Value capture: proceed with caution

Harvesting land value uplifts from transport infrastructure projects is becoming increasing popular as a financing mechanism for major projects. However, imposing additional taxes on capital gains arising from major projects need to be carefully designed, cognisant of Australia's already complex system of Federal, State and Local Government taxes, including: council rates, stamp duty, capital gains tax and land tax. There is also a risk that forecasts of value uplift could be used to make poor projects appear more viable.

Cadence Economics recently assisted the SMART Infrastructure Facility with their submission to the current parliamentary inquiry. The role of transport connectivity on stimulating development and economic activity, which has a major focus on the role of value capture mechanisms to fund major transport projects. The submission analysed the application of value capture in the Australian context.

The submission concluded that value capture can be a useful part of the overall infrastructure funding mix, but that governments should 'proceed with caution' when applying value capture mechanisms in the Australian context.

Issues to consider when designing effective value capture (VC) mechanisms include:

  • The broader issue of whether a public transport infrastructure project is needed and what level of cost recovery it is likely to achieve. This includes the impact on the overall level of debt and taxation, and government credit ratings.
  • Forecasts of land value uplift could be misused to make poor projects appear viable.
  • There is potential for double taxation of land value uplift, due to the interaction between VC and the federal, state and local tax systems.
  • VC should be levied on actual - rather than potential or forecast - value uplift delivered.
  • Route selection or train station locations should not be unduly influenced by the financing mechanism, such as availability of parcels of crown land.
  • Recent experience with implementing taxes on windfall profits (such as mining profits) demonstrates the complexity in defining windfalls and implementing such taxes.
  • VC should not be used as a second-best mechanism for recovering a sub-optimal pricing of public transport fares.
  • Land value uplift due to a rezoning should not be confused with (or combined with, or attributed to) land value uplift from new transport infrastructure unless the two are truly inseparable.
  • VC should be levied on true additionality rather than a redistribution of economic activity.
  • When drawing lessons from overseas experience policymakers should be cognisant of our different circumstances, including Australia's system of federal financial relations, our relatively low population density, and relatively high reliance on income taxation.
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