Funding Urban Infrastructure: Value Creation, Property Tax and Other Revenues - Dominique Bureau

Conseil
économique pour
le développement
durable

                            Funding Urban Infrastructure:
                   Value Creation, Property Tax and Other Revenues
                                  Dominique Bureau

                                              Conseil économique pour le développement durable
                                                            www.developpement-durable.gouv.fr

Motivation of the study: how to fund new stations…

Complex funding model

•   Le périmètre des dépenses du Nouveau Grand
    Paris d’ici 2030 est de 25,525 milliards d’euros.
•   Pour financer ces dépenses, la Société du Grand
    Paris dispose de recettes fiscales affectées déjà     •   Dans un deuxième temps, la SGP aura
    mises en place, qui sont de trois natures :
                                                              recours à l’emprunt, qu’elle remboursera
     – une fraction de la taxe locale sur les
          bureaux en Île-de-France qui est assise sur         grâce à trois types d’apports:
          les surfaces à usage de bureaux, de locaux            – les recettes fiscales affectées;
          commerciaux, de locaux de stockage, de
          stationnement ;                                       – les redevances d’usage payées par
     – la taxe spéciale d’équipement, taxe                         les exploitants (péages) à compter
          additionnelle aux taxes locales ;
     – une        composante        de     l’Imposition            des mises en services;
          Forfaitaire sur les Entreprises de                    – les recettes complémentaires tirées
          Réseaux (IFER) assise sur le matériel
          roulant exploité par la RATP. Ainsi, la SGP              notamment        de      l’exploitation
          perçoit plus de 500 millions d’euros de                  commerciale des gares (publicité,
          recettes fiscales affectées par an.                      commerce, etc.) ou d’autres
•   L’État apportera un soutien budgétaire à la
    Société du Grand Paris à hauteur de 1 milliard                 services.
    d’euros. De même, l’État demande que les
    collectivités locales apportent 225 millions
    d’euros.
•   Enfin, des recettes fiscales affectées
    supplémentaires pourront être mises en place à
    compter de 2020, en accompagnement des
    améliorations de desserte procurées par les
    premières mises en service.

A common problem

• The Crossrail 1 project funding structure includes a substantial contribution
  from two local sources:
    – the Business Rates Supplement (BRS) was established in London specifically
      to fund Crossrail 1 and is generating a steady flow of income that is being used
      to repay debt raised to finance the project’s construction.
    – the Mayoral Community Infrastructure Levy (Mayoral CIL) is a charge on
      all new development in London. Its purpose is to contribute to the cost of
      additional infrastructure required as a consequence of new homes, offices and
      other buildings.
• In summary, the views of those consulted were that:
    – the levy elements of the funding package (BRS and Mayoral CIL) had
      worked well (in that the loans taken out for Crossrail 1 are forecast be repaid
      on time or even early);
    – the amounts raised by negotiating contributions from landowners on the
      route have generated only a small proportion of the value of the scheme;
    – and many land and property owners who have benefited most from the
      project are not making a commensurate contribution to the project costs.”

How to fund the renovation of existing ones?

The standard economic recommandation

• HGT: the value created by          • In practice: special tools (TIF,
  LOCAL public equipments              JPD), rather than general
  capitalizes into land rents          development of property taxes
• Additional rents should be         • And controversies about:
  taxed     for     financing  the      – Distortionary impacts of
  associated fixed costs                  property taxes (« capital
• (By the means of property taxes         view »)
  the local Authority recovers the      – The degree of capitalization
  rent she has created)

Are new business models for airports transferable?

Lost steps

A strong, controversial, tendancy…

  …need to clarify regulatory models
         (one till vs double-till)
    But, before that, the objectives:
   additional revenues or enlarged
quality range of services for consumers?

Purpose of the study

• Two questions:
   – Management rules for additional services provided by
     local public equipments: 1st Best (LLH) Pricing or
     Ramsey-Boiteux markups?
   – Assignment of potential funding instruments between
     property taxes, other local taxes (poll, housing),
     revenues from shops and services?
• Main characteristics of the model: a standard urban
  monocentric model…
   – which does not assume perfect population mobility
     between cities (possible incomplete land rent
     capitalization of the benefits of the projects)
   – with property tax base including the value of buildings
     (hence acting as taxes on construction)

Notations

• Willingness-to-pay for        the
  services provided by          the
  equipment

• Social value for a resident

• Surplus of a resident

• Costs of the equipment

Urban costs

Competitive equilibrium of land markets

Optimal policy with two fiscal instruments: α, τ

A urban platform

                  Local public
                  Equipment
                   (d)         (z,Y)
                               N
             α                         τ
                   Social Value

                         (k)
Landowners
Developers                                 Residents

Urban externalities

Summary of results

                                              Structure of local taxes    Markups above

                                              Role of property taxes     (appropriate) MSC

Benchmark: perfect mobility; no distorsion             +++                      0
Imperfect capitalization                                                       0
Construction choices incentives                                               0
Agglomeration externalities                                                    0
Architectural externalities                                                    0
Weight of low-mobile residents                                                 0
Heterogeneous WTP                                        -                     or ?
Cost incentives                                          -                      0
Fixed costs selection, high mobility                                          
Fixed costs selection, low mobility                      -                      

From average cost pricing to TIF, JPD…

Conclusion

•   The benchmark for pricing additional activities offered residents by public equipments
    should remain marginal cost even with distorsions and imperfect mobility of residents.
    Local taxes remain the most natural tools for funding fixed costs, the development of new
    revenues from retail activities firstly being to be conceived as an element of a strategy for
    global value creation.
•    Structure of local taxes
      – Fiscal distorsions. Ramsey-Boiteux features combined with externalities internalization
         prevail,
      – Selection of socially justified equipments. The transposition of the “average pricing
         rule” in this context is to earmark or capture property value induced by the project to
         fund it: the conditionality that supplementary land rents need to be greater than
         development costs lead to the efficient levels for all public and additional services
         provided by the equipment. In this perspective tools to test and implement this condition
         must be developed.

•   Extensions: competitive issues; cooperation between networks