How to Fund City Growth? Value Capture

Land value tax dates back to the early roots of modern cities, and it could end up financing our future. In the wake of the financial crisis, governments are reconsidering this progressive tax to fund large, city-building projects.

For those who are unfamiliar, land value tax is a special and progressive tax leveraged against unimproved land value. "Land" is the unimproved site, not counting infrastructure or buildings; "Value" refers to the increased market value after public investment; and "Tax" is the payment due for exclusive occupation of the site.

The idea to capture value was first popularized by economist and social reformer Henry George (1839–1897) who was convinced that revenue generated from nature and land belonged to society. In his seminal work, Progress and Poverty, George argued that taxing value increases of unimproved land is economically efficient since wealthy developers will foot the bill. George also argued that land value tax deters speculative land holding.

Even though value capture sounds like a great idea, it challenges the structures and powers of city growth and management. There are some tough choices to be made by the current and next generation of city leaders and managers.

Paul Romer, director of NYU Stern Urbanization Project, shares the view that strong, principled city charters based on value capture will change power relations in cities:

There are a number of cities leading the way with respect to value capture. The $500 million redevelopment of Denver Union Station was planned in 2004 and will become the hub of the new FasTracks lines, a 10-year, $7.4 billion investment in 197 km of new rail lines and 29 km of bus rapid transit lines. Two federal loans will be repaid through Tax Increment Financing (TIF), a land value tax instrument.

São Paulo is another example of the positive impacts of value capture. Research by the Lincoln Institute of Land Policy has estimated that more than $1 billion was generated in two of the 13 Urban Operations (Faria Lima and Agua Espraiada). Following the City of São Paulo's 2002 Strategic Master Plan rezoning plan, such land taxes have been deposited into the Urban Development Fund (FUNDURB), which has developed parks, improved sidewalks, upgraded informal settlements, and so forth.

Capturing value from the redevelopment of Denver Union Station will repay two federal loans.  (Source: Paco Group)

Capturing value from the redevelopment of Denver Union Station will repay two federal loans. 
(Source: Paco Group)

Other cities have sternly opposed value capture. A recent report by consultancy Sinclair Knight Merz on the G:link (Gold Coast Light Rail) project in Queensland, Australia, opening mid-2014, makes proposals for value capture, considering that (as the report states on page 2) "value capture methods are not well understood in Australia and have been studiously rejected by some state treasuries."

Meeting the infrastructural demands of rapidly urbanizing African cities will cost $75 billion per annum, according to the World Bank. Why then are countries like South Africa, which spent R33 billion (US$8 billion) on infrastructure development before FIFA World Cup 2010, not considering value capture? Despite bottom-up pressure from urban think tanks such as Urban Landmark, authorities have not reformed policies to capture these opportunities.

Ahmedabad, a rapidly growing city in Gujarat, India, has become the testing grounds for a stronger state presence in master planning. The state, through its Town Planning Schemes, buys up large pockets of agricultural land, installs infrastructure, and then sells land back to wealthier developers, fueling a speculative economy. Research also shows this to be top-down and isolated decision-making, causing major displacement of slums and the poor.

Building great cities requires brave leadership. Value capture can be a cornerstone of a new system for land taxation and progressive development financing. For, as Henry George taught us, the economic return of land should be shared equally, and not held in the grips of private owners.

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  1. This article first appeared on UBM Future Cities