FACING THE ENVIRONMENTAL CHALLENGE
OF FINANCING PUBLIC TRANSPORTATION
The income from fares is usually
insufficient to pay for both the capital costs and operating expenses of
a modern mass transit system.
Public transportation managers strive to provide safe,
efficient, affordable, reliable, comfortable, clean, and convenient
journeys for passengers. The service provided not only enables millions
of people to travel but also has wider economic, social, and
environmental impacts on urban life.
When planning for new public transportation investments,
wider economic benefits are usually cited as an important reason for
governments to provide subsidies towards the costs of construction and
Apart from people who use public transportation systems,
international studies over many years have shown that there is an
additional beneficiary who plays no direct part in contributing to
transportation financing, but who gains a disproportionate share of the
economic benefits arising from building and operating rail and bus
Don Riley, a London property developer, has written a
book Taken for a Ride in which he explores the impacts of the
construction of the Jubilee Line Extension (JLE) Underground train line
Don Riley visited the construction site in the mid-1990s
and has since commented how these men digging the tunnel were sweating
hard, risking their lives, not knowing where their next job was coming
from, while at the same time he, himself, was making money while he
slept as his adjacent property holdings considerably appreciated in
value when the JLE became a reality.
This understanding of the land market inspired Don Riley
to calculate the total land value increase that arose within a radius of
only 1,000 yards of each of the new JLE stations. His startling
conclusion is that these land values have increased by 13 billion
British pounds (US$22.8 billion), while the construction costs of the
JLE were 3.5 billion British pounds (US$6.1 billion). Don Riley
suggests that some of this wealth should have been collected by the
government in order to fund the project. An independent study carried
out for Transport for London estimated that between 1992 and 2002, near
two of the 11 new stations, Southwark and Canary Wharf, the JLE caused
land values to rise by 2.8 billion British pounds (US$4.9 billion).
This means that the UK government could have built the JLE at no cost
to the public treasury if they had just chosen to collect less than
one-third of the increased land values arising from the new transit
line. Instead, with the exception of two modest private sector
contributions, the funding for the JLE came from the government’s
budget, drawing from income taxes and other traditional revenue sources.
It is no fault of the public transportation industry that
governments choose to ignore private windfall property value gains
generated by public investment. However, the findings of Don Riley
and others mean that no longer should transportation planners go hat in
hand to governments for subsidies to fund new projects or maintain and
renew existing lines. As long as large numbers of people are riding the
trains, then we now know that in addition to revenue from fares, the
railway can generate its own finances from the increased land values.
If governments continue to only tax
wages, trade, or goods and services to create new transportation
opportunities, then they are choosing to give an unearned bonus to the
owners of land and buildings.
If a government refuses permission to build new
transportation improvements due to inadequate budget revenues, and the
public officials do not want to increase existing taxes, then they are
not only denying citizens travel opportunities. In addition,
ironically, they are denying property owners the opportunity to share in
rising values that will arise if the improvements are at least partly
financed from the increase in property values.
In other words, financing new and improved transportation
infrastructure from rising property values creates a virtuous economic
cycle that provides a win-win situation for all stakeholders, including
the private property owners who directly provide some of the funding.
Assuming the project requires even 50 percent of the property value
increases, property owners retain 50 percent of a large gain if the
improvements are completed — rather than 100 percent of no increase if
the transportation investments are not made at all.
How can governments collect this hidden subsidy that goes
to certain very fortunate property owners, some of whom were already
extremely wealthy. Denmark already collects a land tax for local
expenditure. All the land is valued each year and a percentage tax
applied. In Hong Kong a modest income tax is supplemented with
substantial revenues from government land leases. In parts of North
America, South Africa, Australia, and New Zealand property taxes
contribute directly to public funds.
Of course transportation infrastructure is not the only
factor raising property values. Population and employment growth,
greater commercial productivity, higher incomes, good quality public and
private services, and many other factors all contribute to the value of
individual sites. Similarly, nature provides mineral deposits (oil,
gold, diamonds, and even coal), fertile fields, beautiful views of
rivers, lakes, seas, and the countryside — all of which can translate
into higher land values.
A Location Benefit Levy can be applied to all sites which
would be valued annually for their rental income based on their optimum
permitted use, ignoring all building improvements. A tax rate could
then be applied to this land value in order to produce an income for
public funds. As the land value rises, so does the sum collected. This
means, for example, that an empty site in a town or city center with
permission to develop for an office building would pay the tax at the
same rate as an identical site next door which already has a similar
size office building developed. Unlike taxes on buildings, there would
be no reduction in the estimated land value or amount of taxes owed for
a deteriorated structure or for keeping the site empty. Similarly,
there would be no increased tax liability for constructing or improving
a building on the site.
Reduced Urban Sprawl
If a Location Benefit Levy were introduced, several
benefits would begin to flow.
Not only is such a tax inexpensive to administer and
collect, it is also quite difficult to avoid (land can not be moved to
another jurisdiction or concealed like other forms of property,
valuables, and money). More importantly, there would be an immediate
incentive for landowners to improve their land and build upon it.
Environmentally damaged brownfield sites would be cleaned up and used
for homes, jobs, or public open spaces. Housing would become more
affordable through increased supply, and whole neighborhoods could be
revitalized. Urban regeneration would be in the best interests of
landowners, especially in areas that have lost major industries.
With more sites available in towns and cities, small and
medium sized enterprises (SMEs) would have lower lease costs and thus be
able to expand their business or start new ones. More jobs would be
created, claims for unemployment payments would be reduced, and the
economy would grow faster.
With housing more affordable in towns and cities the urge
for workers to move long distances from their work in order to purchase
a less expensive house would be avoided. Urban sprawl into the
countryside, encroaching into green belts, agricultural land, and open
space would be diminished. Public transportation agencies would avoid
the additional costs of building facilities and expanding services for
suburban and exurban commuters.
Families would benefit as workers could spend more
quality time at home rather than commuting for several hours daily.
With less urban sprawl not only would green spaces be
saved but society would avoid the substantial expense of building new
infrastructure and extending service delivery.
Compact, high-density towns and cities operate much more
efficiently, and open space is released for better planning, perhaps
following Sir Ebenezer Howard’s Garden City model.
‘The Smart Tax’
Another reason why some people call the Location Benefit
Levy “The Smart Tax” is because although land values generally increase
due to proximity to transportation improvements, values can also decline
on sites adjacent to the railway lines because of excessive noise,
pollution, unsightly views, environmental and health hazards, harsh
smells, safety and security threats, and other physical and social
intrusions. With the Location Benefit Levy there would be no need for
disadvantaged landowners to apply for compensation, as with the next
annual revaluation of all sites, their land values and corresponding tax
contributions will be reduced.
Fred Harrison, the Director of the Land Research Trust
has demonstrated in his new book Wheels of Fortune how the
careful recording of land value changes over time can provide a very
useful urban planning tool. When new mass transit is being planned the
existing historical records of land value changes can be used to
determine which route will provide the largest land value increases.
There may be perfectly valid reasons for choosing an alternative route,
but at least this decision can be taken with a clear indication of the
total value that the community investment will generate through each
potential transit alignment.
is Vice Chair of Transport for London in the UK, Chair of the
Professional Land Reform Group, Chair of the Labor Land Campaign, and a
member of the Advisory Board of Global Urban Development. He is a
Fellow of the Chartered Institute of Logistics and Transport.
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