Value Capture as a Policy Tool in Transportation Economics: An Exploration in Public Finance in the Tradition of Henry George

American Journal of Economics and Sociology, The, Jan, 2001 by H. William Batt

IV

Capital Cost Recovery through Value Capture: An Alternative Approach

VALUE CAPTURE, most simply defined, is the means by which capital infrastructure investment is financed through means of "capturing" either some or all of the added value of real property that results directly from that investment. Value capture in transportation investments works in two ways:

1. Insofar as infrastructure investments are capitalized in land values in the vicinity of stations or gates by improved accessibility, those values can be recaptured as "rents" put at the service of debt, even perhaps for operating expenses, in support of the services provided.

2. The higher rents on land values in the proximity of the services serve further as an incentive to development density. This occurs because landowners seek to recover their investments, pressed by the immediacy of the rents, rather than holding them for speculative gain. [13]

Value capture is an old idea, given this new name by the US Department of Transportation which is exploring innovative approaches to infrastructure finance. [14] It can be traced in the theories of public finance to the work of the 18th century French physiocrats. [15] In the past century this approach compares closely to the thinking of Henry George and his followers. [16] There are now enough cases where value capture has been employed to finance infrastructure that there is no longer doubt about its merit. [17] As conventional approaches to capital finance are found to be wanting and are exhausted or discarded, value capture represents a tried and true method of both public infrastructure finance and an incentive to further sound growth. In a word, value capture becomes an effective engine to its own further development.

Using a tax on land values that benefit from particular capital investments satisfies all the virtues of sound taxation theory. [18] Unlike finance methods that rely directly or indirectly on income, sales, or franchise taxes, a levy on land correlates well with benefits received, and is likely to be stable, simple, administrable, progressive, [19] and, most of all, efficient. It is efficient because it is economically neutral; that is, it imposes no distortions on economic choices because land, particularly strategically located land, is limited in supply--in economic terms, inelastic. Whereas operating costs are frequently better financed from user fees that also employ the benefit approach, capital development costs are reflected in good part by location, and the resulting added value can be recaptured at the same rate that bond financing projects are amortized.

Experience in other nations shows that the extent to which land can sustain tax burdens is considerable, depending on the economic growth and development pressures of a region. [20] For example, within walking distance of commuter rail stations (typically about 1/4 mile), the land values may increase as much as 25 percent as a direct result of public investment in transit. Rather than permitting this windfall resulting from public investment to redound to the private landowners, land taxes in the form of value capture instruments can easily recoup the typical debt of projects. [21] Depending upon the planned density of the land use for commercial or residential purposes, the return can even be higher.