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60 Minutes: Politics of Infrastructure

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On November 23rd, 60 Minutes broadcast an episode about crumbling infrastructure in the USA. Most politicians, corporations, business interest groups and labor unions recognize the importance of infrastructure in maintaining our economic competitiveness, both at home and abroad. BUT, nobody can agree about how to raise the funds to maintain and repair roads, runways, ports, railroads, etc.

There are several reasons for this. FIRST, when infrastructure works well, it is almost invisible and people take it for granted. You turn on the faucet and water comes out. You get in your car and then arrive at your destination. We hardly think about the pavement, the traffic signals, the street lights, the pavement markings and all of the other street-related facilities and services that make our trip possible -- unless they don't work.

SECOND, in many cases we have divorced payment for infrastructure from its consumption. When we pay our income and sales taxes, we don't have a clear understanding about how the money is spent -- on infrastructure or anything else. And because it often appears to be free to use streets and highways, we drive and park in congested places at congested times more than we would if we had to pay the true costs of doing so.

THIRD, when infrastructure is well-designed and well-implemented, it often inflates the price of well-served land. So after paying taxes for highways or transit, if we want to get the most value out of them, we want to have our homes or businesses near a highway interchange or a transit station. But the price of land near these facilities has increased as a result of that new infrastructure. So now we must pay a landowner a premium rent or price to have access to the land that our taxes made more valuable in the first place.

This compels many of us to locate our homes and businesses at cheaper, but more remote sites where we don't have access to the infrastructure that we have paid for. And when enough of us locate at these remote locations, infrastructure is extended there (at great expense) only to have the cycle start again and have development pushed even father away. This is part of the genesis of sprawl. Not only does sprawl harm the environment, but its wasteful duplication of infrastructure facilities and services wastes our tax dollars and cripples our governmental budgets.

How often have we heard politicians say, "We are funding this infrastructure to facilitate development and create jobs." But then, high land prices make development difficult. While people like us must relocate to cheaper and less productive locations, big developers go to politicians looking for land write-downs, property tax abatements or other subsidies. Then we hear the politicians say, "We are subsidizing this development because, without this subsidy, there would be no jobs and no new tax revenues whatsoever." Paying twice for infrastructure and paying twice to subsidize development does not make the public happy or enthusiastic about paying for more.

FOURTH, while politicians love ribbon-cutting ceremonies for new infrastructure, they don't get public acclaim when they appropriate funds for infrastructure repair or maintenance. But keeping taxes low is always going to be a political winner.

Fortunately, there are ways to address these issues. One of these techniques is "value capture."

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"Value capture" can transform the property tax into an infrastructure access fee by reducing the tax rate on privately-created building values and increasing the tax rate on publicly-created land values. The lower tax on buildings makes them cheaper to construct, improve and maintain. This is good for residents and businesses alike.

The higher tax on land (which returns publicly-created land values to the public) helps keep land prices more affordable by reducing speculative profits and demand. Returning infrastructure-created values to the public helps make infrastructure financially self-sustaining (at least to a greater degree than today) and thereby reduces the need for other taxes and subsidies. It also creates some fairness in infrastructure funding because those who benefit from infrastructure end up paying in proportion to the benefits that they receive.

Value capture motivates the development of high-value land. This tends to be infill sites near existing urban infrastructure amenities like transit and parks -- and this is exactly where we want development to occur. And the more we develop infill sites, the less demand will exist for premature development of remote areas that are more appropriate for agriculture, conservation and recreation.

There's no single answer about how to fund the work that needs to be done. More widespread application of user fees (like congestion-pricing for roads and parking and storm-water runoff fees) are an important part of the equation. But "value capture" is almost always overlooked in spite of its potential to provide significant, fair and comprehensible funding for essential infrastructure investments.

For more information on some of these ideas, see "Funding Infrastructure for Growth, Sustainability and Equity" at http://media.wix.com/ugd/ddda66_d46304b5437c178e2f092319a6f30364.pdf

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1. General public pays taxes to generate and maintain public goods & services.
a. Owners of prime sites contribute less than others because most of their taxes are passed through to tenants and consumers.
2. Governments use taxes to produce public goods & services
3. Benefits of many public goods & services are capitalized into higher land values ("Location, location, location!")
4. Typical property taxes return only 1% or 2% of publicly-created land value.
5. Most land values created by government are windfalls to owners of prime sites who charge premium rents to tenants for the right to access these public goods and services. NOTE: Tenants pay twice for government services. Once in taxes & again in land rent.

1. General public pays taxes to generate and maintain public goods & services.
a. Owners of prime sites contribute more than before. Taxes on land values are not passed through to tenants and consumers.
b. Taxes on labor and capital can be reduced as a result of recycling publicly-created land values. (See step 4)
2. Governments use taxes to produce public goods & services
3. Benefits of many public goods & services are capitalized into higher land values ("Location, location, location!")
4. Publicly-created land values are returned to the public by increasing taxes on land values. (Taxes on building values can be reduced.)
5. Reduced windfalls to private landowners reduce land prices and reduce land rents from tenants to landowners. Reduced taxes on buildings make buildings more affordable, so tenants get more value for the building rents that they pay.

 

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Rick Rybeck, an attorney with a master’s degree in real estate and urban development, is the director of Just Economics LLC.  Just Economics is a consultancy that assists communities in harmonizing economic incentives with public policy objectives for job creation, affordable housing, transportation efficiency and sustainable (more...)
 

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60 Minutes: Politics of Infrastructure