Introduction

Although there appears to be a broad consensus in the United States that there is a significant and unmet need for additional infrastructure maintenance and improvement, public sources of funding are often insufficient. Therefore, additional sources of infrastructure funding provide opportunities for States, counties, municipalities, and regional authorities to fill funding gaps.

Experience shows that new and improved infrastructure often increases the price of nearby land, promotes density, and can stimulate economic development. High land prices can displace some development away to cheaper, but more remote sites. Once these remotes sites are developed, occupants then demand the extension of infrastructure to these areas (even though there is excess capacity where the infrastructure was initially created or improved). And, once infrastructure is extended to these remote areas, land prices increase and the cycle repeats. The ensuing "urban sprawl" necessitates more driving, creates more impervious surfaces, and disrupts natural ecosystems. Thus, sprawl increases energy consumption and pollution. In addition to these adverse environmental consequences, sprawl is also costly for taxpayers who must pay for the wasteful duplication of expensive infrastructure.^[3]

States are exploring value capture techniques for several reasons. First, they raise needed revenue. Second, if properly designed and implemented, they can help integrate infrastructure investments with land use objectives by encouraging development near existing infrastructure, thereby reducing the sprawl that negatively impacts the environment and taxpayers. Additionally, value capture techniques can enhance equity by operating more like fees than taxes. In other words, they raise revenues from those who benefit from infrastructure in proportion to the benefits received, or from those who demand its expansion, in proportion to the costs imposed.

As States explore value capture, they seek to understand the legal prerequisites and standards applied to these techniques. States hold broad powers to impose taxes and fees^[4], subject primarily to due process^[5] and uniformity requirements in Federal and State constitutions and statutes.^[6] To the extent that a State delegates these powers,^[7] local jurisdictions may also impose taxes and fees pursuant to the delegation and according to the same due process and uniformity requirements. Thus, value capture techniques must meet uniformity and due process requirements. Additionally, under some circumstances, some value capture techniques could be challenged pursuant to the "takings" clause of the Fifth Amendment. In the following sections, this report will explore the legal ramifications of the "essential nexus" test, the "rough proportionality" test, and the but-for test for certain value capture techniques. The final section of this report will explore analytical methods and tools for determining the extent of benefits received (or costs imposed) by properties in order to equitably apportion infrastructure costs among those who benefit from (or impose costs upon) these community-provided systems.

To meet the "uniformity" requirement, a tax applies equally to every subject (person, business or thing) in the same situation.^[8] For example, every similarly situated person or business with identical income and expenses in a jurisdiction will pay the same income tax rate. Every purchaser of a taxable item in a jurisdiction will pay the same sales tax rate applied to that type of taxable good or service purchased. If infrastructure investment is likely to produce benefits of the same general magnitude for everybody, then a tax might be a fair way to raise funds to create, operate and maintain it.

However, if infrastructure investment produces unique benefits for only a few (in addition to or in lieu of general benefits for everybody), then it might be more efficient and more fair to charge these beneficiaries in lieu having all taxpayers subsidize them.^[9] Studies show that transportation facilities and services often confer a special benefit on nearby properties to the extent that these properties end up with enhanced accessibility.^[10] This enhanced accessibility is often reflected in increased land value.^[11] In other words, urban land values typically reflect the access of parcels to local and regional amenities. For example, urban land values typically spike in downtowns near the centers of roadway and transit networks; transportation improvements will typically make more amenities accessible and convenient to parcels that are well-served by those improvements.

Returning publicly created land values to the community ("land value return") is one approach for charging beneficiaries for the special benefits that they receive. To the extent that this approach relies on utilizing a standard rate applied universally to objectively determined land values for all parcels, such an approach satisfies standards of uniformity. This variant of the property tax (applied to land value only) acts more like a fee than a tax to the extent that land values are directly related to public infrastructure improvements. Charges based on land values are proportional to the benefits received.^[12]

Communities might also choose different value-capture techniques, such as a special assessment or tax-increment financing (TIF). Special assessments impose a surcharge on the existing property tax, but only for properties deemed to receive a special benefit from new or improved infrastructure. Because a special assessment is applied to some properties and not to others outside of the district, it might raise the issue of uniformity. Jurisdictions using special assessments take care to comply with the principles of uniformity and due process when seeking compensation for publicly created benefits conferred on particular properties. They also make findings that infrastructure projects provide identifiable special benefits to the properties subject to the assessment and that the assessment itself is proportional to the benefits received or costs incurred.

Another approach to value capture when infrastructure creates a special benefit is tax increment financing. Unlike special assessments, TIF does not impose a special or additional tax burden on properties that benefit from transportation improvements. Thus, TIFs are not typically challenged in court by affected property owners. In fact, property owners often advocate for TIF creation.^[13] But TIFs segregate some revenue from a community's general fund in a dedicated account for specific infrastructure improvements, and for this reason, some enabling legislation might constrain the application of TIFs to "blighted" areas where development would not otherwise occur but for the improvement of nearby infrastructure.^[14] This report examines the state of the practice regarding the but-for test.

Whereas some types of infrastructure creation or improvement might benefit some properties more than others, sometimes private development might create unfair burdens for others. In a jurisdiction where the variable costs associated with water and sewer services are paid for by a per-gallon fee, and fixed costs associated with facilities (pipes, reservoirs, and purification plants) are paid for by a fixed percentage applied to ad valorem property taxes, if there is excess capacity in the system and new development occurs in the existing service area, the per-gallon fees for water consumption and sewage production in the new development will cover the variable costs. The new development's generation of revenue for fixed costs is likely to be negligible in terms of the entire system. This is not a problem if this development is primarily using existing pipes, reservoirs, and purification plants.

But in a jurisdiction where the water and sewer treatment systems are at full capacity, new development will require new treatment facilities to avoid system failure. This is similar to new development in a rural area where municipal water and sewer pipes must be extended across miles of farmland to reach the proposed development. In each case, the per-gallon fees generated by the new development cover its share of variable operating costs, but its negligible generation of revenue for fixed costs does not come close to paying for the new treatment facilities or mainline pipe extension (or even for its share of the new facilities, assuming that capacity is greater than required for this one new development).

In this case, the fixed percentage applied to ad valorem taxes dedicated for water and sewage capital expenditures could be increased, the rate of ad valorem taxes could be increased throughout the jurisdiction, or the per gallon fee could be increased to cover new capital costs. Under these three approaches, all taxpayers pay for increasing system capacity although this expenditure is necessary only to accommodate the new development. In other words, a system of general taxation requires the occupants of a new development to pay a small share for essential facilities while most other taxpayers end up paying more for new facilities that provide them with little or no benefit. Thus, payment for new capacity out of general revenues constitutes a subsidy to the new development, raising issues of equity and fairness.^[15]

In the special assessment and TIF example, a jurisdiction's infrastructure investment created a special benefit for some property owners. The infrastructure needed for new private development is imposing a cost on the community that will exceed its share of general taxes paid. In such circumstances, to avoid an unfair and unintended subsidy to new development, jurisdictions might demand that developers provide specified public facilities, dedicate land for such facilities, or pay cash for their fair share of such facilities as a condition for development permit approval. These demands are referred to as "exactions." Some jurisdictions negotiate exactions on a case-by-case basis.^[16] Some jurisdictions have adopted formal calculations to determine the appropriate cash payment for offsite infrastructure improvements necessitated by various types of new development. These are often referred to as development impact fees.^[17]

Exactions are cash or in-kind infrastructure required of developers in return for development permits. Although exactions could be described as cost reimbursement or cost avoidance, exactions have induced some property owners to claim that the implementing jurisdiction has taken their property without just compensation. Lawsuits brought by property owners are often referred to as "inverse condemnation." Under condemnation, a government agency uses its eminent domain power to initiate a judicial proceeding to obtain private property for a public purpose and with just compensation (as determined by a court) pursuant to the Fifth Amendment. Under inverse condemnation, the property owner initiates the proceeding, claiming that the government has taken property through over-regulation and must be required by the courts to pay compensation. Supreme Court opinions on such cases have given rise to the essential nexus and rough proportionality tests that are the subject of the next section.