Infrastructure investments are primarily public sector driven, with governments playing a predominant role. While there are public projects that involve multiple stakeholders, infrastructure projects such as highways and water supply are
natural monopolies where governments like to maintain control to prevent abuse of monopoly power. At the same time, infrastructure investments have an inherently public good character as services generated by infrastructure facilities are accessible to large sections of society. Their
indirect externalities benefit the economy as a whole.
Infrastructure investments have an inherently public good character as services generated by infrastructure facilities are accessible to large sections of society.
Beyond the implicit and explicit set of positive externalities, publicly facilitated infrastructural networks, particularly in urban areas, influence the
spatial configuration of economic activity as private investment decisions of households and firms are determined by transport networks. Subsequently, publicly-funded infrastructure facilities influence land values or prices and land-use patterns in urban areas. In the context mentioned above, this article looks at the potential role of value capture taxation or land value capture as a public policy tool to address social, economic, and ecological challenges related to land use planning in urban areas.
What is value capture taxation?
Value capture is based on the rationale that the beneficiaries of transport investments are not limited to direct users (e.g., motorists, transit riders, etc.)
but also include landowners and developers who benefit from enhanced location advantages. Value capture taxation policies thus aim to recover the value of benefits received by property owners or developers due to infrastructure improvements and use these revenues to fund such improvements. In other words, the land values
reflect the value of public infrastructure investments that benefit particular locations. These values must be returned to the public treasury in the form of taxes as
public expenditures primarily create them in the first place.
Value capture taxation policies thus aim to recover the value of benefits received by property owners or developers due to infrastructure improvements and use these revenues to fund such improvements.
American political economist
Henry George first proposed the land tax in the 19
th century to eliminate land speculation. The underlying idea of introducing such a tax was that
imposing higher taxes on land and reducing taxes on structures brings down land prices and encourages compact development as land owners pass their vacant land to land developers to avoid taxes. Since then, land value tax as a policy instrument has been used in different parts of the world with various incentives for sprawl management, efficient land use planning, reducing land prices, generating revenues for infrastructure development, etc.
Effect of land values on urban land prices
Land value or
land rent is a land price component influenced by locational differences. For instance, a piece of land within the city centre may hold a higher land value than a piece of land along the outer limits of urban areas. The variation in land value or land rent due to locational differences is influenced by levels of social, physical, and ecological development indicators. These include access to commercial spaces, educational, and healthcare facilities; proximity to transit corridors (such as roads and highways) and other giant infrastructure projects like airports and ports; and neighbourhood and environmental quality.
Land values, thus, reflect the values of public goods and services available to that particular site, including the accessibility provided by transportation networks.
Housing property prices across major Indian cities are expected to rise by approximately
6 percent in 2023 and 2024. While major hubs such as Mumbai and Delhi continue to register a steep rise in prices and rent on properties, metropolitan centres like Hyderabad, too, have experienced nothing less than at least a
five-fold increase in land prices around upcoming highways. Gurugram, a financial and technology hub located in the Delhi National Capital Region, has seen close to an average of
triple-digit growth in land prices in the last couple of decades, with localities near the Golf Course Road and MG Road being some of the most expensive areas in the district.
Funding essential urban infrastructure services
Transit enabling urban density also spurs the need for infrastructure financing for essential urban services. Transit corridors incentivise centres of economic investments, real estate growth and other commerce and business activities, which in turn create demand for services such as water supply, sanitation, sewage, electricity and gas distribution, etc. Concomitantly, urban densification again creates pressure on resources, particularly land; this scarcity is directly linked to the price of land or land value. Land values, thus, reflect the values of public goods and services available to that particular site, including the accessibility provided by transportation networks. Private landowners who benefit from an increase in land values due to public investments tend to hold out their landed properties in expectation of better prices in future, leading to speculation. As more landowners hold out their landed properties,
an artificial scarcity of developable land increases land rents and prices. Such artificial scarcity drives people who cannot afford land around public infrastructure to move towards the peripheral areas or other inexpensive areas. The cycle is repeated with additional demand for urban infrastructure services, including the extension of highways and transportation corridors.
Land values: Social and ecological effects
The rise in land prices around growth centres and subsequent demand for land in peripheral areas leads to a phenomenon called ‘
leap-frog development’ or ‘
urban sprawl’. ‘Leap-frog development’ or ‘urban sprawl’ is
discontinuous development often characterised by segregation of land use and low average density. Urban sprawl results in higher land consumption with segregated land parcels sealed for housing, industry, and other recreational purposes. It deters compact development and increases the costs of infrastructure and community services. It also leads to energy resource depletion and roadway congestion. More generally, urban sprawl and dissected land-use patterns have a negative ecological impact with consequences for loss of biodiversity, agriculture, forest, and natural land.
Urban sprawl results in higher land consumption with segregated land parcels sealed for housing, industry, and other recreational purposes.
Dispersed land use and rise in land prices also have social consequences as they create a bottleneck for a higher supply of affordable housing. Moreover, urban sprawl caused by rising land-use prices also leads to social segregation as lower-income groups move away from high land rent locations and seek housing or rental properties in city suburbs or other peripheral areas with low land prices. With longer travelling distances between economic centres located within core city areas and city suburbs, the lower-income groups tend to pay higher for transportation services. Thus, the lack of availability of land that can be developed and dispersed land use spurred by urban sprawl impedes socially and ecologically sustainable urban development.
Conclusion
Publicly funded infrastructure investments, be it roads, highways, or other transit services such as intra-city rail systems, considerably influence nearby land values. These tend to benefit a select few land owners over others and also, depending on buying capacity, affect the affordability of land across income groups. The accompanying economic development opportunities brought about by transit corridors tend to drive up land prices, often to excessive levels, much beyond the reach of middle- and low-income groups. Apart from economic consequences, segregated land use development patterns spurred by rising land prices in core city areas deepen the existing urban inequality in social and spatial aspects. In effect, taxing land values through various value capture instruments can be one way to address urban land use challenges. Across the world, cities have used these instruments with varying degrees of success, and there have been attempts in India also to strategise value capture financing. Given vast differences in city planning and urban land use patterns, there are no one-size-fits-all approaches to implementing such taxes. Yet, experiences account for the fact that land value taxes, when introduced with specific enabling institutional mechanisms, can prove to be helpful.
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