Value capture: revenue grab or vital revenue raiser?

The Government hopes value capture will help it to fund its ambitious infrastructure programme, but will it be enough? Thomas Coughlan reports.

Minister of Finance, Grant Robertson, has indicated that a new value capture rate could be used to fund much-needed rail infrastructure in Auckland. He told an audience at a lunch last week that the Government was looking at “innovative” ways to fund new infrastructure. Auckland Council is already looking at such 'value capture' targeted rates that take some of the capital gains on land around routes zoned for railways and motorways.

National’s Finance Spokesperson Amy Adams and Housing Spokesperson Judith Collins opened fire on the idea, labelling it “another new tax”. But leader Simon Bridges was more measured and equivocal in his comments, having backed similar proposals when in Government. On Sunday he said it was "pleasing to hear from Grant Robertson today that finally he’s coming round to the need for innovation in this area".

By Monday, he was forced to clarify the position further. He expressed enthusiasm for looking at new revenue raising measures, but said he was opposed to taxes on individual ratepayer and claimed what National had been considering when in government was "altogether different". 

What are you capturing?

Value capture is designed to solve an acute problem in the way local governments fund infrastructure development. Essential infrastructure is expensive and needs to be financed, planned and built well before it is needed. As Auckland’s current problems demonstrate, by the time commuters are sitting in hour long traffic jams, it’s often too late to start thinking about funding, planning and eventually building a new rail link or motorway.

But big building projects are expensive and councils are restricted in what they can borrow or raise from rates. In addition, supporters of value capture argue that paying for expensive infrastructure with rates rises or central government funding is unfair. Only a select few ratepayers and taxpayers will benefit from a new rail link to a particular suburb and see their land values rise. So why should the rest of the city - or the whole country - foot the bill?

Malcolm Alexander, Local Government New Zealand chief executive, said value capture was one of a range of revenue solutions LGNZ had considered when reviewing local government funding mechanisms in 2015. He said the current revenue model for councils was unsustainable.

“With rates, you’ve got many people who are going into retirement, particularly over the next 15 to 20 years, who don’t have retirement savings, so the ability just to lift property tax on them when they cannot raise their own revenue shows that clearly the system is not sustainable,” Alexander said.

“A lot of people will be asset rich and income poor.”

As property values further detach themselves from average incomes, councils will need to look at ways of generating revenue that are not so directly linked to the value of a home.

The Productivity Commission last year recommended value capture as one of a raft of revenue solutions, including increasing the number of "user pays" services operated by councils.

How do you capture it?

Councils and government already consider how to raise revenue and pay for infrastructure and services equitably. Using debt to pay for essential infrastructure is often described as equitable because the generations who will make use of it will eventually pay off the debt.

Value capture aims to raise revenue based on the idea that essential infrastructure being built in an area raises the value of property in that area relative to others that did not receive the infrastructure investment. Part of the increase is taxed to pay for the infrastructure.

“Public money is being invested, but as a result of that investment there will be private gain because the land will appreciate higher than it would have otherwise,” said Alexander.

“Why should public investment be appropriated privately, beyond a point?”

A study in the Productivity Commission’s report looked at the effects of upgrades to Auckland’s western rail line during the 2000s. It found that houses close to the line increased in value from the announcement of the upgrades in 2005. They attributed a total in $667 million in land value increases to the rail upgrade, a sum closely aligned to its $620 million cost.

The commission’s report used an example of a property owner who saw the unimproved value of their land rise 150 percent to $250,000 in the five years following a nearby infrastructure improvement, while values elsewhere in the region rose 100 percent. If a value capture rate was operating and set so that 20 percent of the increase over and above the average increase was taxed, that would mean $30,000 of the rise in value would be taxed. If the tax was 10 percent, payable over five years, the land owner would have to pay $600 a year, but would still retain most of the unearned capital value.

Political posturing

Prime Minister Jacinda Ardern said on Monday that it was still early days for the Government’s proposals on value capture. The issue continued to put the heat on National as Bridges sought to define his position of being both open to new revenue raising techniques, but opposed to a tax on individual homeowners.

“He (Robertson) was prior to the election very opposed to seeing the private sector building really big infrastructure projects and the likes of public-private partnerships,” Bridges said.

Before the election, Labour said it was opposed to PPPs for core infrastructure like hospitals and prisons, but open to using them for transport infrastructure.

“What we will never accept is taxing individual homeowners in the way he seems to be talking about. That was never something we were going into,” Bridges said.

Bridges said that what he had been looking at last year was “an altogether different thing that you wouldn’t call a tax.” He said that he had looked at big Waterview Tunnel-size projects around the world and looking at co-funding with large commercial property developers in advance.

“It was much more in the realm of contractual negotiation where they were going to see large value from the project going ahead,” he said.

He cited London’s Crossrail as an example. Greater London Authority raised £5.2 billion out of the estimated £14.8 billion project cost from value capture. This was primarily from a Business Rates Supplement, a 2 percent levy on non-domestic (commercial) properties with rateable values above £55,000.

Labour, for its part, insists that their value capture rate is simply an evolution of what National had already started, but said that the work was still in its infancy.

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