Against Land Value Capture
An otherwise-good video by the Joint Transit Association about A Better Billion criticizes us for not proposing value capture to fund the scheme. I’ve seen other otherwise-good American transit advocates back this, and I’ve seen many a thinktank propose it and similar nonconventional schemes to fund public transit, in lieu of taxes. Taxes are political. Taxes annoy voters. So why not get around them by taxing development behind the scenes? It’s attractive on the surface, but in truth, broad taxes are the only way to fund government and expect it to perform as expected; value capture is so opaque that it is very easily wasted, to the point that 100% of the funds it provides can sometimes be wasted on excess construction costs, as has been the case in Hong Kong. Good transit advocates should reject this scheme and demand that funding be as straightforward as possible, with the understanding that the part about taxes that annoys voters is what ensures the money is spent well.
What is value capture?
Value capture is the name for any of a set of programs aiming to fund infrastructure by taxing the development that it would unlock – in other words, to capture some of the value gained by the private sector. This contrasts with broad-based taxes, which capture value from the entire economy and not just from specific developments or developments in specific areas. The idea is that the infrastructure generates value not just for the broad economy but also specifically in the area it serves, so it’s right to tax that area.
In practice, value capture schemes are most common when there’s perception that raising broad taxes is too difficult politically, or undesirable otherwise. Hong Kong extensively uses value capture to fund MTR expansion, not because its taxes are too high but because it wishes to keep its taxes very low. American cities have begun looking into such schemes in much higher-tax environments, with limited willingness to fund things out of the general budget; the 7 extension in New York was built with bonds tied to tax increment financing (TIF), which promised that the higher property taxes generated by Hudson Yards development would pay the bonds back.
Which projects are funded by value capture?
Naturally, value capture and TIF systems favor projects that have the most real estate value to capture. In New York, this meant the 7 extension but not Second Avenue Subway, which the real estate advisors to Bloomberg denigrated on the grounds that the Upper East Side was already developed.
This already creates biases, in favor of not just wealthier areas (the Upper East Side is after all rather rich) but also ones with high redevelopment potential, for example because they are underbuilt. This, in turn, favors worse projects, because they serve lower preexisting density.
The dominant benefit of public transportation in benefit-cost analyses, which are not undertaken in the United States, is the benefit to passengers, representing social surplus. For an example that was just sent to me, a study from last month analyzing a further Nuremberg U-Bahn extension classifies the total benefits of the chosen alternative on p. 30 as 5.73 million €/year in passenger benefits, plus about 3 million €/year in various externalities of which the biggest are reduced accident costs and reduced traffic congestion. Similarly, Börjesson et al’s ex post analysis of the T-bana, finding a benefit-cost ratio of 6, has consumer surplus dominating the benefits of the system. Land use changes are helpful, but the main purpose of a subway is to be ridden rather than to stimulate real estate development. A Better Billion looks at the possibilities of development unlocked by new lines, but not for nothing, we also look at existing bus ridership and subway capacity problems in analyzing which projects to recommend; development-oriented transit can work but only as a secondary option, and value capture overemphasizes it in preference to other needs.
Value capture and costs
Hong Kong is famous in the core English-speaking world for linking development with MTR construction. It’s also a very good example of what not to do. I complained mightily about value capture in 2017, but if anything I pulled punches, because while I did talk about Hong Kong’s use of MTR value capture as a corrupt slush fund, I didn’t know enough to connect this with Hong Kong’s other problems:
- Very high infrastructure construction costs. They are so high that value capture only covers about half the project costs, and the other half, funded directly by the government, is still more per kilometer than the world average cost. Hong Kong, moreover, has been ground zero for the adoption of the consultant-centric globalized system of procurement – British consultants who were there in the 1980s and 90s workshopped the system and then brought it home, leading to a cost explosion that rendered first London, then Australian and Canadian cities, incapable of building urban rail. In this sense, value capture is an attempt to paper over the inability to build by using a tool perfected in the city that has extreme construction costs and can only build anything because, with car ownership suppressed by taxes, it has atypically high demand.
- Overcrowding, likely the worst in the developed world. The data out of Hong Kong isn’t quite comparable to the most overcrowded cities in the democratic world (Paris averages 31 m^2/capita). Hong Kong reports median rather than mean housing size: its median is 16 m^2, and while it has a lot of inequality, it doesn’t produce nearly a factor of 2 of a mean-median spread. Hong Kong has atypically high inequality, but even that only produces a mean-to-median income ratio of 0.67, and housing surface area is distributed more equally than income. So it’s almost certain Hong Kong is the first world’s overcrowding capital, all because the state doesn’t develop enough land or housing (net annual housing growth is 3.8 dwellings/1,000 people, low for East Asia) in order to create more profits for the MTR to fund ever growing construction costs.
The way forward
Value capture and other nonconventional funding strategies should be categorically rejected. They lead to poor project selection, high construction costs through opacity, and, in the most extreme cases, other governance problems including Hong Kong’s legendarily bad overcrowding. The only legitimate way to fund public transportation and other infrastructure project is through broad-based taxes, either directly as in some dedicated payroll and sales taxes found in both the United States and Europe or, better yet, through the general budget, debated at the highest responsible level of government (municipal, provincial, or national), itself funded largely by broad taxes.
Pedestrian Observations 
Just so that we’re all on the same page without room for miscommunication, your objection is only to installing land value taxes as a direct payment method to fund transit capital expansion projects and not to a broad-based general land value tax separate from but in conjunction with extant property taxes designed to discourage underdeveloped land usage e.g. parking lots, is that correct?
Robert Moses used a similar scheme to fund his parkways back in the 1930’s. NYC had, and still has, a borrowing limit that’s based on the assessed valuation of its real estate. Moses was officially building parks, which legally increased property values. The parkways were legally access roads to these parks. That’s how the Belt Parkway system was financed.
The Department of Transportation seems to think they are.
https://www.transportation.gov/sites/dot.gov/files/2025-12/Benefit%20Cost%20Analysis%20Guidance%202026%20Update%20%28Final%29.pdf
You really have some kind of blind vendetta on this subject and on Hong Kong’s MTRC. In this new piece you are attributing high construction costs with Land Value Capture (LVC) but does anyone believe those costs would be any lower without LVC? They are only related in the general sense that everything in HK is determined by the upper echelons of the corporate elite (and of course these days, Beijing).
Except that it has built one of the world’s best Metro systems, and gets voted World’s Best in various polls. And as I suggested last time (see below) in some ways it is an anti-corruption scheme because the money can go nowhere except to transit. It is true that, as I suggested and you are repeating here, it is a partial substitute for direct taxes. But what is wrong with that when the likelihood of getting such taxes to fund public infrastructure is so hard to obtain? And yes, that resistance by top earners in HK (and everywhere in the world) is a manifestation of corruption or at least undue influence but the solution is not corrupt but simply a rather elegant rational workable one.
Anyway, rather than repeat myself afresh I will repost my entire post from your earlier piece for your reader’s delectation (without direct links to try to avoid the spam filter): (I have added some emphasis).
[pedestrianobservations.com/2017/09/07/meme-weeding-land-value-capture/#comment-25783]
Michael James 2017/09/07 – 04:55
Alon, this is an extremely disappointing piece. I can only conclude that you must be politically/ideologically driven to make so many incorrect statements, especially as I have specifically addressed most of them on your blogsite in the recent past. I think it is outrageous to call what happens with HK-MTRC as corruption. It’s what I call good planning to bring stable finances to the crucial transit system for the overall good of the city-state. That is why several Chinese cities (Shenzen …) have adopted the same approach and other transit specialists commend it (more in a separate post).
This is very misleading. Even Stephen J. Smith calls it “a public-private company”, because that is what it is. Still 70% owned, and obviously largely controlled, by the HK government. The minority of shareholders is presumably to bring the much-vaunted private-sector financial discipline blah blah (though I don’t know who those investors are–are they truly non-governmental?).
and:
(That’s confusing and seemingly contradictory but never mind …) In both cases (and also French-SNCF’s TGV operations) this is merely an operational profit which is fair enough, but of course the capital cost will never be repaid. This includes all of the “privatised” JR companies who have never had to repay or buy any of their huge assets (indeed massive debts remained in a government holding entity that continues to lose money to this day). For the same reason it is dubious to consider those JR companies as “entirely private”, indeed extremely misleading IMO.You haven’t given any concrete or meaningful example of corruption in the HK case. Stephen J. Smith does not use the word in his piece even though he too doesn’t seem to approve of the arrangements but then his history involves the Real Estate industry, and to be sure there are property developers in HK (many billionaires) who object to the fact that they are effectively cut out of some part of the development that MTRC does. But the reality is that private developers have plenty of opportunities in all the developments that MTRC [do], and I suspect any whinging is limited (they surely must realize these developments wouldn’t happen at all without the MTRC).
This is your what you consider corrupt:
Now, if this profit was going back to shareholders or some other private entity you might be right. BUT IT ISN’T! It is designed so that the public-private entity is financially viable and can also raise some of the huge capital costs involved in expanding the transit system (more later). Also there is nothing the least “surreptitious” about it. It would be seriously pointless just the government selling the land or development rights directly to the developers because that money would be a one-off infusion of cash that would disappear into general government revenue. Instead, MTRC has a permanent income stream from its developments that the politicians can’t get their miserable pork-barrelling hands on. If anything this is anti-corruption. Further I reckon it creates better type of development than private developers left to themselves (this would be even worse, is even worse, in the west or at least the Anglosphere).
Doesn’t something similar happen with US airports (essentially independently-operated but ultimately owned by various governments, federal, state or local): do the airport companies sell off their retail portions to a developer in a one-off deal, or does the airport recover rents from those retailers directly? I know which makes the most sense (even as developers probably scream about it: don’t tell me, I’ll bet there is a law against this arrangement in Texas ….).
No, he didn’t. There is no use of that word and really not even the accusation or implication. You’ve got this seriously wrong and I ask myself why are you doing it. The citation from the South China Morning Post is faintly ridiculous and of course merely reflects some actually corrupt business interests; I wonder if Murdoch was still the owner of the SCMP when that was published? And does anyone doubt that a rail-line and big station with associated development doesn’t, almost “magically”, create value? It’s just sour-grapes that those developers aren’t the sole beneficiaries.Stephen J. Smith writes:
That is another misleading simplification. Building costs are so high that MTRC contributes about 50% of the capital cost of any new line extension and stations, ie. the government must still find about 50%; but of course under these value-capture arrangements MTRC will recover more over a longer timescale from those developments. It’s win-win for the city-state of Hong Kong and I have no idea of why you want to deny this.
This is simply untrue. Hong Kong has less buildable land than almost any city you could think of. And it rather belies that point you are failing to make, that MTRC’s most notable value-capture developments have been on reclaimed land, such as Kowloon-West, the massive IFC scheme in Central and the Tung Chung development opposite the airport (which, even if on the biggest island in HK, Lantau, the vast majority of it being undeveloped forest on rocky mountains & hills, nevertheless at least half of the land of Tung Chung was reclaimed from the sea–for the obvious reason that the mountains of most of Lantau go right to the sea). Further, MTRC has only a minority share of all development at Tung Chung.Of course exactly this has happened in NYC, in the reclamation by the city (NYNJPA) to build the original twin towers WTC then Battery Park City adjacent; the NYNJPA acts as the master developer in all these things, yes? Though I have asked here recently whether the MTA recovers any direct and recurrent income via rents etc of the vast shopping precinct built above its stations (run by Westfield, a rapacious Australian property developer)?Grumbling about the “low quality” of Hudson Yards sounds like a bit of corruption in itself; I mean does anyone doubt it will turn into highly valuable real estate with time? Then there are “air rights” which presumably apply to any redevelopment of, say Penn Station, etc. These should belong to the MTA or at least shared with the city so that a permanent source of income offsets the high capital costs and operational costs. I believe the same operates at Chatelet-les-Halles in Paris, the world’s biggest Metro station with a very large retail complex above and fully integrated.
The efficiency or inefficiency of how different transit authorities operate is really a different issue and should not be wrapped up in the argument.
That only deserves one response: nonsense.
Property tax, it’s called property tax. Almost everywhere it’s based on current-ish market value. When the value goes up because the property can put “walk to train” in the ad it gets taxed. Because the market value went up. Which is taxed.
20 billion dollars of skyscrapers get assessed more than the air that was west of 10th Ave. before they built 20 billion dollars of skyscrapers. When they do the part west of 11th Ave. it will likely be another 20 billion or so. And the sales taxes the mall under the skyscrapers will generate. Which is more than air generates.
Much more than the air that was between 10th Ave. and the river before Hudson Yards was developed. Air doesn’t get assessed.