‘Value capture’ is the infrastructure pay-for everyone is missing
The bipartisan infrastructure framework endorsed by President Biden in late June includes a remarkably diverse collection of revenue sources, ranging from boosted IRS enforcement to crackdowns on unemployment benefits fraud. With so many “pay-fors” that are completely unrelated to infrastructure, the proposal seems to ignore the very premise of the latest legislative push: Infrastructure provides large returns on investment. Tapping into the new value created by infrastructure projects, a funding mechanism called “value capture” should be part of the conversation as federal legislation takes shape.
Expensive transit projects in big cities often demonstrate the promise of value capture most clearly. The Second Avenue subway expansion in New York City, for example, has cost $1.7 billion per kilometer — far more than recent subway construction around the world. I recently found, alongside co-authors Stijn Van Nieuwerburgh of Columbia and Constantine Kontokosta of New York University, that the project lowered commute times and raised the value of local real estate dramatically. In fact, as I detail in a recent policy brief for the Manhattan Institute, the increase in land value alone would have been enough to pay for the entire subway construction.
The problem is that existing government financing methods leave this value largely untouched. We estimate that New York City will recoup less than a third of the real estate value generated, while the rest is a windfall for private developers who just happened to own land in the vicinity of the subway stops. Local governments around the country will find that infrastructure improvements constructed in isolation will cost taxpayers enormous amounts while enriching local property owners.
Value capture helps address this problem. Urban governments tax the incremental property gains resulting from infrastructure improvements in order to finance their construction, making public investment more fiscally responsible and more equitable. Meanwhile, taxing the surplus windfall that accrues to local landowners leaves landowners no worse off than they were before, while providing funding to finance essential projects.
So far, the U.S. has not been receptive to value capture’s virtues, with many infrastructure projects in American cities amounting to huge cost sinks. But successful projects in cities across the world can offer instructive models for American policymakers. Hong Kong and Tokyo, for example, feature privately-run subway companies that actually turn a profit. These transit systems develop real estate in the vicinity of subway stops, thereby internalizing the value uplift from new infrastructure and providing substantial operating profits for these companies. The viability of purely privately-operated infrastructure companies in Asia presents a stark contrast to costly public-sector projects in the United States.
Most of the time, value capture techniques do not even require this sort of privatization. Both the Hudson Yards project in New York and Crossrail in London charge incremental levies to properties in the area in order to help finance important infrastructure improvements. They also incentivize additional transit-oriented development in the vicinity of transit stops, with the additional incremental taxes going to fund infrastructure expansion.
Politicians and affected residents often forget that value capture does not impose another tax added to the cost of doing business in a given region. Value capture levies are closely tied to specific infrastructure expansions and improvements that directly benefit local property owners. Charging for up-zoning rights provides builders with concrete benefits in the form of higher development rights, while targeting dense construction in transit-rich areas.
It is also important to remember that value capture does not add new taxpayer burdens; it just makes them more targeted. By supporting the construction of infrastructure projects, cities incur expenses that ultimately will need to be paid back, one way or another. Value capture simply ensures that the people who benefit most from the project wind up paying, rather than taxpayers as a whole — many of whom will never benefit from the project in question.
Focusing the financial burden of infrastructure projects on their primary beneficiaries has bipartisan promise at a federal level. Republicans and Democrats support infrastructure investment because a new project can bolster economic activity, improve quality of life, and connect citizens to greater opportunities. Increased real estate values in a neighborhood or region very closely reflect this return on investment.
Capturing this new value — which most often benefits the wealthy and corporations (the taxation targets of President Biden’s original funding proposal) — should appeal to Democrats. Republicans also might be refreshed to see that $110 billion of investments in public transit and rail would be paid for by the specific stakeholders who reap the rewards, not taxpayers in rural states who are less likely to benefit. State and local governments, which are poised to play a major role in the bipartisan framework, could coordinate with the federal government to apply value capture to eligible projects under new legislation.
America desperately needs new transit and transportation infrastructure, and Congress urgently needs innovative, substantive ways to pay for it. With economists questioning the projections of revenue generated from IRS funding boosts, unemployment fraud reductions, and vaguely described public-private partnerships, now would be the right time for policymakers to look to value capture. At its root, value capture recognizes that infrastructure investment builds brighter cities and more prosperous communities — and harnesses that progress for the public good. That seems like something we can all get behind.
Arpit Gupta is an adjunct fellow with the Manhattan Institute and an assistant professor of finance at New York University’s Stern School of Business. Follow him on Twitter @arpitrage.
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