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Financing Transit System Through Value Capture

Value capture refers to an innovative way of infrastructure financing: A new or improved infrastructure tends to raise property values in adjacent areas, and thus generate a windfall for private landowners; through a variety of ways the increased value may be all or in part "captured" to pay for the investment of the infrastructure.

In recent years, value capture is often proposed as an alternative to traditional approaches of transportation finance, such as general revenue, gasoline tax, or tolls. A transit system, for instance, may be (in part) funded through several ways of value capture:

•         Joint (or linked) development of transit system and adjacent parcels through public-private partnership, so that the cost of transit system can be offset by the benefits gained from adjacent development;
•         Rezoning and reselling: public agencies may buy privately held land near transit hubs that is zoned for low-density use on the open market, increase the designated use density, and then sell the land back to private developers on the open market;
•         Impact fees (or development fees), which are applied on the construction of new buildings (or new improvements) in areas adjacent to the transit system. They can be one time levies but are also possible to be designed to be paid over a long period of time;
•         Special assessment district: a defined area in which the market value of real estate is enhanced due to the construction of transit system. An additional tax is apportioned in the district to recover the the cost of the transit system;
•         Tax increment financing: a tool to use future gains in taxes to finance the current improvements that will create those gains. A transit system will not only raise the value of surrounding properties, but also bring in new investment. The increased site value and investment creates more taxable property, which increases tax revenues. The increased tax revenues are the "tax increment," which is used in TIF to finance debt issued to pay for the project.
•         Split-rate property tax, an idea to have separate property tax rates for land and improvement (buildings). A transit system tends to increase the value of land rather than that of buildings. Thus taxing a higher rate on land is able to reclaim part of the the benefits that it received because of the transit system. The land value tax is considered efficient because land is immobile and with inelastic demand. And it has additional benefits in encouraging compact development and smart growth.

To examine the possibility of using value capture to fund transit system in Minnesota, we may evaluate the above options of value capture along with other alternatives of transit finance again a set of tax criteria:

•         Efficiency: How does it relate margin cost with margin benefit of the project? Is it business friendly? Does it promote or hinder economic development? How would it distort people's behavior?
•         Equity: Who pays for it? How is the payment related to the benefit received or people's ability-to-pay? Is it regressive or progressive? Is the distributional effect desirable or acceptable?
•         Revenue sustainability: Is the (tax) base broad or narrow? How high should the (tax) rate be? How stable is the revenue? Can it catch up with the growth of personal income? Is it pro-cyclical or counter-cyclical?
•         Feasibility: Is the tax (fee) visible to the public? To what extent the revenue can be "exported" to nonresidents? How difficult is it for the government to administer the tax (fee)? How complicated is it for the public to comply with it?

In general, a properly designed system of value capture may meet well with most of these principles: it can be both efficient and fair as the cost correlates well with benefits received; it may generate sustainable level of fund to supplement construction, to support operation, or to pay back debt; it may be more politically acceptable than to raise other taxes; many examples of it has been proved to be administrable.

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