02 May 2010
What the report says …
In general, infrastructure charges will operate more effectively if they are set to reflect the cost of infrastructure, not to tax the profit of development.
Applying infrastructure charges through use of simple flat prices that do not well approximate actual avoidable costs can sometimes reduce housing supply. Where the charge exceeds the cost of providing infrastructure, it acts like a tax and can discourage development. This is more likely to occur where the size of the charge is not set relative to the cost of infrastructure but the developer’s capacity to pay. In these cases, the charges may attempt to capture part of the increase in value resulting from the provision of infrastructure or from changes in zoning, that is, to impose a betterment tax …. However, the benefit to the developer is difficult to determine, and attempting to set charges on this basis can lead to negotiations that are protracted and non-transparent.
… betterment taxes can increase the uncertainty associated with land development. To operate effectively, betterment taxes need to isolate the increase in value attributable to the zoning decision or the building of infrastructure from general land price increases at the local level. This is often difficult since the value of land will move in anticipation of a change in re-zoning. Sometimes this can occur many years before the re-zoning.
Betterment taxes may be applied on an ad hoc basis and the rate of the betterment tax is sometimes left to discussions between developers and government as part of the planning approval processes, rather than being set in a transparent manner. Betterment taxation can involve lengthy disputes as, by setting the tax conditions, the dispute is really about how to share the economic rent.
Additionally, having a betterment tax in place may encourage governments to create economic rent through additional zoning restrictions or delays in land release, in order to raise more revenue. Where zoning is used in such a manner, it is likely to stop land being devoted to its most productive use – at least in the short run. A land tax applied to all types of land …, is likely to encourage governments to allow land to be used for its most productive use as this will increase the value of the land (and hence increase the revenue raised from land tax).
What the Urban Taskforce says …
The report exposes the fact that many so-called “infrastructure charges” are, in fact, merely thinly disguised betterment taxes.
We welcome the report’s clear statement that infrastructure charges should not be about taxing the profit of development. This will undermine many so-called infrastructure levies imposed wlily-nilly by local councils.
Local councils have been loading up infrastructure levies with non-essential capital projects merely to “capture” perceived developer profits. This process has killed projects, because without profits there is no incentive for the private sector to build. If government acts on this aspect of the report, there will need to be a major re-think of the existing approach to development levies.
