I have blogged earlier (here and here) on the application of land value capture instruments to mobilise tax revenues.
The central point is that public investments like metro railways increase land values, which being an unearned increment for the land owner, should be partially captured by the government and used to finance the investment itself.
An excellent new working paper (abstract here) presented at the annual American Economic Association Conference by Maureen Cropper and Palak Suri examined the impact on land prices of the first subway line in Mumbai (the 11.4 km Metro Line 1) which became operational in June 2014. Their findings on its impact is striking
To estimate the effect of Line 1 on property prices we use administrative data on assessed prices in 725 sub-zones of Mumbai from 2011-18 for residential, commercial, and industrial land use categories. Using difference-in-differences in an event study framework, we compare areas that are within 1 km of Line 1 with control areas between 1 and 3 km from Line 1 before and after Line 1 opened. We find that up to two years prior to the opening of Line 1, the change in property prices in areas within 1 km of Line 1 was about 5-6% higher than the change in areas between 1 and 3 km from Line 1, reflecting anticipatory effects of the policy. After 2014, prices for residential and commercial properties within 1 km of the Metro increased between 17% and 13% compared to the control group... The magnitude of increase in prices goes down as the size of control group is expanded to include regions beyond 3 km, reflecting changes in other parts of the city. The increase in residential, commercial office, and open land- use prices was greater than the increase in industrial and commercial shop prices.
To study the factors affecting residential prices, we estimate hedonic price regressions using data on 3,000 houses in a 2019 World Bank survey. Log price depends on distance from the nearest rail station and on an employment accessibility index, in addition to housing and other neighborhood characteristics. Employment accessibility is measured using a commute-time- weighted average of wages obtainable across the city, estimated using a gravity equation. A house that is 1 km closer to a rail station sells for 5.6% more than an other wise identical house. A one standard deviation increase in employment accessibility raises house price by 4%. We also compute the employment accessibility index for 2004, using a 2004 World Bank survey to study the changes in sub- zone level employment accessibility. The employment accessibility index within 1 km of Line 1 increased faster over this period than in other parts of Mumbai. Improvements in employment accessibility and access to rail stations are plausible channels underlying the observed capitalization effects.
They even make an assessment of the aggregate increase in property values just due to this one investment,
How large are the increases in property values within 1 km of Line 1 and how do they compare with the aggregate benefits due to commute time savings? Lacking precise data on floor space within 1 km of Line 1, we conservatively approximate the increase in property values after the opening of Line 1 to be $20 billion (PPP). Annualizing this over 30 years using a 10% interest rate yields a value of $2 billion (PPP). This is approximately twice as large as Suri’s $1 billion (PPP) estimate of the value of travel time savings, highlighting the need for a more comprehensive framework to study the benefits of infrastructure projects.
The paper referred above examined the impact of commute time savings due to Metro Line 1 finds,
I value travel time savings due to: (i) Line 1 (11.4 km), operational since 2014, and (ii) three upcoming lines (92 km), scheduled to open during 2021-22. The value of short-term benefits for an average beneficiary under either project is Rs. 71-99 per month (9-14% of the average out-of-pocket cost). The medium-term benefits are over twice the short-term benefits for Line 1, and 6-7 times the short-term benefits for the upcoming lines. Women, college educated workers, and high-income households receive greater benefits...The average medium-term values are an order of magnitude higher, valued at Rs. 189 and Rs 618 for Line 1 and Lines 2, 3 and 7, respectively. This is about 2-6% of the average monthly rental price. In the short-term 19% of commuters have a positive willingness to pay for Line 1, while 51% of commuters have a positive willingness to pay for Lines 2, 3 and 7. In the medium-term, virtually every household experiences positive benefits. Therefore, in terms of aggregate benefits, the implied annual medium-term benefits for Line 1 (Lines 2, 3 and 7) are 5-10 times (10 times) the short-term benefits.
Both are excellent papers, rare ones with immediate public policy relevance. The first paper brings hard evidence in quantitative terms from a very salient Indian example. Land value capture is gradually becoming accepted as an important means of municipal finance in India, as is seen from this policy framework. But its widespread adoption remains a step away. Such papers can be very useful in the internalisation of the idea among important policy makers and expediting the adoption of land value capture policy instruments.
This goes to the heart of an important insight to increase municipal finance, one which has been a constant in this blog. Instead of scatter shot trying several approaches and struggling in everything, the focus should be just two-fold - increase property tax revenues and collections (shift from the opaque rental value to capital value based property taxation system, and target a gradual increase in PT as a share of GDP); and tap the full potential of all LVC instruments. To this one can add the idea of fixing a basic FAR with property right and having the rest purchased.
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