The resurrection of urban living

The Wall Street Journal (6/16, A18, Karp) reports, increasingly, people want to live in urban areas, a change of "a half-century-long pattern of how and where Americans live," due to demographic changes and economic trends such as higher gasoline prices. 

"The generational demands" of housing location from both baby boomers and millennials (those "born between the late 1970s and mid-1990s") are "in perfect sync." Getting ready to retire, baby boomers are looking to downsize their homes and simplify their lives in urban condos. Likewise, millennials are attracted by higher-density urban living, as a way of "rebelling the suburban cul-de-sac culture that pervaded their youth."  

Additionally, the subprime mortgage crisis and high gasoline prices are "delivering further gut punches by blighting remote subdivisions nationwide and rendering long commutes untenable for middle-class Americans," when the used-to-be drivable surbub has become "for many a mile too far." 

Some conceives that the drive for urban living may reverse the trend of urban sprawl and push for New Urbanism practices in land use and construction. Traffic behaviors will change accordingly: with the hasten demand of urban living, Americans may mimic "a European preference of public transportation."

Outsourcing red-light traffic control

The Wall Street Journal reports that many cities are overburdened by "time-consuming and complicated tasks" and thus elect to outsource these duties to companies. Typical examples include "auctioning off unclaimed stolen goods, unloading unwanted supplies and collecting unpaid traffic fines."

In Columbus, Ohio, Redflex Traffic Systems Inc. is hired to handle "the entire process" of running the city's red-light cameras, "including capturing the visuals of the violator, cross-checking with databases from motor-vehicle departments, verifying that a violation was committed," and "mailing out the citation and collecting the fine." In exchange, the company "receives about 40 percent of the actual fines collected." 

Financing the Nation's Infrastructure

The July issue of Budget & Tax News of the Heartland Foundation features spotlight discussions on "Financing the Nation's Infrastructure," in particular roads and bridges. 

• Private Investment, Tolls Will Play an Increasing Role in Funding Tomorrow's Transportation Infrastructure
• Political Roadblocks Still Slowing PPPs
• Kentucky Considers Tolls to Fund New Bridges
  

Bridge's Private Ownership Raises Concerns

In "Bridge's Private Ownership Raises Concerns," The New York Times (Davey, 10/12/2007) reported a debate over a privately owned bridge over the Detroit River between the US and Canada.

The bridge is called the Ambassador Bridge. As the busiest commercial border crossing in North America, it is owned not by either country, not by the cities of Detroit or Windsor, Detroit’s Canadian neighbor, and not by some public bridge authority. It is owned by one man, Manuel J. Moroun from Detroit suburbs, who is believed to be "making billions of dollars on that bridge.” It is predicted that the bridge would reach its capacity around 2015, and thus a new $1 billion crossing will be built there. Mr. Moroun proposes to make the new bridge himself. The offer seems tempting particularly because of the economic crisis in Michigan. However, concerns have been raised over national border security, the safety of the nation's bridge, and enforcement of relevant standards and regulations.

Value capture: Presentation at the Citizens League's Policy Forum.

On May 6, the Citizens League organized a policy forum on "Transparent Funding Options for Meaningful Transportation Choices." Held at the Minneapolis Central Library, the event featured David Levinson as the "mind opener" and then Tyler Duvall at U.S. DOT as the keynote speaker. Finally, a panel of managers and scholars including me shared perspectives on transportation choices and funding mechanisms, followed by a more focused discussion on value capture.

Please click here for my presentation on value capture.

Value creation by transportation improvements

Empirical evidence has mounted about value created by transportation improvements, through increasing land or property price, enhancing business activities, or promoting economic development in general. The research priority today is not whether in some individual cases transportation creates value, but a synthesis or knowledge accumulation of "how?" -- under what circumstances would a type of transportation improvement create what level of value to whom, in what area, and in what time period?

For the purpose of value capture, we need a practical model to assess transportation value creation, which may include the following dimensions.

• Type of transportation improvement: Are we talking about highway, transit, or streetcars? Does the improvement involve new station, new routes, or extended network?


• Beneficiary: Who gets a major part of the value creation? Providers, developers, or land owners?


• Area: Different types and level of value may be around transportation nodes, corridors, networks, or some specific areas measured by distance or time.


• Time: Immediate value may be created right after transportation improvement, subsequent value may be realized when the enhance accessibility is fully recognized; induce value may be later created with successful high-density mixed-use development.
  


• Circumstances: Value creation tends to be affected by many other factors, including market condition, regulation environment, current accessibility, development density, or topology, etc.
  

Value capture for transportation in Minnesota: The rationale

A good way to understand "value capture" is to compare it with other types of transportation finance.

For decades in transportation finance we have been trying to better relate benefits to costs through dedicated revenues. Gas tax is levied on the benefits enjoyed by motorists; congestion price is collected on the social costs (congestion and pollution) led by motorists; and in the case of transit, fare structure has often been re-designed to improve its match with riders' benefits. However, transportation improvements not only bring benefits for motorists and riders, but also create value for landowners, developers, etc. It would be great to recover this value to supplement transportation finance -- this is the idea of "value capture."

In the recent transportation bill the state legislature launches a project to study value capture, which is "financing new and improved transportation infrastructure in Minnesota through capturing the value of the benefits created." Take two notes for this broad definition. First, value capture has potential for all transportation infrastructure, not just transit, of which value capture is most often discussed. This is understandable because transit cannot make use of gas tax and is not quite suitable for congestion pricing either. Second, the value of transportation improvement need not be restricted to land value, the typical target of value capture.

Value capture: A benefit receipt tax?

Among the ideas proposed by Citizens League on transportation policy (in 2005 and 2008) is a "benefit receipt tax," which will be collected at the point of sale of land that benefits from a transportation improvement.

Bob DeBoer in Citizens League shares an example of a land sale based on a highway improvement where the assessed value was in the $500,000 range and the land sold for over $3 million. In such a case a benefit receipt tax "based on a percentage of the amount above the assessed value" may be an effective way of "value capture" to partially recover "the level of benefit that should help pay for the transportation improvement." 

This sounds a great idea. But the first concern I have is about the timing of sale. Over time the assessed value would catch up with the market value and make the value gain less discernible. So the benefit receipt tax may just deter or delay the sale of land. It probably makes more sense to have an annual levy based on the the assessed (land) value rather than to have an one-shot collection at the point of sale. 

Value capture: A land tax for transit?

"A land tax for transit is fair, because transit service increases land values, and those who benefit the most pay the most." 

A recent issue of monthly publication of the Heartland Institute, "Public Transit Creates Value but Fails to Collect," calls for the use of a land value tax to supplement transit funding in order to "avoid (or minimize) service cuts and fare increases" as many transit agencies around the nation "have been in financial difficulty for a long time."

The essay compares the land value tax to more commonly used alternatives like sales tax or automobile registration fee. The question is whether we want consumers, motorists, or landowners to pay the transit subsidy. "To some extent these are the same people, but the economic impacts of taxing them aren't the same." A sales tax may burden the poor people the most and drive commerce out . Increase automobile registration fee may be less regressive than a sales tax, yet it is unfair for low-incomers cannot afford to live in the areas with good transit service, and hard to prevent evasion by people who register their cars elsewhere. 

A land tax is considered a much better choice. It is not regressive "because many poor people own no land at all, and if they do own land it is of relatively low value;" it can't be evaded "because land is visible and real estate tax information is public;" it is fair "because transit service increases land values and those who benefit the most pay the most;" and it can't drive away jobs "because it isn't a tax on economic activity."

The essay was based on the Henry George School's recent Research Note #5A: "Retrieving Transit's Benefits": 

http://www.heartland.org/article.cfm?artId=22499.

Resources for transportation finance research

1. Transportation Research Board's Publications Index: http://pubsindex.trb.org

2. Transportation Research Information Service (TRIS)

3. NCSL's website on transportation funding

More to come soon...

International Conference on Funding Transportation Infrastructrue

Just heard from Professor Levinson that the 4th International Conference on Funding Transportation Infrastructure will be hosted in UMN in summer 2009.

Links to previous conferences:

• 1st, Alberta, Canada, 2006
• 2nd, Leuven, Belgium, 2007 (final symposium)
• 3rd, Paris, France, 2008

Transportation finance from an intergovernmental perspective

The National Academy of Public Administration and six national associations representing state and local officials have released a report that explores, from an intergovernmental perspective, options to strengthen the nation’s transportation finances.

The report, Financing Transportation in the 21th Century: An Intergovernmental Perspective, is the product of the Intergovernmental Forum on Transportation Financing, which was convened in January 2007 to consider "the current status of surface transportation financing, the appropriate roles of each level of government and the governing policies and financing agreements that may be needed."

In addition to this Forum, there are two separate SAFETEA-LU commissions that were established by Congress to address related issues of transportation finance. For their reports, click here.

Funding transportation with value capture in Minnesota?

An innovative way of transportation financing is through value capture, which involves (partial) recovery of value gains associated with transportation improvement. In the recently passed transportation finance bill, the state legislature is launching a study to assess the feasibility of using value capture in Minnesota to supplement transportation funding. Following is a tentative outline of questions that I think should be addressed in this study:

1. Measuring value gains of transportation
• Theoretical frameworks of value gains
  
• Empirical evidence about value gains
  
• Practical ways to measure value gains
  
2. Strategies of value capture: rationales, applications, and issues
   
• Tax-based approaches: special assessment, split-rate property tax, or TIF
  
• Fee-based approaches: development impact fees or development exactions
  
• Market-based approaches: selling, leasing, or joint-developments
  
3. Recommendations for Minnesota
   
• Criteria for evaluation
  
• Evaluating possible policy options
  
• Policy recommendations
  

Value capture: The Vancouver example

The Vancouver Sun (Shore, 03/19/2008) reports that Metro Vancouver's Transportation Authority is launching a real estate division that could produce up to $1.5 billion in revenue over the next 10 years, modeled on an agency that has reshaped Hong Kong. Under the plan, enabled by a 10-week-old provincial legislation, TransLink will purchase land along new rapid transit routes and around stations and ramp up the value of the land through denser zoning and partnerships with land developers to create high-density commercial and residential developments.

To fund infrastructure improvements, "value capture" may be done in three broad ways: tax-based approaches such as special assessments or split-rate property taxes, fee-based approaches such as development impact fees, or direct value capture through "getting involved to a greater degree in real estate development," such as the Vancouver example above.

(Thanks Bob for suggesting this case.)

A "poster child" case for Value Capture

Stone's Throw is a 619 acre master planned community located in the fastest growing corridor in the State of Minnesota. It will have +/- 136 acres of commercial, retail, office, industrial and mixed use property types right around a proposed I-94 interchange. The mixed use land is for sale under an "Exclusive Investment Offering" -- this can be an example of "value capture," a source of public finance by capturing part of benefits that will incur with the construction of the interchange.

Before knowing more about this project, one question that occur to me is the timing of this "offering." Is it better to sale the parcels now, or to hold them until later? Would all the parcels be sold one time or bit by bit gradually? Some may say that the government may have to sell the land earlier in order to have money for construction. However, as long as there is a reasonable expectation of future revenue, the government can still borrow money through municipal bonds to be repaid by proceeds of future sales -- if the later- or gradual-offering is shown to be a better approach.

(Thanks, Bob, for suggesting this case.)

Deconstructing the transportation finance bill

Gather (Raabe, 03/03) reports that Minnesota House Legislators Denise Dittrich, Kathy Tingelstad and Melissa Hortman answered questions about the newly effective Transportation Finance Bill (HF2800) in a well-attended Town Hall Meeting in Senate District 47 on March 1. They explained specifics including what exactly is in the bill, how it is being funded and what compromises were agreed upon in order to get a transportation bill of any kind passed.

It is well known that the bill will adds $6.6 billion to state transportation funding in the coming decade through increase gas tax, metro sales tax, and vehicle license tab fee. Yet few may know that the bill also includes 40 additional state troopers, qualifies the state of Minnesota for $160 million in federal matching funds and includes tax credits for the lowest income bracket.

Before it was passed, the bill went 17 revisions and many compromises have been made. Take several examples. The wheelage tax and indexing were taken out of the bill. The increased gas tax is still below the proposed $.10 tax that was vetoed back in 2005. A tax credit was included to accommodate the Governor's position that the "gas tax is regressive." The proposed metro sales tax for transit was decreased from .5% to .25%. In addition, the bill includes the bonding that the Governor asked for, as well as the Urban Partnership Agreement.

It is estimated that the bill will create approximately 33,000 new jobs, and will reduce the cost of congestion, which amounts to $790 a year for the average driver and 43 hours of delays.

Minnesota state aid programs for local transportation

Funding for local governments' transportation investment comes not only from own-source revenues such as the property tax but also from intergovernmental grants such as federal and state aid.

In Minnesota, most grants for local transportation are administered by State Aid for Local Transportation (SALT) in Minnesota Department of Transportation (MN/DOT). SALT is in charge of the County State Aid Highway (CSAH) and Municipal State Aid Street (MSAS) portions of the Highway User Tax Distribution Fund (HUTDF), along with federal aid highway dollars. In addition to funding support, staff from SALT provides technical assistance in highway and bridge design, construction and maintenance.

For more about State Aid programs, see State Aid Manual 2007.

New transportation reports released from SAFETEA-LU commissions

The current federal legislation for transportation programs is call SAFETEA-LU ( Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users), which authorizes the Federal surface transportation programs for highways, highway safety, and transit for the 5-year period 2005-2009. In recent weeks, two commissions created by the SAFETEA-LU each released a new report on future development of public transportation systems.

On January, the National Surface Transportation Policy and Revenue Study Commission issued its report, "Transportation for Tomorrow," that recommends a radical restructuring of surface transportation programs and incremental increases in the federal tax. The commission concludes that the United States needs to invest at least $225 billion annually from all sources (federal, state, and local) for the next 50 years to repair the existing transportation system and create a more advanced system. Today, only 40% of the recommended amount is invested each year. This significant increase in funding is needed to sustain strong economic growth and keep the United States competitive.

Accordingly, the commission recommends that the federal fuel tax be increased five to eight cents per year over the next five years, after which it should be indexed to inflation. States are encouraged to enact even larger increase. Additional recommendations include new federal ticket taxes to help pay for transit and passenger rail, a federal freight fee to help finance freight-related improvements, new flexibility regarding tolling and congestion pricing, and public-private partnerships.

Another commission is the National Surface Transportation Infrastructure Financing Commission, which is charged with analyzing future highway and transit needs and the finances of the Highway Trust Fund and making recommendations regarding alternative approaches to financing transportation infrastructure. The Finance Commission recently released its interim report titled The Path Forward: Funding and Financing our Surface Transportation System. This report outlines the current issues facing transportation funding and how the commission will analyze funding options and finally make recommendations. Highlights of the preliminary observations:

• Demand for transportation is out pacing investment;
• Maintenance costs are increasing and reducing the funds available for system expansion;
• The fuel tax is not sufficient at current rates;
• Direct user fees should be explored;
• Along with increased investment, more intelligent investment and better operation of the system is needed.

Minnesota: 20 years behind in transportation investment

Growth & Justice, a "progressive" economic think tank in Minnesota, claims that Minnesota is 20 years behind in transportation investment. According to their research, if the state had kept up with its highway funding in 1986, "adjusting for inflation and dramatic growth in highway usage, it would have invested $13.89 billion more over the last 20 years."

The complete report is titled “Twenty Years Behind: Highway Spending & Revenues by Minnesota’s State Government, 1986-2006.” According to the report, the trend line for overall highway spending in Minnesota lags behind that for overall spending by all states combined.

Over the years, Federal highway funds to Minnesota declined significantly, adjusted for inflation and miles traveled. The trend is driven in part by a problematic formula of federal gas tax distribution, which was recently fixed by Congress, and in part by the fact that federal gas tax revenue has failed to keep up with inflation for the rate has not been increase for many years.

Regarding own-source revenue, Minnesota's Motor Fuel Tax, a major source of the state Highway Fund, dropped by more than a third from 2006 to 1986.

Ambitious Transportation bill proposed by legislative session.

The legislative session in Minnesota opened on Feb. 12 and on its very first day proposed an ambitious transportation finance bill with an $8.4 billion package that includes up to a seven-and-half cent gas tax increase, tab fee increase on new cars and a possible half-cent metro sales tax.

The bill is likely to be vetoed by Gov. Tim Pawlenty, as was the fate of a similar bill last year. However, sponsors hope public pressure after last year's fatal Interstate 35W bridge collapse will help them win over the heated debate or at least gain partial success with some compromise.

Like many other states, Minnesota has a biennial budget. The legislature convenes in regular "long-year" session each odd numbered year from January to mid-May to discuss budget proposal submitted by the Governor. In even numbered year the legislature re-convenes for a "short-year" session, as "one of budget review; action on the results of interim studies; consideration of emergency measures and the result of the evaluation of the needs of the state." This current session will end in April, when we will know the result of this transportation finance bill.