A new approach to transport funding
Euro Transport : Dave Wetzel
The income from fares is usually insufficient to pay for both the capital cost and running expenses of a modern mass transit system.
Transport practitioners strive to provide a safe, efficient, affordable, reliable, comfortable, clean and convenient journey for passengers.
The service provided not only enables millions of people to travel but also has a wider impact on society generally and more specifically on local and indeed national economies.
When planning new routes wider economic benefits are usually recognised as a justification for Governments to provide subsidies towards the cost of construction and operation.
Apart from travellers who use transport, international studies over many years have shown that there is an additional beneficiary who plays no direct part in transport provision, who makes no contribution to the funding but who takes an unequal large share in the financial benefits arising from the building and operation of good transport links.
Don Riley, a property developer in South London has written a book “Taken for a Ride” in which he explores the impact of the building of the Jubilee Line Extension (JLE) linking Central London with East London.
Don Riley visited the tunnelling site in the mid-1990s and has since commented how these men digging the tunnel were 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 local land holdings appreciated in value as the line 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 alone, have increased by a staggering £13billion when the construction cost of the line itself was only £3.5billion. Don Riley argues that some of this wealth should have been collected by the Government in order to fund the project. If Don Riley is right, the UK Government could have built the JLE at no cost to the public purse if they had just chosen to collect less than one third of the increased land values arising from the scheme!
Instead, with the exception of two modest contributions, the JLE was paid for from normal taxation.
It is no fault of the transport industry that Governments choose to ignore windfall gains that transport creates. However, the findings of Don Riley and others in North America does mean that no longer should transport planners go cap in hand to Governments for subsidies if they wish to fund new projects or renew existing lines. As long as people are flocking to use the trains, then we now know that as well as fares revenue the railway will generate it’s own finance in the form of increased land values.
If Governments continue to only tax wages, goods and services to create new transport opportunities then they are choosing to give an unearned bonus to the owners of land.
If a Government refuses permission to build a new transport improvements because of inadequate finances and they do not want to increase existing taxes, then they are not only denying users new travel opportunities but also ironically, denying landowners the opportunity to share in land value gains that would arise if the improvements were financed from a part of these land value gains.
In other words, funding new and improved transport infrastructure from land value gains creates a virtuous economic cycle that provides a win-win situation for all concerned, including the landowners who provide the finance.
- The Government can provide a new transport improvement
- Taxpayers are not penalised
- The travelling public gain shorter travelling times with more convenient
journeys
- Car users are able to use the new system with economic and environmental
gains for all
- Businesses near stations see their trade and profits increase, and finally
- Assuming the project requires even 50% of the land value gain, landowners
retain 50% of a large increase if the scheme is completed – rather
than 100% of no increase if it is not built.
We all know the adverse effects that traditional taxes have on trade and jobs. A recent study by a UK think-tank has claimed UK tax increases over the past few years have raised individual tax payments by £4k per head, but they have also resulted in a further cost to each taxpayer of an additional £2k because of the damage these taxes do to the economy. In his recent book “Double Cross”, Ron Banks has estimated that if the UK were to raise its revenues from natural resources rather than use existing taxes, each man, woman and child would be better off by an astonishing £15,000 per head, per annum. If Ron Banks is only half-right, this would mean that a family of four could be £30k a year better off!
So how can Governments realise and collect this hidden subsidy to some of the richest people in the land? 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 15p in the pound income tax is supplemented with huge revenues from Government land leases. In parts of North America, South Africa, Australia and New Zealand land wealth contributes directly to public funds.
Of course it is not only transport infrastructure that creates increased land values. Most good public and private services add to the value of individual sites. Similarly, Mother Nature provides beautiful views of rivers, lakes, seas and the countryside – all of which can translate into higher land values.
A Land Value Tax would apply to all sites which would be valued annually for their rental income based on their optimum permitted use, ignoring all improvements. A tax rate would then be applied to this 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 with planning permission in a town centre for an office block would pay the tax at the same rate as an identical site next door which already has a similar size office block developed. Unlike taxes on buildings, there would be no reduction for dilapidation or for keeping a site empty. Similarly, there would be no increased tax liability for improving a building.
Several benefits would begin to flow.
Not only is such a tax cheap to collect and impossible to avoid (you can’t take land to a tax haven) but it would have an immediate incentive for landowners to bring their land into better use. Brownfield sites would be used for homes, jobs or public open spaces, urban sprawl into the countryside would be avoided, homes and business premises would become cheaper, whole neighbourhoods would be smartened up and revitalised, regeneration would be in the interests of landowners especially in areas that have lost major industries and face reconstruction, in these areas the lower tax on less valuable land would create a vitality that taxes on trade succeed in destroying.
Another reason why in some parts of America they call this the “Smart Tax” is because although land increases in value around stations, it can reduce on sites adjacent to the line that suffer from noise, pollution or vibration. With the Land Value Tax there would be no need for disadvantaged landowners to apply for compensation, as with the next annual revaluation of all sites their land value will be reduced and their tax contributions would be cut also.
A record of land value changes over time would also provide a useful planning tool. When a new mass transit is being planned it would be possible to use the existing record of land value changes to estimate which of a choice of routes would provide the largest land value increase. There may be perfectly valid reasons for choosing an alternative route but at least this decision would be taken in the light of a clear indication of the total value the community puts on each alignment.
In this article I have explored a new way for funding our transport systems and suggested a measure that can not only deliver this immediate aim but has much wider implications for the prosperity of the wider economy.
At a time when the fastest travel was on horseback, the early rail pioneers opened up the world and brought people and places closer together at speeds which hitherto had only been imagined. It would be befitting, if today’s descendants of those early pioneers not only led the way to sensible transport funding but showed Governments around the World how there is a fairer and more sustainable way to pay for public services.
In transport – we don’t need subsidies – we just need access to the land wealth that we and Mother Nature creates!