Land Value Capture Can Help Mass Transit Systems Rebuild Post Pandemic

The rush to declare the ‘death of cities’ in the wake of COVID-19 was almost certainly premature, given that rural areas are now struggling to contain the virus to nearly the same extent as urban areas did in the spring. However, the virus has dealt a major blow to one of the great assets that makes modern urban living possible – urban mass transportation systems.

Cities from San Francisco to New York have dramatically cut down on their transportations systems as their funding bases – in many cases, rider fares and sales taxes – have been devastated by the continuing pandemic.  The depth of the cuts is unprecedented; New Yorker subways will face a 40% reduction in capacity, and a majority of bus lines in San Francisco will be eliminated. In some ways these cuts are reversible; if the funding sources improve after the pandemic has been mitigated, then services can be resumed again; however, the interruption of these services will degrade the quality of life in the impacted cities and will almost certainly slow their recovery.

NYU’s Rudin Center for Transportation estimates that over the next few years these cuts in New York could cost nearly a half million jobs and tens of billions in lost GDP. In the short term, the only feasible option is for the federal government to use its capacity to borrow and create money to fill in the gap. In the long run, however, a more dependable, and fairer, funding mechanism is needed: land value capture.

The reliability of land value capture is apparent from the continuing high price of land in urban areas, even those suffering from COVID. While sales volumes dropped precipitously in major cities, median prices did not experience anything like the massive drop in ridership and overall GDP that blew a hole in transportation budgets – overall list prices dropped by less than 5% in San Francisco, among the most impacted cities. Even if there was a major drop in housing prices for a year, it is unlikely that such a drop would be as dramatic in the underlying value of land, and particularly unlikely that it would last long enough to depress land value assessments and thus taxes.  This can be seen empirically with San Francisco’s agency, which relies much more heavily on property taxes than other Bay Area agencies and, as a result, has shown itself to be far more resilient in the face of the crisis.

The advantages of land value funding for transportation infrastructure are not limited to weathering economic storms. Overall, the efficiency of this funding mechanism comes down to basic economics – as Henry George said in “Justice the Object, Taxation the Means”:

‘We impose some taxes for the purpose of getting rid of things, for the purpose of having fewer of the things that we tax…why should we impose a house tax unless we want to get rid of houses? Why should we impose a farm tax unless we want fewer farms? Why should we tax any man for having exerted industry or energy in the production of wealth?”

By the same token, to the extent that we tax sales to fund infrastructure, we will have fewer things sold. Even ‘taxing’ riders by means of fares will necessarily lead to fewer riders and thus, unless the infrastructure is nonetheless at capacity, less efficient transit; fares are useful for controlling congestion, but are in many ways inefficient as a core funding mechanism. Even property taxes, which are currently the best funding mechanism commonly employed, serve as a drag on the production of new, valuable property.

A tax on land cannot, however, decrease the quantity of land, because for most purposes that quantity is fixed. It may drive down the sales price of land, but land selling at lower prices is not fundamentally a problem for the economy. Two international examples of using land value for effective infrastructure funding are Hong Kong and Singapore. In both cities, the government owns all (Hong Kong) or the majority (Singapore) of the land, and either develops it directly or issues long term leases to developers while retaining the deed to the land. As a result, according to a study by Yu-Hung Hong and Alven H S Lam, both cities manage to fund the majority of their infrastructure spending through some kind of land value capture – selling leases to plots, collecting rents on land owned by the city, or by other means. It is not a coincidence that both cities rank as among the very best in the world for their transportation infrastructure.

Professor Sock-Yong Phang, of Singapore Management University, completed a study of rail development in East Asian cities and found that the success of rail in the cities studied – including Tokyo, Singapore, Hong Kong, and Shanghai – was closely linked to the success of implementing land value capture techniques. Managed properly, infrastructure funded by land value capture can create a virtuous cycle, as transit, education, and other amenities raise land values.  Those rising values, in turn, fund improved amenities.

It is true that in policy making there are sometimes tradeoffs between polices that are efficient and those that are fair. Fortunately, this is not one of those cases. To see why taxing land values to fund infrastructure is fair, one need only look at the impact of transportation access on the value of land.

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