A straightforward land tax may provide a better option than common ‘value capture’ mechanisms as a means to raise finance for large scale infrastructure investment, a leading researcher has argued.

In her What Price Value Capture? report, Grattan Institute researcher Marion Terrill has warned state governments to exercise caution before following Commonwealth advice to seek opportunities to employ methodologies whereby governments ‘capture’ a portion of the windfall gains which landowners derive as a result of construction of new railways, roads or social forms of infrastructure.

“Value capture may sound like a free lunch,” Terrill said. “But in practice the costs may often outweigh the benefits.”

Terrill’s comments come as the federal government seeks to make greater use of value capture as a means for raising part of the funding to meet the cost of new infrastructure projects.

In a discussion paper released late last year, the Turnbull government outlined options such as the federal government mandating use of value capture as a condition of Commonwealth funding for some projects and requiring proposals for major developments to be accompanied by a land use development plan which would require consideration of value capture funding streams.

In her report, Terrill acknowledged the merits of ideas that those who benefit most from the construction of new infrastructure should contribute toward the project’s cost. She warned, however, that such concepts are difficult to apply in practice.

Determining the boundaries as to who should and should not be subject to the taxes not was an inexact science, Terrill said.

Moreover, whilst the benefits of rail projects were largely derived by those whose properties lie within close proximity to stations, those associated with other types of infrastructure such as road and hospitals are more widely dispersed.

In such projects, beneficiaries are difficult to identify and applying additional taxes through value capture mechanisms on a genuinely transparent basis is problematic.

As a result, Terrill says value capture is more often applied to rail projects – a situation which leads to landowners whose properties benefit from uplift associated with rail projects to contribute toward those projects through value capture mechanisms but many of those whose properties derive an uplift from road projects not in fact doing so.

As a result, Terrill says greater equity through value capture was difficult to achieve in practice.

Moreover, she said, value capture schemes are less efficient compared with broad based taxes as they require greater precision in valuation and create more opportunities for corruption.

Because of this, Terrill says a straightforward land tax is often a better option.

“At first glance, value capture seems marvelously fair, because it only applies to those who benefit from the particular new project,” Terrill said. “So the people of western Sydney do not help fund a new railway station on the North Shore.

“But in practice, value capture schemes are less obviously fair.

“As a result, an additional broad-based, low-rate property tax on all land may be a better option for governments seeking to fund major new projects.”