Minnesota Report Lists LVT for Value Capture

Nadine Stoner

[Reprinted from GroundSwell, May-June 2009]

"Value Capture for Transportation Finance" is the title of a Feb. 27, 2009 draft report released by the Center for Transportation of the University of Minnesota. Funding for the study was provided by the Minnesota State Legislature The report's Executive Summary acknowledges: "Funding for streets, highways and transit is provided by joint efforts of federal, state, and local government. ... To ensure adequate and sustainable transportation investment for current and future needs, policymakers need to reassess the current mechanisms of transportation finance in the United States and explore alternative revenue sources. ... One possible alternative is known as 'value capture'. Large public investment in transportation infrastructure can substantially increase the value of adjacent land. Capturing the value of this benefit through various tools is gaining interest as a finance mechanism for infrastructure investments. ... Accessibility to desired destinations by customers and employees tends to play a major role in location decisions and, therefore, drives up the value of land in highly accessible locations. ... Transportation improvements create benefits for three groups of beneficiaries: the general public, transportation users, and property owners and developers ..."

The report discusses "value capture techniques, examining each in relation to economic efficiency, equity, sustainability, feasibility and, where required, implementation considerations."

The value capture techniques discussed include land value tax, tax increment financing, -special assessment districts, transportation utility fees, development impact fees, negotiated exactions, joint development, and air rights.

Quoted here is the Value Capture Evaluation and Implementation Considerations section on Land Value Tax (LVT).

"Rather than being assigned to a specific project, land value taxes more generally capture the value created by the provision of public goods, including the accessibility afforded by transportation networks. A tax on land would be preferred to a tax on buildings, as the former would result in less economic distortion due the fixed supply of land. A pure tax on land is possible, though rarely used. While land value taxes are desirable from the standpoint of economic efficiency and sustainability, they would most likely be slightly regressive in terms of ability-to-pay. Further, land value taxes may prove politically infeasible due to high visibility and potential unpopularity."

In the Evaluation section, it is reported of the Land Value Tax, as follows.

"Land value taxes (LVTs) are the most general type of value capture policy we will describe. Rather than being designed to apply to a specific project, land value taxes are designed to capture the value that is created by the provision of public goods more generally, including the accessibility that transportation networks provide. Conventional methods of local public finance rely heavily on the property tax, which serves as a tax on both land and any improvements, including buildings, that are made to the property. In principal, a tax on land rather than buildings would be desirable, as it would be less distortionary. Where part of the tax burden falls on buildings rather than land, the higher price for buildings discourages additional investment in the supply of buildings. On the other hand, the supply of land is fixed, implying that while an additional tax might raise the price of the tax good (land), it will not affect its supply.

"In principle, a pure tax on land is possible, though there are few documented examples of its application. Variations on the LVT principle have been experimented with, however. The most common is a form of split-rate property tax, in which the land and improvements that constitute a property are valued separately and taxed at different rates, most often with a heavier emphasis on land. While variations on the land tax mechanism have been adopted abroad in countries like Canada, Australia, and New Zealand, their application in the United States has been limited to a handful of experiments with split-rate property taxes. Along with isolated instances in the towns of Fairhope, Alabana, and Arden, Delaware, both of which were initially established as development corporations, most of the applications of split-rate property taxes in this country have been in various cities in Pennsylvania."

(For a related article, see the Jan.-Feb. 2000 GroundSwell about the Dec. 1999 Minnesota Planning Environmental Quality Board's report, "Smart Signals: Economics for Lasting Progress.")

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