Last month’s Patreon poll was about meme weeding – that is, which popular meme in public transit I should take apart. The options were fare caps on the model of London, popular among some US reformers; wait assessment, a schedule adherence metric for trains I briefly complained about on Vox as used in New York; and land value capture/tax increment financing/the Hong Kong model. The last option won.
Good public transit creates substantial value to its users, who get better commutes. It’s an amenity, much like good schools, access to good health care, and clean air. As such, it creates value in the surrounding community, even for non-users: store owners who get better sales when there’s better transportation access to their business, workers who can take local jobs created by commuters to city center, and landowners who can sell real estate at a higher price. All of these positive externalities give reason to subsidize public transit. But in the last case, the positive impact on property values, it’s tempting to directly use the higher land values to fund transit operations; in some cases, this is bundled into a deal creating transit-oriented development to boost ridership. In either case, this is a bad way of funding transit, offering easy opportunities for corruption.
Value capture comes in several flavors:
- In Japan, most urban private railroads develop the areas they serve, with department stores at the city end and housing at the suburban end.
- In Hong Kong, the government sells undeveloped land to the now-privatized subway operator, the MTR, for high-density redevelopment.
- In the US and increasingly Canada, local governments use tax increment funding (TIF), in which they build value-enhancing public infrastructure either by levying impact fees on development that benefits from it or by programming bonds against expected growth in property taxes.
In both Hong Kong and the major cities of Japan, urban rail operations are profitable. It is not the case that value capture subsidizes otherwise-money losing transit in either country, nor anywhere I know of; this did not prevent Jay Walder, then the head of New York’s MTA, from plugging the MTR model as a way of funding transit in New York. What’s true is that the real estate schemes have higher margins than rail operations, which is why JR East, the most urban of the remnants of Japan National Railways, aims to get into the game as well and develop shopping centers near its main stations. However, rail operations alone in these countries are profitable, due to a combination of high crowding levels and low operating costs.
The Japanese use case is entirely private, and does not to my knowledge involve corruption. But the Hong Kong use case is public, and does. For all the crowing about it in Anglo-American media (the Atlantic called it a “unique genius” and the Guardian said it supported subsidy-free operations), it’s a hidden subsidy. The state sells the land to the MTR, and the MTR alone, at the rate of undeveloped outlying land. Then the MTR develops it, raising its value. Other developers would be willing to pay much better, since they can expect to build high-density housing and have the MTR connect it to Central. This way, the government would pocket the profits coming from higher value on its land. Instead, it surreptitiously hands over these profits to the MTR.
While Western media crows about Hong Kong as an example of success, local media excoriates the corruption involves. Here’s the South China Morning Post on the MTR model:
The rail and property model was never anything but a delusion to which only Hong Kong bureaucrats could be subject. It traded on the odd notion that you cannot assign a value to property until you actually dispose of it.
Thus if you give the MTR the land above its stations, these sites suddenly and magically acquire value and the proceeds cover the cost of building the railway lines. Ain’t magic wonderful? We got the MTR for free.
Stephen Smith dealt with this issue in 2013, when he was still writing for NextCity. He explained the local corruption angle, the fact that MTR rail operations are profitable on their own, and the lack of undeveloped land for the state to sell in most first-world cities. (Conversely, one of his arguments, about construction costs, doesn’t seem too relevant: Hong Kong’s construction costs are probably similar to London’s and certainly higher than Paris’s, and doing value capture in Paris would be an urban renewal disaster.)
Stephen also tackles American examples of value capture. With no state-owned land to sell to the public transit agency at below-market prices, American cities instead rely on expected property taxes, or sometimes levy special fees on developers for letting them build TOD. Stephen talks about scale issues with the TIF-funded 7 extension in New York, but there are multiple other problems. For one, the 7 extension’s Hudson Yards terminus turned out to be less desirable than initially thought, requiring the city to give tax breaks. See for examples stories here, here, and here.
But there are more fundamental problems with the approach. The biggest one is the quality of governance. TIF is an attractive-looking option in American jurisdictions that recoil at raising direct taxes to pay for service. This means that as happened in New York, it is tempting for cities to promise property tax windfall, issue bonds, and then let successor governments raise taxes or cut services to pay interest. This opaqueness makes it easier to build bad projects. When the government promises especially high benefit-cost ratios, it can also keep issuing new bonds if there are budget overruns, which means there is no incentive for cost control.
TIF also requires the city to use zoning to create a shortage of land in order to entice developers to pay extra to build where it wants them to. Stephen complains that New York reamed problems on upzoning in Midtown East, one of the few locations in Manhattan where developers are willing to build supertall office towers without any tax breaks; the new zoning plan, in the works since he was writing for NextCity in 2013, only just passed. Another such location is probably the Meatpacking District, near the Google building at 14th and 8th, now the city’s tech hub – there is no tall office construction there due to the power of high-income residential NIMBYs. Were the city to loosen zoning in these areas and permit companies that need a prime location to set up offices in these areas, it would find it even harder to entice developers to build in a lower-demand area like Hudson Yards. Midtown East and the Meatpacking District are replete with subway lines, but there are no new plans for construction there, so the city wouldn’t do a TIF there.
The same problem, of TOD-reliant funding requiring the city to restrict development away from targeted investment areas, also works in reverse: it encourages development-oriented transit. In 2007, Dan Doctoroff, then a deputy mayor and now head of Google’s Sidewalk Labs, opposed Second Avenue Subway, on the grounds that the area is already developed. Second Avenue Subway was eventually built, but the 7 extension omitted a stop in an already-developed area amidst cost overruns, as Bloomberg prioritized Hudson Yards. This is not restricted to New York: San Francisco is more interested in a subway to Parkmerced than in a subway under Geary, the busiest bus route, busier than the subway-surface light rail branch serving Parkmerced today. Smaller American cities propose core connectors, aiming promoting redevelopment in and around city center. This in turn means ignoring low-income neighborhoods, where there is no developer interest in new buildings except as part of a gentrification process.
These problems are for targeted investments. But when there is more widespread TOD, TIF ends up being a tax on transit users. Cities build roads without levying special taxes on sprawling development, whether it sprawls by virtue of being near the highway or by virtue of being far from public transit. When they build transit, they sometimes tax TOD, which means they are giving developers and residents tax incentives to locate away from public transit.
Hong Kong is not the right model for any TOD scheme; its corruption problems are immense. It’s a shiny object for Americans (and other Anglophone Westerners), who are attracted to the allure of the exotic foreigner, like a premodern illiterate attributing magic to the written word. Instead of replicating its most questionable aspect, it’s better to look at models that are attractive even to local corruption watchdogs.
This means funding public transit and other services out of transparent, broad-based taxes. Paris uses a payroll tax, varying the rate so as to be higher in the city (2.95%) than in the outer suburbs (1.6%). Everyone will hate them, especially people who don’t use transit and don’t view it as directly necessary for their lives. This is why they work. They compel the transit agency to run efficient service, to stave off opposition from aggrieved center-right middle-class voters, and to run it well, to stave off opposition from populists (“why am I being taxed for trains that break down?”). They leave no room for waste, for cronyism, or for slush funds for favored causes, precisely because they’re hard to pass.
It’s easy to see why politicians avoid such funding sources. The democratic deficit of local governance in the US is immense, and that of Canada is only somewhat better. Nobody wants to lose an election over raising taxes, even in cities where the political spectrum runs from the center leftward. Value capture sounds like a good, innovative idea to fund government without hated taxation, and its abuses are hidden from sight. Even as it forces city residents to endure opaque fees (never call them taxes!), it wins accolades to politicians who propose it. No wonder it continues despite its failures.