Value capture: a good idea to fund infrastructure but not easy in practice

Marion Terrill and Owain Emslie are the authors of the new Grattan Institute report, What price value capture?

….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…..

Which brings us to Home Truth No. 2: to raise a reasonable amount, a value-capture tax would need to include the family home….. A tricky question of who’s in and who’s out.

Home Truth No. 3 is that many taxpayers are likely to feel aggrieved…..Drawing a boundary around a new piece of infrastructure to distinguish between those who must pay the new tax and those too far away to benefit is bound to involve rough justice.

Broad-based land tax is better still

A better answer still could be a broad-based land tax. Such a tax is highly efficient, because land is an immobile tax base (see the chart below).

While it would not zero in on the beneficiaries of new infrastructure, a land tax would capture the effects of all infrastructure, old and new, as these translated into land values, making it scrupulously fair. A broad-based land tax would also be simpler to administer than a value-capture tax. That’s because there would be no requirement to police the geographic boundary of the catchment area.

So a broad-based land tax has some distinct advantages over a value-capture tax…..

One of the biggest dangers with any tax is complexity. It promotes the perception of unfairness and makes collection difficult.

Funding infrastructure is a headache for government. Benefits from increased indirect taxes like personal and company taxes may prove elusive. “User pays” taxes, like road tolls, tax direct users but assume that every user benefits by the same amount. And they have no way of taxing others who indirectly benefit — landowners who build a new shopping centre for example.

A broad-based land tax is far more efficient than indirect taxes and fairer than narrowly-focused direct taxes, while encouraging broader use of new infrastructure assets.

An example of the pitfalls surrounding infrastructure funding is the Skye Bridge in Scotland, a road bridge which connects the Isle of Skye via the A87 to the mainland. The bridge was built by a private consortium and opened in 1995.

Skye Bridge

Locals objected to the tolls charged (a round trip cost £11.40). Mass protests followed and a prolonged non-payment campaign. Despite numerous prosecutions, by 2004 the issue had become such a political hot potato that the Scottish government purchased the bridge for £27m and abolished the tolls.

Land taxes would have stood a better chance of success, especially if weighted towards land and businesses that would receive the greatest benefit. They also ensure public ownership of monopoly assets that may be exploited by private operators.

Source: Value capture: a good idea to fund infrastructure but not easy in practice

Skye Bridge: Wikipedia

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