Transport Funding

Innovative Transport Funding

Dave Wetzel FCILT

Because of the need for taxpayer subsidy many transport infrastructure projects are delayed, never implemented or built to a minimum standard that does not capture the full potential that a higher standard project might achieve.

This approach by Governments is understandable as their source of income is taxes on the production of wealth such as taxes on income; sales or company profits. Thus transport projects have to be financially beneficial in terms of greater transport efficiency but in addition, they have to finance the dead-weight loss to the wider economy as taxes on the production of wealth reduce GDP, increase unemployment and have a relatively high cost of collection.

One alternative is higher user fees for both rail and road projects. These have their own drawbacks as the higher the fees fewer people or businesses are inclined to use the new infrastructure. e.g. high tolls on a new road bridge river crossing will deter some users. These users may decide not to make the journey at all or to take the original longer detour wasting time and fuel, increasing pollution, risks of accidents and increased Co2.

On occasions we might wish to employ user fees to suppress demand e.g. The London Congestion Charging Scheme (CCS) reduces vehicular traffic, reduces congestion, reduces pollution/Co2 etc. encourages efficient use of vehicles and leads to greater use of public transport in the urban environment. However, because of the high cost of collection, congestion charging should never be introduced as a desirable method for raising revenue (In London 40% of CCS revenue is spent on operating costs including cameras, computers, signage, advertising, call centres, admin for penalties etc).

Most Public Private Partnerships (PPPs) have proven to be a costly mistake in the UK. Private companies have a legal duty to maximise profits for their shareholders so it should be of little surprise that once they have a signed a      30-year contract as in the case of the London Underground they use their monopoly position to avoid competition and award contracts within their own consortia at much higher costs. There may be "political" reasons for imposing PPPs e.g. off Government balance sheet funding (borrowing), impression that the private sector is better able to control project costs than public officials and security that the contract can give to the operator that the PPP funding locks-in a project contractually so that the whims of Government stop-go funding are avoided but even just the higher private sector borrowing costs (when compared to Governments usually able to borrow at much cheaper rates) means that for these marginal benefits PPP can be a very expensive exercise indeed. With regard to the PPP for the London Underground the PPP was a complete costly failure and the entire renewal programme is now managed in-house with private contractors competing for the work, project by project.

But there is a better alternative.

It’s easily recognised that with a new rail project for example, rail users benefit and where the improvement encourages a transfer from road to rail, road users also benefit with quieter roads than would otherwise be the case. Businesses usually also benefit from having a wider pool of staff to employ and a wider pool of customers and clients. However there is one important beneficiary who is seldom mentioned.

We know from many international studies that where a new rail line (or road) is built the access points (rail stations or road junctions) become desirable locations and the landowners in those areas are able to increase their rents. For taxpayers who own their freehold they achieve a huge financial windfall because of their higher asset value but for tenants (business and domestic) they get a double hit - they've paid their tax for the new infrastructure but now they face a rent rise from their landlord - this is iniquitous!

So instead of raising fares or taxing wages and trade - why don't we tax land values? Land is a free gift of nature intended surely for the benefit of all? 

An annual Land Value Tax would not only provide a sustainable source of finance for transport infrastructure but would reduce land hoarding, land speculation, empty sites and empty buildings as landowners seek to gain an income from their valuable urban sites. This would reduce the cost of land, allow governments to reduce taxes on production and thus grow GDP and reduce unemployment. 

Surely a "No-Brainer" in most people's language?

In London we know that the extension of the Underground's Jubilee Line (JLE) to Stratford cost £3.5billion and led to a land value increase of £13billion within a 1,000-metre radius around the eleven new stations. Of course, the JLE caused land values to increase in other areas also, especially on transport corridors that enjoy direct links to the eleven new stations.

With this clear example, when we were arguing for the Government to fund the proposed CrossRail project (now being built for opening in 2018) we argued for an annual Land Value Tax (LVT). The Government of the day would not contemplate a new tax but conceded the argument re increasing land values and allowed the Mayor to levy the CrossRail BRS (Business Rate Supplement) on larger businesses in London (business rates being the UK property tax on business premises) which will raise £4bn towards the £16bn cost of the project. Indeed, in recent discussions with the former Chancellor's (UK Finance Minister) political adviser at the time, he told me that the Treasury would never have allowed the project to proceed unless this innovatory form of funding had been suggested.

The sad irony is that CrossRail will increase land values along the length of its route including the considerable number of stations outside London as it links Shenfield, in Essex and Abbey Wood in the east to Canary Wharf, the City, the West End to Heathrow and Maidenhead in the west and yet these additional beneficiaries will make no contribution to the project which is going to enhance the value of their land. Had we a system of annual Land Value Tax in place, instead of tortuous negotiations over many years, the CrossRail project could have been completed and served last year's Olympics. Even now, to keep within the tight budget, many opportunities to widen the scope at stations and increase the true transport value of the project are being lost. As all of these additional improvements would have also increased land values they would have been readily adopted under a Land Value Tax funding system.

The increase in land values created by a new transport project is a very accurate assessment of the value that the community actually puts on that project. So that, once a record of changing land values over many years is established then the measurement of the increase in land values that a proposed transport project will generate can be used as a far more accurate planning tool than present models based on theoretical time savings.

Bur not all railways raise land values. Imagine a railway built in a desert between two points with no water, no population and no mineral resources in the ground. This railway will have no customers and no effect on location values. Similarly, if London's new CrossRail project only operated one train a day, the effect on land values would be zero. So used as a planning tool, LVT can provide guidance not just on the most desirable route but also the optimum train frequency which may also effect the design.

Even if Governments and economists choose to ignore the benefits of annual Land Value Taxation, there is no excuse for transport planners and practitioners not to explain to the wider world that the result of their professional expertise being put into practice is a free, unearned gift to landowners.

 DaveWetzel42@gmail.com  17 May, 2013