A recent report by eminent economists Kevin Fox and Dr Nigel Stapledon from the Centre for Applied Economic Research at the UNSW Business School has exposed the myth that ‘value capture’ will fund all future infrastructure in Australia.

A bit like the famous Australian story The Magic Pudding, there is this hope that the “Value Capture Pudding” will solve all our problems.

The report by Fox and Stapledon is fittingly titled Value Capture is Not a Magic Pudding – Options for Funding Infrastructure. The authors have skin in the game. Fox is a Fellow of the Academy of the Social Sciences in Australia, professor of Economics at the UNSW Business School, consultant to the Commonwealth Treasury and a member of the Australian Bureau of Statistics Methodology Advisory Committee. Stapledon was the chief economist for Westpac for 10 years, worked in the federal Treasury and now teaches macroeconomics at UNSW and research at the Centre for Applied Economic Research. So these guys know what they are talking about.

The report defines five broad categories of tax (or equivalent) that can be imposed on land, or the development of land, which are each a form of value capture. They are as follows:

  1. Land Tax: an annual tax on the value of land. A variation on this is a supplementary land tax which could be imposed on a geographic area or for a fixed period of time.
  2. Transaction tax: a tax on the transfer of land. This is measured as a percentage of the value (not the change in value). Stamp duty is this type.
  3. Development contribution: also known as impact fee. This is a fixed amount per unit of land for approval to develop land to a higher value urban use. Both state and local governments impose these levies.
  4. Capital gains tax: landowners subject to capital gains tax would be liable to pay tax on the increase in value of their property.
  5. Betterment tax: a variation on capital gains tax. It is an indirect capital gains tax on the landowner; indirect in that it is imposed on the developer but with the intention that it is passed through to the landowner.

“Current uncoordinated attempts by different levels of government to capture value uplift from infrastructure investments are raising the costs of development,” the Fox/Stapledon report reads. “This can result in less development and hence have an adverse effect on housing affordability, as well as raising costs to businesses, Coordination and clarity are hence required in balancing value capture options with other policy concerns such as housing affordability.”

Clearly, they see problems with the current enthusiasm for value capture policies.

The report does, however, suggest a better way to fund essential infrastructure in cities like Sydney.

“A broad-based tax is the most efficient way of capturing value created by new infrastructure investments. This is consistent with the recommendation of the Henry Tax Review,” it states.

The answer seems to be in spreading the levy burden across as many beneficiaries as possible rather than focussing levies on new development. A similar position was taken with London’s Crossrail, where contributions come from an increase in business rates across all of London rather than focussing on developments near the new stations. A similar approach was taken with funding for the Light Rail in Queensland’s Gold Coast.

Another interesting case study presented is that of the City of Calgary in the province of Alberta in Canada. Here, a property tax is shared between different levels of government. The City of Calgary gets 62 per cent of the property tax with 38 per cent going to the province’s budget but the two taxes are combined into one when paid by property owners. There is also the provision in Alberta to impose a ‘local improvements tax’ on a specific area to fund a service improvement.

The Fox/Stapledon report raises many other issues. The authors believe removing rate capping would encourage councils to support more growth and density. The timing of any new value capture tax is important so that land owners factor in the taxes in their sale price to developers. Any opportunity to remove the transactional tax of stamp duty should be taken as this simply increases the cost of housing and discourages people moving to a new house.

Ultimately, a broader review of taxation related to property needs to be undertaken rather than hoping the new concept of value capture will be the magic pudding that solves all of our problems.