There seems to be a unanimous view that New Zealand needs more and improved infrastructure. From roads to three waters, every council has a wish list of projects to support service delivery and provide for growth. By Mike Doesburg, Partner at Wynn Williams, specialising in local government and environmental law.
However, infrastructure is expensive and someone needs to pay for it. A solution that has attracted attention recently is the concept of value capture. It has been considered in papers commissioned by government organisations and commissions, was being seriously considered alongside the now disbanded Auckland Light Rail project and features in the Coalition Agreement between the National and Act parties. This article explains what value capture is and explores some of the arguments for and against the controversial funding tool.
Value capture explained
Value capture refers to methods of public financing that recovers some or all of the value that public infrastructure generates for private landowners. Value capture is essentially a tax on the increase in land value that results from public investment in infrastructure.
Value capture can take many forms, including targeted rates, betterment taxes or tax-increment financing (apparently popular in the United States).
For example, in Victoria, Australia, landowners that receive an uplift in value of more than A$100,000 following a planning scheme amendment are liable for “windfall gains tax” (payable on sale of the land or 30 years after the rezoning, whichever occurs first).
Value capture already exists here
At the outset, it is important to recognise that value capture already exists in New Zealand. Most councils levy rates based on land value. If land value increases as a result of infrastructure delivery, so too does the rate take – the value is captured (albeit indirectly).
A large proportion of growth-related infrastructure is funded through developer contributions under the Local Government Act 2002. That mechanism effectively captures value by requiring those that cause growth to contribute to funding the necessary infrastructure.
Section 326 of the Local Government Act 1974 empowers councils to recover increases in land value resulting from new or widened roads. If a council acquires part of someone’s land for the formation or widening of a road and the remaining land increases in value by more than the cost of the land acquired, the council can send the dispossessed landowner a bill for the difference.
It is no surprise that this power is rarely used – compulsorily acquiring land and then forcing the landowner to pay for the pleasure is difficult to justify politically. Compounding the sense of unfairness, section 326 only applies to people a council acquires land from – it cannot be used to capture value from other benefiting landowners.
Under the Urban Development Act 2020, Kainga Ora has similar powers as councils to require betterment payments when forming or widening roads, or building public transport infrastructure.
Considerations for and against value capture
In my humble view, the best argument for value capture is that, if implemented well, value capture would increase infrastructure funding in an equitable way – taxing those that directly benefit from public investment will help fund essential projects while more fairly distributing the funding costs.
An often-cited international example is London’s Crossrail project, with approximately 35 percent of the £18.8 billion project cost funded by value capture sources.
However, the key is the qualifier “if implemented well”. If implemented poorly, value capture may unintentionally discourage development in proximity to infrastructure, distort property markets or exacerbate housing unaffordability. Good implementation will be complex – opportunities will need to be carefully considered and the potential value creation and value loss for stakeholders accurately assessed.
Targeted rates are a key mechanism for councils considering “new” value capture opportunities. While recent decisions like the Supreme Court’s findings in Auckland Council v C P Group Ltd [2023] NZSC 53 and the Court of Appeal’s decision in New Zealand Forest Owners Association Inc v Wairoa District Council [2023] NZCA 398 may encourage councils to consider implementing targeted rates, those cases show how contentious such rates can be.
Conclusion
There is clearly political interest in value capture tax as another tool in the toolbox for funding and financing infrastructure.
As with any major policy change, the devil will be in the detail. While the simplicity of a tool like Victoria’s windfall gains tax is attractive, concerns have been raised about the impacts of that tax on the property sector.
A project-specific framework for value capture may be able to avoid unintended or undesirable outcomes, but may be administratively difficult or heavily litigated. Wherever the debate heads, the local government sector should watch it closely, as councils stand to benefit from the new funding source and will likely lead the implementation of any new system.