New York's Plan to Make Station Neighbors Pay for the Subway Isn't New

(Bloomberg View) -- Here's some cutting-edge thinking from the editorial writers at the New York Times:

It will surprise nobody to learn that the new Eighth Avenue subway has already added millions to the value of land along its route, and will add more once it is in actual operation. That has been the history of rapid transit construction throughout the city. Nor will there be any quarrel with the City Affairs Committee's conclusion that "the logical source of new revenue to finance the subway system is the specially benefited land the value of which is increased by such transit facilities."

OK, if you're familiar with New York City, the part about "the new Eighth Avenue subway" may have you scratching your head, given that said subway line opened for business in 1932. Some of the phrasing ("specially benefited land") may seem a little archaic, too. Beyond that, though, the arguments seem remarkably current for an editorial published, as this one was, on Dec. 11, 1930. In fact, the Times had a front-page story just two weeks ago that told of rising real estate values on Manhattan's Upper East Side in the wake of the opening of the Second Avenue subway last year, and continued:

The notion that property owners should pay extra for their proximity to the subway is called “value capture” and has long been debated in urban planning circles. Now Gov. Andrew M. Cuomo, a Democrat, has made value capture a prominent part of his plan to salvage the subway system by proposing to give the Metropolitan Transportation Authority the power to designate “transit improvement subdistricts” and impose taxes.

It's not just Cuomo and the MTA. The "Legislative Outline for Rebuilding Infrastructure in America" released by the White House on Monday calls for making value capture a prerequisite for Federal Transit Administration capital investment grants. The impact of this does seem to be undercut somewhat by the fiscal-year 2019 budget also released by White House on Monday, which "proposes to wind down the Federal Transit Administration’s Capital Investment Grant program," but it's still an indication of how bipartisanly fashionable value capture is at the moment.

Value capture in the form of special property tax assessments or districts has been used in the U.S. in recent years to extend the Silver Line of the Washington Metro toward Dulles International Airport, transform Denver's Union Station into a light-rail and bus hub, and build the South Lake Union streetcar line in Seattle. It's been used for decades to pay for transit station renovations in the Chicago area, and in 2016 the Illinois Legislature approved a big expansion to pay for improvements to and extensions of rail lines. A more ambitious form of value capture, in which the commuter rail system actually owns the development rights around stations, has helped make Hong Kong's mostly government-owned MTR Corp. Ltd. (the MTR stands for Mass Transit Railway) profitable and globally admired.

Tapping into rising property values near stations to help pay for transit improvements makes a lot of economic sense, and I've cited the Hong Kong approach before as an example that U.S. metropolitan areas ought to emulate. What I had failed to get my head around until I dug a bit deeper into the value capture literature this week, though, is that the practice is not new to the U.S. at all -- which raises some questions about why it isn't more widely used today.

That Times editorial from 1930, which I found thanks to a reference in a 2015 Minnesota Center for Fiscal Excellence report, was just the beginning of my explorations. I found these three value-capture examples from U.S. history on my own bookshelves:

  • The streetcar lines that enabled the late-19th- and early-20th-century expansion of Los Angeles, Oakland, Washington and other cities were often built by entrepreneurs "more interested in selling land than streetcar tickets," Kenneth T. Jackson writes in his classic history of U.S. suburbanization, "Crabgrass Frontier."
  • Decades before that, as Richard White recounts in "The Republic for Which It Stands," the new history of the Gilded Age that I wrote about last week, Congress granted railroad companies 131 million acres of adjacent land (more acres than in all of California) to help them finance new tracks mainly in the Midwest and West.
  • Going even further back, the financing plan for the Erie Canal approved by the New York state Legislature in 1817 included a tax on all real estate within 25 miles of the canal, according to Peter L. Bernstein's "Wedding of the Waters."

That Erie Canal real estate tax was also the most unpopular part of the plan, and it was never collected (instead, the canal was financed chiefly with borrowings later paid off with toll revenue). The enduring unpopularity of property taxes remains one key reason value capture isn't used more widely today. The Los Angeles County Metropolitan Transportation Authority  used special property tax assessment districts around stations to help finance the initial construction of the Red Line subway that connects downtown Los Angeles with the San Fernando Valley, but since Californians voted for a referendum in 1996 that required two-thirds majorities of property owners to approve such districts, it has relied on other financing means such as local sales taxes. In New York City, the governor's recent embrace of value capture via property taxes has already raised hackles at the mayor's office and among local real estate developers, according to the Times story that I cite above.

As for putting land or development rights in the hands of those who build transit lines, well, that's complicated. White argues that Congress's land grants to the railroads in the 1860s and 1870s were rife with corruption and perhaps even unnecessary. South Dakota, which did not have any major land-grant railroads running through it, ended up by the 1880s with "a railroad network as dense as and more efficient than those of neighboring states."

Still, it does seem like the grants sped up settlement of the Plains States and the West, along with enabling multiple transcontinental connections that didn't make a lot of immediate economic sense but did help knit the nation together. The problem in the modern context is that there aren't millions of acres to be given away along prospective transit lines.

In a 2012 study of value capture via development rights in Hong Kong and suburban Tokyo, City University of Hong Kong professor Jin Murakami found that such endeavors worked best during times of population growth when rail companies could develop fallow land into suburban commuter communities -- akin to what the streetcar developers of the early 20th century U.S. did. In fast-growing U.S. suburbs and exurbs today, real estate developers generally don't need rapid transit connections to convince people to buy or rent the houses, condominiums, apartments and offices they build. And in the places (mostly older cities and suburbs) in the U.S. where transit connections are highly valued, there's not much empty land.

There is, as Swedish public finance experts Dag Detter and Stefan Fölster have been explaining for several years now, a lot of government property in and around cities that could be managed to generate much more money to pay for things like schools and transit. So that's one form of value capture. There's also surely potential for more value capture via property taxes than is being done now. But value capture isn't some exciting new idea that's going to transform U.S. public transportation. It's an old idea that might help some.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”

  1. Seriously, do different parts of this administration even talk to each other?

  2. LACMTA was created in by a merger of the Southern California Rapid Transit District  and the Los Angeles County Transportation Commission, so it didn't technically exist yet when the first phase of the Red Line was being built. I figured it was OK to relegate that detail to a footnote, though.

To contact the author of this story: Justin Fox at justinfox@bloomberg.net.

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