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Legal

Value capture techniques require local legal authority to collect revenues. Each technique may require State enabling legislation. However, in the broadest sense any value capture technique must meet the following basic legal requirements:

• Uniformity where the same tax or policy applies equally to every subject (person, business, or thing) in the same situation⁶;
• Avoid challenges pursuant to “takings” under the Fifth and Fourteenth Amendments to the U.S. Constitution; and
• Adhere to State and local laws and requirements including but not limited to how districts and zones are defined, the placement and location of sponsorship signage, uses of funds, and revenue collection.

Uniformity could be an area of concern as taxes or fees should be applied equally and value capture can give the appearance of treating some properties or taxpayers differently from others. Value capture is used when infrastructure investment is likely to produce benefits that are distributed unequally, resulting in much greater benefits for certain individuals or groups than others. In these cases, it is fairer and more efficient to have these beneficiaries contribute a share of cost proportional to their share of benefits than to have all taxpayers subsidize them. If the amount collected through value capture can be demonstrated to be proportional to benefits received, it will typically meet the legal standard of uniformity as well as takings. Another way to meet uniformity is to demonstrate that the money collected through value capture returns publicly created land values to the community (“land value return”) and is one approach for charging beneficiaries for the special benefits they receive.

There are three critical tests that an implementation must pass to avoid legal challenges from violations of uniformity or as takings under the Fifth and Fourteenth Amendments: “essential nexus”, “rough proportionality”, and “but-for” tests (Table 2). These tests can and should be applied together to determine: (1) if there is an established relationship between the infrastructure and the development, (2) if the value capture is proportional to the impact, and (3) will development occur without the infrastructure improvement.

Legal research, following local examples, and analysis of proposed value capture implementations and uses of funds are important to remain in compliance with local requirements. Additional legal information for the basis of these tests can be found here: “Essential Nexus, Rough Proportionality, and But-For Tests: State of the Practice” report.⁷

Table 2 : Legal Tests for Value Capture

Legal Test	Description
Essential Nexus	For any type of exaction or special assessment, a nexus, or relationship between the development and the infrastructure must be established. This nexus test provides the assessing jurisdiction the validity to use these value capture techniques through demonstrating the benefits the infrastructure provides to private developments.
Rough Proportionality	Private development has impacts on infrastructure and can be required to remediate or mitigate those impacts. To be equitable, the burden should be “roughly proportional” to the impact being mitigated.
But-for	The but-for test establishes the case that: (a) the proposed infrastructure project is necessary to generate increased economic activity and tax revenues for the district; and (b) the economic development would not occur in this location without the project.

Footnotes

⁶ Legal Information Institute, “Uniformity Requirement.” https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-1/uniformity-requirement.

⁷ “Essential Nexus, Rough Proportionality, and But-For Tests: State of the Practice.” https://www.fhwa.dot.gov/ipd/pdfs/value_capture/rational_nexus_and_but_for_study_state_of_the_practice_report_final_05122021.pdf

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