underwrite at least a portion of the costs.

We’ve seen evidence of this in the Washington, D.C. area. On November 27, 1995, Passenger Transport, the newspaper published by the American Public Transportation Association, reported that a real-estate firm would design and build a Washington metro station on what was then the abandoned Potomac Yard railyard. The project would have been a 342-acre mixed-use site and included up to 5,000 housing units. Unfortunately, Arlington County downzoned the property, robbing the land of the (market-driven) value necessary to finance the station. This experience points out an important political problem: local governments often interfere with land markets in ways that make recovering full market value difficult if not impossible through zoning and development regulations.

More recently, private land owners and developers voluntarily agreed to cough up $30 million for the Florida and New York Avenue metro station (now Gallaudet University stop). The D.C. government was apparently so surprised that the private sector would see value in the metro stop that it failed to fully tap the private sector funding potential. The private capital in the project amounted to about 30 percent of the total cost. Nevertheless, the metro stop ended up being an award winning public-private partnership. According to the National Council for Public Private Partnerships:

“The project far exceeded the promise of 5000 new jobs and $1 billion in area investment upon the construction of the Metro station. Assessed valuation of the 35-block area increased from $535 million in 2001 to $2.3 billion in 2007. Over 15,000 jobs have been created since 1998 with $1.1 billion in private investment. This increase in property values (300 percent between 2001 and 2007) has attracted further real estate development and residents with higher purchasing power, which has reduced the number of affordable housing options for some would-be residents. Additionally, the public sector supplied nearly two-thirds of this project’s funding. Had a more intensive market research study been conducted, it is likely the private sector would have been asked to contribute a larger portion of the funding.”

One of the people aggressively promoting this idea is Rick Rybeck at Just Economics, LLC. See also this annotated bibliography of reports and studies produced for Todd Litman’s Victoria Transport Policy Institute.

These are baby steps to be sure, but if the benefits to transit (or any transportation) access are real and tangible, we would see the value capitalized into land prices. This would be a far more preferable and sustainable way to finance transportation infrastructure as a supplement to direct user fees such as transit fares and tolls than relying on the general taxes. The prospects for monetizing this value in the market place also opens up important avenues for privatization and market-based accountability for spending decisions.