Financing Transit Systems through Value Capture: An Annotated Bibliography

By Smith, Jeffery J.; Gihring, Thomas A. | The American Journal of Economics and Sociology, July 2006 | Go to article overview

Financing Transit Systems through Value Capture: An Annotated Bibliography


Smith, Jeffery J., Gihring, Thomas A., The American Journal of Economics and Sociology


Most mass transit systems are financed not by riders but largely by subsidies from local public general funds. Those subsidies necessitate either higher taxes, reduced spending on other public services, or both. Does mass transit need to be so highly subsidized? An underutilized source of funding involves the recovery of site value gains associated with properties near to transit stations. Were transit systems to use the economic value that they themselves generate, transit agencies would not have to rely so heavily on public subsidies. Is it possible to finance a mass transit system through a combination of fare box revenues and the capture of land-value increments within transit corridors? Nobel laureate economist William Vickrey claims that mass transit operators could keep fares at a minimum, even at zero during off-peak hours, by funding the bulk of operating costs as well as development costs from site rents (see Reference 13).

Transit riders, by not paying the full operating cost, are not the only free riders. Another group consists of the landowners who are in a position to capture windfall profits by virtue of owning land near newly installed rail transit stations. When a transit station opens, the owners' land values rise, so presently they are in a position to sell their advantageous locations at a higher price* Were owners to relinquish these unearned value increments, they would incur no loss on their original capital investment. But retaining this speculative gain is actually receiving a publicly created benefit. Unearned value increments are a public windfall that neither they nor any individual alone produced. Hence, the public sector is justified in recapturing at least some of this "betterment"--the value of the services rendered by installing the transit improvements. Earlier in our Western culture, this form of economic justice was more clearly understood; indeed, the words own and owe were once one word at a time when owners owed rent to their lord or king. Today, we frequently see the justice of government's compensation of owners for a property "taking"; we are now beginning to relearn the justice of compensating society for a "giving."

Value capture is the appropriation of land-value gains resulting from the installation of special public improvements in a limited benefit area. It is a betterment levy, based on ad valorem assessments of ordinary property taxes, and is similar in conception to development exactions and impact fees. The aim is to finance all or part of the costs of local transportation projects. Based on the "benefits received" rationale for public taxation, it proposes to recapture what is essentially publicly created value. Unlike building value, which derives from private capital investments, land value represents the speculative dimension of real estate. Thus, value capture is a variation of an unearned increment tax, and is based on the premise that property owners benefiting from a government-conferred locational advantage should pay some portion of the cost of public improvements from which the added value is originally derived.

Having stated the claim of fiscal surety and the principle of recovering land-value increments, is value capture practicable in real-world settings? R. T. Meakin notes that Hong Kong's rail transit system receives no subsidy (see Reference 72). All costs, including interest on bond indebtedness, are paid from land rents derived from development in station areas. W. Rybeck estimated the added land values sequential to the development of Washington, D.C.'s Metro, and found a surplus of incremental land value (see Reference 23). D. Riley, who studied the London tube extension, also found that surplus land values were generated (see Reference 22).

To date, the bulk of the published studies related to the subject of value capture focus on the impacts of transit facilities on property values, with data obtained from properties within transit corridors. …

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