Many people understand that we are not even maintaining our existing transportation infrastructure, much less improving it. However, that isn’t translating into political willingness to raise more money by increasing long-established taxes, such as the state-level gas tax or local-level property taxes.
At a political impasse like this, with needs that are clear but without any consensus on how to meet those needs, finding a new funding source is an inevitable impulse.
Enter “value capture.”
This tax starts with the economic fact that many government actions, in this case transportation improvements, often increase the value of private property. Look at what has happened to property values in towns like Worthington or Fairmont, both on a major interstate highway, compared with those in other county seats, like Ivanhoe or Slayton, that are distant from a freeway. Or consider the increased prices of land and buildings along Hiawatha and University avenues as a result of light rail lines.
Capture some of that increase in value and most citizens don’t have to pay more — only those whose net worth in the property benefits.
That’s the idea anyway. From the point of view of the economic theory of government finance, it has much to recommend it. But there is many a slip between theory and practice, and that is particularly true in this case.
So the Center for Fiscal Excellence (www.fiscalexcellence.org) has done society a favor by publishing a report analyzing some of these knotty details.
Before broaching these details, let’s review some basic economic ideas in public finance.
One is the “correspondence principle,” which is often explained as “benefit matches constituency.” For example, one should not impose a tax on people in St. Paul to fund a program that benefits others across the entire state. But neither should people across the entire state be taxed to provide a benefit available only to St. Paul residents.
The area may be defined in political jurisdictions. For example, looking back to how the old Metrodome was funded, should diners in Kittson County pay a tax on their meal to fund a football stadium in Hennepin County? Obviously not, most people would say. But what about Ramsey County, where many people attending football games might stay and eat? It may also be defined spatially — should a bar serving drinks more than 30 miles from a stadium, say in Hastings, have to remit the same sales tax for the stadium as one in Roseville, only six miles away?
And what about people who don’t benefit from the stadium at all? Summer tourists visiting the Twin Cities, say. Why should they pay?
Obviously, this principle is often flouted. If really observed, there would not be any federal funding for things like light rail that have purely local benefits. But it remains a useful ideal.
The second idea is that of the “burden” of a tax. The burden is the total cost to society. This includes not only the money actually paid in for the tax itself, but also the costs of administering it and compliance by taxpayers, plus the losses caused by any incentives toward economic inefficiency generated by the tax.
The amount by which this total burden exceeds the revenue received by government is the “excess burden” of a tax. Ideally, this excess burden should be as low as possible. For that to happen, administration and compliance should be simple. Distortionary incentives should be small.
Now consider a “value capture” tax. As the Center for Fiscal Excellence’s report explains, quantifying how much any particular property increases in value because of a new road or bridge is very difficult. Myriad factors can change property prices. Separating out the particular effect of just one is daunting.
Moreover, while some property owners benefit from improved roads or bridges nearby, others see the value of their property go down. If increased value is to be captured, should value losses be compensated?
Moreover, just how distant should increments in value be estimated? Adding capacity to an arterial freeway feeding a central business district produces some benefit for all commuters using it, and not just those living immediately adjacent. It may even benefit those using parallel alternate routes, as might happen if increased capacity on Highway 52 pulled some Dakota County commuters away from Interstate 35E. But the degree to which these faster commutes boost the value of housing or commercial property is very unclear. Trying to meet the goal of correspondence is very difficult.
The administrative costs of estimating all these increases in value in an accurate and defensible manner could be very high, thus boosting the new tax’s excess burden. Using hard and fast guidelines and inflexible procedures reduces costs, but increases inaccuracy and unfairness.
Moreover, creating any new tax requires a new bureaucratic structure to administer it. Inevitably, there are political pressures to add special provisions to correct some actual or perceived injustice or to motivate some desired behavior. We have seen this happen with our state sales tax, one of the most complicated in the nation, and with local property taxes.
Such complication increases excess burden, both in terms of direct administrative costs and because of perverse incentives inevitably created by increasingly detailed provisions.
Finally, as the report emphasizes, we already tax increased property values, over time, through local taxes on real estate. Property values along University Avenue are higher than a decade ago because of light rail, and so are the taxes on these properties.
The devil is always in the details. While “value capture” in the abstract is exciting much interest, there are many knotty problems once you get to specifics. It becomes increasingly clear that its greatest lure is possible political acceptability, not its economic efficiency. This should lead us to question why increasing revenue from existing taxes is off the table. It is not that spending on transportation infrastructure is at some new and extreme level. As a fraction of the total value of state output, it is below what it was at many times in the past. What has changed is citizens’ willingness to tax themselves. That is the root problem, and no gimmick is going to change that.