“Value Capture” is the infrastructure that is paid for for everyone


The non-partisan infrastructure framework, approved by President BidenJoe BidenCalifornia Convention Center Dumps Gaetz Hosting Plans, Greene’s America First Tour Xi, Kim Vows to Strengthen North Korea’s and China’s Friendship, Cooperation Sunday Preview: Biden Defends Troop Withdrawal in Afghanistan; COVID-19 affects unvaccinated bags from MORE Late June encompasses a remarkably diverse collection of revenue streams ranging from reinforced IRS enforcement to raids on unemployment benefits fraud. With so many pay-fors that are completely independent of infrastructure, the proposal seems to ignore the premise of the latest legislative initiative: Infrastructure offers high returns. To unlock 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 large cities often show the promise of value creation most clearly. The subway expansion on Second Avenue in New York City, for example, cost $ 1.7 billion per kilometer – far more than the most recent subway construction around the world. Along with co-authors Stijn Van Nieuwerburgh of Columbia and Constantine Kontokosta of New York University, I recently discovered that the project cut commute times and dramatically increased the value of local real estate. In fact, as I pointed out in a recent policy brief for the Manhattan Institute, just increasing the land value would have been enough to pay for the entire subway construction.

The problem is that existing government funding methods leave this figure largely untouched. We estimate that New York City will recoup less than a third of the property value generated, while the rest is a godsend for home developers who happen to own land near the subway stops. Local governments across the country will find that infrastructure improvements built in isolation cost taxpayers huge sums of money while enriching local property owners.

The recording of values ​​helps to solve this problem. City governments tax the additional real estate gains resulting from infrastructure improvements to finance their construction, which makes public investments more financially sustainable and equitable. In the meantime, taxing the surplus profits that accrue to local landowners does no worse for landowners than before, while at the same time providing funds to fund important projects.

Until now, the United States has not been receptive to the virtues of recording value, as many infrastructure projects in American cities represent huge cost savings. But successful projects in cities around the world can provide educational models for American politics. In Hong Kong and Tokyo, for example, there are privately owned subway companies that are actually making a profit. These transport systems open up real estate near subway stops, internalize the added value of new infrastructures and bring these companies significant operating profits. The profitability of purely privately owned infrastructure companies in Asia is in stark contrast to costly public projects in the US.

In most cases, valuation techniques don’t even require this type of privatization. Both the Hudson Yards project in New York and the Crossrail in London are collecting additional royalties from the area’s properties to fund major infrastructure improvements. They also offer incentives for additional traffic-oriented development near bus stops, with the additional taxes being used to finance infrastructure expansion.

Politicians and affected local residents often forget that the added value in a particular region does not impose any additional tax on top of the cost of doing business in a particular region. Value added taxes are closely tied to specific infrastructure expansions and improvements from which local property owners benefit directly. The collection of up-zoning rights offers building owners specific advantages in the form of higher building rights and is aimed at dense development in areas with high traffic.

It is also important to remember that recording value does not add any new burdens to the taxpayer; it just makes them more targeted. By supporting the construction of infrastructure projects, cities incur expenses that ultimately have to be repaid in one way or another. The recording of values ​​only ensures that in the end it is the people who benefit most from the project who pay, and not the taxpayers as a whole – many of whom will never benefit from the project in question.

The concentration of the financial burdens of infrastructure projects on the main beneficiaries is promising across all parties at the federal level. Republicans and Democrats support infrastructure investments because a new project can boost economic activity, improve the quality of life and create greater opportunities for citizens. Increased property values ​​in a neighborhood or region reflect this return on investment very precisely.

Capturing this new value – which most commonly benefits the wealthy and corporations (the tax targets of President Biden’s original funding proposal) – should appeal to Democrats. Republicans could also refresh themselves to see that $ 110 billion in public transport and rail investment would be paid for by the specific stakeholders who are reaping the benefits, rather than rural taxpayers who are less likely to benefit from it. State and local governments, which will play an important role in the bipartisan framework, could coordinate with the federal government to apply the valuation to eligible projects under new legislation.

America desperately needs new transit and transportation infrastructure, and Congress desperately needs innovative, substantial payment options. With economists questioning projections of revenue from increasing IRS funding, reducing unemployment fraud, and vaguely described public-private partnerships, now is the time for policy makers to look into appraisal. At the root of the recording of values, it is recognized that infrastructure investments lead to better cities and more prosperous communities – and use this progress for the common good. That seems like something we can all get over with.

Arpit Gupta is an Adjunct Fellow at the Manhattan Institute and Assistant Professor of Finance at the Stern School of Business at New York University. Follow him on Twitter @arpitrage.


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