Caution needed on value capture

Published in Insights, The New Zealand Initiative’s newsletter, 4 May 2018

Last week, the National Business Review reported that the New Zealand Government is considering introducing so-called land value uplift charges to finance new infrastructure projects.

Papers obtained by the NBR under the Official Information Act show that the New Zealand Transport Agency and the Ministry of Transport are weighing the pros and cons of making property owners bear the costs of projects that increase the value of their land.

Before anyone now cries out that this is just another tax grab not flagged by this Government, this is not quite fair. Transport Minister Phil Twyford has long signalled his interest in alternative financing proposals like this. And there are good arguments on the economist’s blackboard for them if they are done well.

Doing it well is harder in developed parts of Auckland today than you might expect though – and especially when a lot of the infrastructure going in has been long-anticipated.

On the blackboard, we can assess the value of a piece of land before a piece of infrastructure has been announced and compare it with the value of that land after the announcement. That uplift is due to the infrastructure, and part of the uplift can be taxed by the government to help fund the infrastructure.

It can work well where the new infrastructure is a surprise. And a different variant on it works very well too where the land enjoying the value uplift is owned by the company putting in the new rail line. That model provides much of Tokyo’s rail network, where the rail company funds the line by building the apartment towers on the land it owns beside the stations.

But it does not work well where the infrastructure has been long-anticipated.

Taxing the uplift in value in that case will never recoup the cost of the infrastructure because the price of land, prior to the announcement, already reflected market expectations of the new infrastructure. The windfall gain was already captured ages ago by whoever owned the land when the project was first listed in the long-term plan.

And setting a tax on current owners sufficient to recoup infrastructure costs will not be taxing windfall gains but rather will impose windfall losses.

As tempting it may appear to tap into land value uplifts, we need to be cautious. The model can work – but we need to apply it only in the cases where it can work.

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