The Grattan Institute has told state governments to be wary of a federal push to use value capture as a way of funding transport infrastructure, saying the mechanism works better in theory than in practice.

Value capture refers to policy where governments capture some of the increase in land value that occurs as a result of nearby infrastructure development. It’s seen as a fair tax as it applies to windfall gains, and is levied only on those who benefit from projects.

But difficulties in the way it is applied in practice have led the Grattan Institute to recommend avoiding value capture “because better, fairer and simpler taxes are available to [state governments]”.

“It may be attractive in theory, but there is nothing easy about capturing value,” Grattan Institute transport program director Marion Terrill said.

For example, drawing a boundary around a new project to distinguish between who pays a value capture tax and who doesn’t involves an element of “rough justice,” the report states.

“People on one side of the boundary will not be happy to get a tax bill when their next-door neighbour doesn’t.”

The report also says the fairness of the tax is also called into question because it is harder to apply to infrastructure such as roads and hospitals where the benefits tend to be spread more broadly.

“There is nothing fair in the beneficiaries of rail projects paying extra tax while the beneficiaries of road and other projects do not.”

The report said an “additional broad-based, low-rate property tax on all land” may be a more equitable way to raise funds for major new projects.

However, if governments wanted to continue down the value capture route, the Grattan Institute said it would need to be done in a way that minimised corruption and increases fairness. Bespoke schemes, rather than a legislated consistent scheme, led to increased risks, costs, inequity and the opportunity for rent-seeking and corruption, it said.

Legislation for a standard approach to complying projects would specify the following:

  • minimum size of a project for it to be eligible
  • what authority will be responsible for defining the affected landowners
  • which types of infrastructure will be subject to value capture
  • what authority will be responsible for assessing baseline and uplift values
  • the rules governing how the tax rate is set
  • the arrangements for paying that proportion of a loss back to a landowner whose land value falls because of the new infrastructure

The report said that whatever taxation arrangements were used, governments could realise additional value through joint development around infrastructure projects.

“They can sell government land that is no longer needed after construction, or sell new development rights from rezoning land in the neighbourhood,” the report said.

“But the value of such schemes will depend on how much the government already owns, and the demand for new intensive development.”

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