With the Australian Government issuing a discussion paper in late 2016 into ‘Using value capture to help deliver major land transport infrastructure’, it is important to understand what value capture is and how it might be levied.
How does value capture work?
Value capture (or perhaps more accurately, value uplift capture) is when governments impose a tax on the increase in value of a parcel of land when it increases because of an action by government, such as the land being rezoned to a higher value use (e.g. from farmland to residential housing); the building of more efficient local transport access; or the building of local amenities such as schools or cultural centres.
Value capture can be essential in helping government fund local infrastructure improvements or in establishing new housing suburbs. There is also an issue of ‘fairness’ as the wider community may perceive it is unfair that infrastructure and services (including the rezoning of land) provided by government for the good of all the community leads to businesses or private individuals benefiting financially from the increase in the value of their land, through no merit of their own. Value capture seeks to redress this iniquitous situation and return some of the benefits of government investment to the wider community.
Value capture through a betterment tax
One method of value capture is a direct tax known as a betterment tax, which is paid by the vendor on the increase in the property’s value when the property is sold. However, it can be very difficult to isolate the increase in land prices due to a specific action of government from local area land price increases. In addition, the price of a parcel of land may have the expected impact of a government action factored into its price many years before the actual government legislation or infrastructure legally commences. As a consequence, there can be a problem in determining just who is responsible to pay the betterment tax and at what date it should have been levied.
Value capture through stamp duty
A form of value uplift is captured for government in the higher stamp duty received when the land is sold, although technically this is a tax on the buyer and not the seller. The increase in value is also captured in higher capital gains tax payments received by government if the selling landowner is not an owner-occupier and is eligible to pay the tax.
Value capture through inclusionary zoning
Inclusionary zoning, the requirement for developers to supply a proportion of new developments as affordable housing, can be seen as another form of value capture in that some of the benefits to a developer in rezoning land to allow the development to go ahead is returned to the community in the form of affordable housing.
Value capture through a universal land tax
Probably the fairest value capture method is a universal land tax, paid annually and based on the value of land. This would serve to capture value uplift efficiently for all properties in the community, regardless of whether the properties are investment properties or owned by owner-occupiers. Such a tax would also have the benefit of allowing the removal of stamp duty on property sales, a very inefficient tax for the wider economy.