List of Figures
Most taxpayers pay for infrastructure creation, operations, maintenance, rehabilitation, and replacement through taxes. However, funding infrastructure with general taxes leaves consumers oblivious to the consequences of some of their actions and creates no incentive for adjusting behavior in relation to the costs and benefits of public goods or services being consumed.[92] Value-capture techniques (user fees, impact fees, and access fees), however, inform consumers about the impacts of their consumptive behavior and motivate behavior changes that takes those impacts into account.[93]
Value capture techniques, because they are more like fees (prices) and to the extent that they are properly designed and executed, can mimic market transactions, thereby generating revenue while simultaneously internalizing externalities, creating market incentives to encourage more responsible and efficient use of public resources.[94] In this way, they also create economic incentives for more efficient and responsible land use decisions.[95] In particular, this section suggests that life cycle asset management budgets, fiscal impact analysis, real estate professionals and computer-assisted mass appraisal (CAMA) software programs can provide a basis upon which to satisfy the "nexus" and "proportionality" legal tests for various exactions and special assessments. These activities can also provide a foundation for developing an array of value capture techniques, including those related to land value return, that can simultaneously raise new revenue while also motivating infrastructure consumption and land development behaviors that minimize resource consumption, pollution and per capita tax burdens while enhancing affordability (for both residents and businesses) and economic vitality (employment).[96]
After the end of World War II, appropriations from Federal and State governments began laying the groundwork for the Interstate Highway System, expanded municipal water and sewer systems, and funded other infrastructure networks that facilitated suburban development.[97] Because the infrastructure was new, operations and maintenance expenses for the local governments were relatively small. This allowed suburban jurisdictions to impose relatively modest taxes and maintain balanced budgets. But, as the infrastructure aged, operations and maintenance expenditures began to rise. And, according to the nature of particular infrastructure assets, periodic rehabilitations are undertaken until system replacement becomes necessary. When rehabilitation and replacement spending spikes occur, Federal funding is typically not available, state budgets are often tight and local revenues might be insufficient.
As suburbs grew, excess infrastructure capacity began to shrink until it was nonexistent. New development, at that point, was very expensive because its tax revenues, while sufficient to meet its share of variable operating expenses, were not sufficient to pay for infrastructure capacity expansion. During this time, development impact fees were created to help ensure that new development would pay for its share of new infrastructure capacity.[98] While this was a step in the right direction, it's difficult to see how a one-time payment for capacity expansion will adequately compensate the jurisdiction for infrastructure facilities that are a perpetual fiscal liability.
Going forward, communities can develop comprehensive life-cycle budget schedules for key infrastructure assets. They can also perform fiscal impact analyses to determine the revenue per acre generated by potential future development scenarios and compare them to the life-cycle infrastructure costs per acre in various locations. Such analysis might reveal that low-density development, is not able to sustain the substantial life-cycle infrastructure costs that it incurs.[99]
Lifecycle budgets for infrastructure combined with fiscal impact analysis can provide the basis for exactions, including development impact fees, that satisfy legal requirements for essential nexus and rough proportionality. A number of jurisdictions have also developed detailed ordinances, procedures and manuals for computing development impact fees. For example, here are the section headings for a development impact fee ordinance in Blaine, Washington:[100]
To the extent that impact fees increase the cost of development where necessary infrastructure is lacking, they can help discourage sprawl and the premature development of rural areas that are more appropriate for agriculture, conservation, and recreation. They encourage transportation and infrastructure efficient development patterns using market incentives.
Local value capture revenues (user fees, impact fees and land value return) could be calculated to cover both annual variable operating costs as well as periodic capital expenditures for rehabilitation and replacement.[101] Cash flow peaks and valleys could be smoothed out by appropriate financing techniques. But it is important to remember that bonds and other debt instruments are not sources of funding. They are sources of financing. The future taxes and fees that pay off any debts incurred are the sources of funding.
Today, many residents pay no fees to drive and park on public streets, even if they are congested. If distance- and congestion-based roadway user fees and performance-based parking fees were more used more extensively, economic incentives (to minimize payment of these fees) would encourage residents to locate homes closer to daily activities, encourage business owners to locate stores and offices closer to typical customers and employers, and to generate support for transportation facilities and services that could substitute for single-occupancy vehicles.
Today, infrastructure-created land values are primarily a windfall to owners of well-served sites.[102] A desire for these windfalls is the fuel for land speculation. Land speculation is the acquisition of land, not for the sake of using it, but for the sake of holding it until it appreciates in value. Land speculation (the buying and selling of land) creates nothing of value. But withholding land from development creates an artificial scarcity of land available for development. This artificial scarcity results in real increases in land prices, particularly at prime sites (sites near infrastructure amenities). These high land prices then drive development to cheaper, but more remote locations. Thus, infrastructure investments intended to facilitate development result in higher land prices that drive development away from infrastructure, exacerbating urban sprawl. Sprawl damages the environment, wastes energy, and necessitates the wasteful and expensive duplication of infrastructure facilities.[103]
Therefore, in addition to user fees and impact fees, land value return techniques could be key components of a value capture strategy. Land value return techniques include:[104]
Unlike exactions and impact fees that entail accounting for infrastructure costs, land value return techniques entail accounting for infrastructure benefits. With regard to special assessment districts, long-term leases of land or air rights, and joint development agreements, State and local governments could utilize real estate assessors, appraisers, development analysts and other professionals with similar skills to determine the geographic extent and intensity of infrastructure-related land value uplift. Additionally, enabling state legislation could be created to transform the traditional property tax into a land value return fee for an entire jurisdiction. Use of computer-assisted mass appraisal software systems would facilitate this approach. Such systems have regression modules that can apportion total property value to its building value and land value components. This multiple regression analysis could also be used to determine how much individual infrastructure systems contribute to total land value, and this could be a factor in allocating land value return revenue among the infrastructure systems and agencies.
Although computer-assisted mass appraisal systems can be powerful analytical tools, households and individuals evaluate the difference between building values and land values whenever they purchase or rent a home. When a family is looking for a home, it typically narrows the search to characteristics such as number of bedrooms, total area, yard size, architectural style, and building condition. Families typically find many examples of houses or apartments that meet their criteria, but that sell or rent for vastly different prices depending on their location. Given that the physical buildings and yard sizes are similar, the primary factor in these price differences is related to the value of the land in different neighborhoods. Thus, while property assessment and appraisal is a technical endeavor, regular people understand it and make significant financial decisions based on their own understanding of these factors.
By returning infrastructure-created land values to communities, the following objectives can be achieved:[105]
Thus, instead of infrastructure investments chasing development away to cheaper, but more remote sites, infrastructure investments will attract development, resulting in more compact development patterns that are less impactful on the environment and that can be served by more efficient (less extensive and less expensive) infrastructure networks.
As shown above, appropriate user fees, impact fees and access fees (land value return) in a balanced combination, would not only raise revenues, but would also reduce costs by encouraging more compact development that requires less infrastructure per capita.
[92] Rick Rybeck, "Funding Long-Term Infrastructure Needs For Growth, Sustainability & Equity" (DC Tax Revision Commission) 2013.
[93] Id.
[94] In the context of user fees, when somebody has a leaky faucet and pays for water with a per-gallon user fee, they don't see water going down their drain, they see money going down the drain, which motivates them to fix the leaky faucet. We could pay for water with a sales tax or income tax, but this wouldn't motivate people to fix leaky faucets. In the context of impact fees, they discourage development where infrastructure is lacking (or at least obtain payment for the additional infrastructure capacity required). Likewise, in the context of infrastructure access fees, returning publicly created land values to the community encourages the development of high-value sites where infrastructure amenities are abundant.
[95] Rick Rybeck, "Funding Long-Term Infrastructure Needs For Growth, Sustainability & Equity" (DC Tax Revision Commission) 2013 at http://media.wix.com/ugd/ddda66_d46304b5437c178e2f092319a6f30364.pdf. See also Rick Rybeck, "Financing Infrastructure with Value Capture: The Good, The Bad & The Ugly," at https://www.strongtowns.org/journal/2018/2/20/financing-infrastructure-with-value-capture-the-good-the-bad-the-ugly/.
[96] Id.
[97] "Our Nation's Infrastructure," Hearings of the Joint Economic Committee, Senate Hearing 98-647 Aug/Sept 1983 (GAO) 1984, Statement of Hon. Norman Rice, pp 367-368. See also, James P. Pinkerton, A Vision of American Strength: How Transportation Infrastructure Built the United States, (American Road and Transportation Builders' Association) 2015, pp 98—105.
[98] Peter N. Brown, City Attorney, Graham Lyons, Deputy City Attorney, City of Carpinteria, "A Short Overview of Development Impact Fees," League of California Cities Continuing Education Seminar, February 27, 2003 at https://www.ca-ilg.org/sites/main/files/file-attachments/resources__overviewimpactfees.pdf.
[99] Joe Minicozzi, The Economics of Land Use in Florida, March 11, 2020. https://1000fof.org/wp-content/uploads/2020/03/U3-1000-Friends-3-11-20F-web.pdf.
[100] Blaine Municipal Code at https://www.codepublishing.com/WA/Blaine/html/Blaine03/Blaine0380.html (accessed January 13, 2021).
[101] Joe Minicozzi, The Economics of Land Use in Florida. Slides 244 to 255 show cascading spending requirements for a jurisdiction's capital budget based on construction costs and out-year rehab and replacement costs for roadway segments constructed at different times. https://1000fof.org/wp-content/uploads/2020/03/U3-1000-Friends-3-11-20F-web.pdf.
[102] Rick Rybeck, "Avoiding Mis-Givings: Recycling Community-Created Land Values for Affordability, Sustainability and Equity," Journal of Affordable Housing and Community Development Law, Vol 28 No 2, p. 299, October, 2019. https://www.americanbar.org/content/dam/aba/publications/journal_of_affordable_housing/Volume28_Number2/ah_journal_10_18_19.pdf.
[103] Rick Rybeck, "Financing Infrastructure with Value Capture: The Good, The Bad & The Ugly." https://www.strongtowns.org/journal/2018/2/20/financing-infrastructure-with-value-capture-the-good-the-bad-the-ugly/.
[104] NCHRP Report 873, Guidebook to Funding Transportation Through Land Value Return and Recycling, p 17. http://www.trb.org/Main/Blurbs/177574.aspx.
[105] NCHRP Guidebook to Funding Transportation Through Land Value Return and Recycling, Appendix E.
