Property, taxes and the law have all been linked for a very long time. Property has largely been the base measure of wealth and power, a reality not lost on William the Conqueror when in 1085 the Doomsday Book first started to record land ownership across his kingdom, and the main reason was so the king could know the extent of taxes he might raise, sounds familiar.

In 13th Century English towns urban land tenure was based primarily on tenants paying cash rents (to the king) and not the provision of labour. Even then infrastructure was already an issue as England became more urban and taxes were raised by the towns for walls, streets and bridges including road tolls. There were also temporary taxes for the repair of bridges, and these were governed by the issue of the king’s letter of patent which enabled the toll collections.

Urban regulation had also started as the granting of market town status originated in the Middle Ages as an early form of land value enhancement, if you like a form of betterment that enhanced a village’s or town’s appeal along with its amenity and commercial value.

The realisation of increased value was not wasted on the ruling classes and soon kings and administrators understood that these market towns could generate extra revenue. From around the 12th century, English kings began granting charters to villages allowing them to create a market on specific days.

As trade and commerce became more concentrated the granting of charters was tightly managed and eventually helped create permanent shops and business premises and many market towns still exist.

Today the same idea continues as modern infrastructure has a huge impact on our cities and arguments over who should pay persist.

Someone Must Pay

Australia and many other countries are now engaged in a huge explosion of infrastructure development including roads, light rail, airports, bridges, schools and hospitals plus lots more. An investment that’s going to cost trillions of dollars and re-shape many of our cities and communities. Even countries will be impacted, when for example China’s Belt and Road initiative gets going with projects worth $US1.3 trillion across 400 projects and 68 countries.

Much of the investment is necessary to play catch-up as existing infrastructure decays, but it’s a trend also driven by the massive concentration of population in cities. Which is a pattern of development repeated over history.

The colossal level of investment naturally raises the question of how to fund the work and who should pay? There are some well-established avenues of funding, including joint government funding between local, state and federal governments, public-private partnerships and public asset sales, which are often used in Australia and with mixed result.

Another option is to impose additional taxes and levies on developers and that includes the option of a betterment tax or value capture to recover costs against the rise in land values generated by the infrastructure projects.

Betterment levies are a form of tax or a fee levied on land that has gained in value because of benefits flowing from public infrastructure investments. They are considered the most direct form of value capture.

Transport projects are among the most topical as these projects are a prime influence on the demand for land in any city across both inner city or greenfield locations. Proximity to a new railway station is a prime example.

Extensions to Sydney’s rail system is a topical example, and so too is London’s new Cross Rail underground where a form of betterment tax was applied, but only to a limited number of prime commercial sites. The Greater London Council charges a supplementary land tax to help fund the Cross Rail but it only applies to large business properties.

Betterment levies try to capture part of the infrastructure investment already incurred by the government, although it needs to be remembered that sometimes there can be negative impacts associated with noise, pollution and increased traffic, for example Sydney’s third runway.

There are various ways to implement betterment levies, and different countries have adopted various models. In the United States, many cities use levies called ‘special assessment districts’. These districts levy a special assessment on the land values and the funds are then used to repay the debt incurred from capital markets.

However, in Australia the Henry Tax Review in 2010 recommended a much more broadly-based property tax on all urban land, including owner-occupied properties. The HTR also said that stamp duty should be phased out.

The relationship between cost recovery for infrastructure and current taxes suggests an interesting point. Which revolves around the fact that as governments collect taxes like stamp duty and land tax based upon land value, those taxes could reasonably be expected to increase and reflect the impact of projects like better transport.

In turn this pushes up demand and usually prices and so the government notionally collects a higher tax, including any capital gains tax, flowing from the infrastructure and does so in perpetuity.

In NSW and most other states there are already an entire range of development levies and contributions from developers and this interrogates how any additional tax, like a density tax should be raised. Parramatta Council have already suggested a tax of 50% on the lift in land values aligned to projects like the regional light rail.

Cost and Equity

These taxes may look equitable on the surface and in isolation that might be true however, when seen against the current total tax mix associated with property and development the case is less clear. Infrastructure delivers a large and ongoing community benefit not only to the local area but to the wider population and open-ended property taxes are then boosted.

We also see user-pays applied to many projects which are then sold to private investors and the funds are notionally recycled into more projects. And in the same vein public money raised from asset sales is applied to infrastructure.

As complex as this is, it does beg the question of equity as any betterment taxes are added to an already high tax burden on the industry. There’s also a further question of the challenge of housing affordability in such a high tax environment.

Isolating the additional levies and taxes only to those who directly benefit is an easy solution, whereas a more broadly-based property tax is a much discussed and more equitable option however this should also involve the elimination of a range of existing taxes. This appears to be a hurdle for most governments, although the ACT is already heading down that path.

While some infrastructure is new, a lot of money is also being spent because services have been allowed to rundown or investments have been delayed, at times for decades, because of political reasons and a lack of long-term planning and these delays greatly inflate costs.

Governments do need sufficient revenue to do all this work however, a betterment tax in isolation may not be the best or only solution.

These taxes have been used in the past even funding the Sydney Harbour Bridge, however the question remains that given the current scale of work being undertaken is there a need for a more holistic solution and perhaps not just another isolated tax?