economics

Taxing Land to Pay for Trains Will Work. In Some Places.

The politics of using "land value capture" to finance public works will vary depending on developers' power.

Rare look at a subway in progress.

Photographer: Spencer Platt/Getty Images

What if we made landowners pay for infrastructure and urban improvements? After all, under a recent proposal from Governor Andrew Cuomo, New York may do just that to fund subway extensions. Property taxes would go up for New York City landowners within a certain distance from train lines, perhaps up to 1 mile. Land value capture, as it’s called, has also surfaced as a means of paying for President Donald Trump’s proposed infrastructure improvements.

Although land value capture is not quite “the solution of the moment,” as it has been described, there’s potential for it to ease some major urban problems. It’s already helping to finance new work on the Chicago subway system.

The idea is both fair and efficient. It’s fair because nearby landowners do benefit from a subway extension, so it seems reasonable for them to foot some of the bill.

The efficiency stems from the economic theory of taxation, which recommends levying tax burdens on relatively inelastic resources, such as land. Because land can’t run away to another country, taxing it may less distort economic activity than taxes on labor or capital.

Using land value capture for New York City subway improvements makes sense because other funding methods have failed politically. Earmarking some of the state income tax to the subway might be better, but people who don’t use the subway -- the majority in New York State -- just don’t want to pay. So the state must look elsewhere.

In the meantime, new subway lines are rare, even though the population and economic output of the city have grown substantially. The new Second Avenue line opened only last year, though construction started in 1972 and had to overcome numerous fiscal and political obstacles. On the older lines, delays are frequent and the system lacks modern technology. It is not unusual for signal switches to date from the 1930s. By one estimate, a much-needed revamp of the New York City subway system would cost more than $100 billion.

Yet the corresponding value is there. Many parts of New York City could be made more convenient and more economically valuable by subway upgrades. For example, the L line to the Williamsburg section of Brooklyn was improved, much to the advantage of that now gentrified and relatively expensive neighborhood.

Note that with the state Metropolitan Transportation Authority overseeing the subway, local landowners do not dominate the political calculus for assessing potential improvements. Putting a new fiscal burden on them, through land value capture, won’t mean they can shut down new construction and repair by lobbying against them.

That said, land value capture does not make sense when local landowners are the relevant interest group with the ability to make or break new infrastructure projects. In that case, landowners must be allowed to benefit disproportionately from construction, even when that is unfair.

My own locality, Fairfax County in northern Virginia, treats landowners and real estate developers pretty favorably. They have been a dominant special interest group with many state and local politicians. That might not sound ideal, but those individuals have strongly supported the building out of the community, creating jobs and keeping down home prices. If landowners had been asked to foot more of the bill, the local political pressures for pro-growth policies probably would have been less strong and a NIMBY mentality would have prevailed. Unlike with the New York City subway, here the local interests have much greater sway, and thus land value capture could clog up politics rather than inducing new construction.

Recently I spent a day at a conference discussing Henry George’s “Progress and Poverty,” a late 19th century work that is perhaps the best-selling economics book in U.S. history. George spent much of his life campaigning for a relatively high tax on land and thus landlords, developing the fairness and efficiency arguments I mentioned above. By the end of the conference, I concluded that George had some good economic arguments, but also that he was politically naive. At the margin we should move in George’s direction, but ultimately landowners have to be part of the building coalitions rather than pure victims.

The advantage of taxing labor income so heavily, as the federal government does today, is that the workers/taxpayers are a broad-based interest group that demand something in return, namely good, or at least acceptable, government. When progress happens locally, such as the building out of the Los Angeles subway system, we don’t put the entire burden on the localities that have the power to stop the thing -- we shift some of the costs to the public nationally.

We should experiment more with land value capture taxation, but keeping in mind a sorry truth: “Fairness” is not always how things get done.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Tyler Cowen at tcowen2@bloomberg.net

    To contact the editor responsible for this story:
    Stacey Shick at sshick@bloomberg.net

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