Tax increment finance and failing conventionally in NSW – UPDATED

The NSW opposition will quite certainly become the NSW Government, so any policy announcements they give should be taken as a guide to future government policy. Unfortunately, such policy is extrememely thin on the ground – sometimes to an absurd extent.

In the edition changes of  Saturdays Sydney Morning Herald, Mike Baird was quoted as  proposing the use of Tax Increment Finance to fund infrastructure improvements. I was going to write a more substantial post on this, but I can find no material on either his individual or party website, nor can I even find the original article on the SMH website. A desire to give the future government the analysis it deserves ended up being a chase after a polict will-o-the-wisp. Whilst I can find evidence Baird has been married to the idea for a while, there’s very little sign of any desire to promote or subject to scrutiny any policy  – why bother when scandal mongering and whinging is so much easier on the part of pollies and journalists alike. So regrettably, this post can only be based on an ephemeral piece of copy who came in the night, who tantalised and teased, but in the morning had left me alone and palely loitering.

The article described Tax Increment Finance as “An innovative financing method from the US to capture the increased property values from infrastructure development”.

To begin, “innovative” means “over half a century old” and “from the US” being one of the least inspiring ways to sell an infrastructure policy. It doesn’t get much better.

TIF covers a wide variety of policy techniques and mechanisms, but they can be reduced to a common factor. An infrastructure (or other public good improvement) will increase property values in a prescribed area and hence future tax revenues under existing forms of taxation. TIF dedicates this areas increased future tax revenues to servicing the debt created by, or creating a return on investment made for the improvements in question.

I stress “under existing forms of taxation“. This is distinct from the idea of governments claiming the unearned increment that I talked about here. TIF doesn’t allow the creator of the infrastructure to claim the increment in property prices created directly by their investment. It only guarantees that the increased revenue from existing taxes on the more valuable property are dedicated towards the infrastructure’s provision. It is after all “tax increment financing”, not “property increment financing”.

So what on earth does Baird mean when he claims TIF allows us to “capture the increased property values”. He can’t mean the government. After all, future tax revenues from appreciated property (for instance stamp duty) are already captured by the government. They’re taxes, they go to government as a matter of course. In the American context it might make sense that a local government would issue a bond backed by future tax revenues. Their local governments may require investments that vastly outstrip their capacity to access finance. In this case they would be “capturing” the revenue in an ability to access debt. But this is patently unnecessary for the state government. They have a ready, and massively under exploited access to the bond market.

So if the government isn’t the one “capturing” these revenues, who is? There’s two possibilities, both motivated by an intense aversion to government debt, as inviolable as it is inane. The less likely option is to create independent authorities funded by revenues in prescribed areas, like the authorities that formed Robert Moses’ empire and provided New York with substantial (and substantially flawed) infrastructure. The second and much more likely prospect is that the Private Public Partnership zombie will be given a Berocca and kept shambling along. Instead of enticing private companies to create infrastructure viatax breaks and tolls or ludicrous “station access fees“, the PPP would be made profitable by the government ceding it’s own future revenue[fn1]. As PPPs continue to fail, the deals have to be made sweeter and sweeter at the expense of both the quality of infrastructure and of the taxpayer.

They could just borrow to build in the infrastructure. Instead they’re determined to fail conventionally

From a political (as opposed to ideological) perspective, I can’t see the benefits in the opposition sticking to this. Advocating debt can’t cost it the election now, and the anti debt position didn’t do anything for Labor. They sacrificed everything at the altar of AAA, and even now as the mobs gather in the wasteland outside the temple with pitchforks and torches aflame, they continue to offer up surpluses. Voters have not been appeased. Posterity will not treat them well. The bond market vigilianties have been avoided yes, but only because of their non existence. The only ones happy are Standard and Poors. And the opposition are determined to keep them that way.

[fn1] It’s also likely that they wouldbe ceding great deals of revenue that would have come in regardless of the infrastructure as all land increases in value. It is possible that the value contributed by the infrastructure could be disaggregated from secular rises via hedonic pricing, but the spivs would probably prevent that to make the deal sweeter. Thus ceding revenues that would have been their’s anyway, the government damages a long term budget position to avoid debt in the short term.

UPDATE

In response to a two sentence email from me to Baird’s office I was directed towards this speech. Given the scant detail there, it may well be that there is no firm idea of how the concept might be implemented.

Elsewhere (which I read in preparation for the initial post but left out when I realised there wasn’t much material behind the original story), here is a PWC report on the topic. It tends to describe TIF primarily as a way to back bonds (although it does mention developer financing). This seems unnecessary to me, since state governments have little difficulty accessing debt currently, unlike the smaller US governments that have used TIF. A more interesting point is here.

It provides an upfront and sustained commitment to specified
infrastructure provision – that is, it ensures that long-term
funding and planning, which is necessary for the effective
provision of public infrastructure, is not eroded by competing
priorities or short term distractions;

I take this as meaning that since the bond (or at least part thereof) can only be paid out of the tax increment and not general revenue, governments are unable to drop projects left and right the way they have done since the Great Depression (read up on the history of the Eastern Suburbs railway if you think that the sudden plan changes are a recent Carr/Iemma/Rees/Kenneally phenomena), since there has to be a tax return lest the bond be unpaid . This can easily create distortions if unrelated public services funded from general revenue get crammed into the designated TIF district in order to raise values and thus revenue in order to meet and obligation. That said, it is an interesting way to tie governments to a project that extends beyond the electoral cycle. The Greens have suggested legislating projects. I wonder what other mechanisms there are. Another post maybe.

About Richard Tsukamasa Green

Richard Tsukamasa Green is an economist. Public employment means he can't post on policy much anymore. Also found at @RHTGreen on twitter.
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Ted H
Ted H
11 years ago

Richard,

Haphazard policy proposals are, alas, common given the “cruise to the finish line” temperament of Opposition policy (which, although indefensible from a policy perspective, is understandable from a political. Also, I should stress, desperation from the ALP aint producing anything great either). Oh, and a media that would rather exploit the private lives of MPs…

Although I’m in no position to comment on economic (lack of) details in Baird’s proposal above, I’ve found the Opposition to be sending some mixed signals in the Transport portfolio this year, which is frustrating.

First Baird runs an anti-congestion-tax line in February: http://www.mikebaird.com.au/interactive/manly_news/a_congestion_tax_that_doesn_t_reduce_congestion.html

However, Andrew Stoner this month has flagged a potential congestion tax:
http://www.streetcorner.com.au/news/showPost.cfm?bid=19461&mycomm=SC
and
http://www.theherald.com.au/news/national/national/general/coalition-puts-congestion-toll-on-fair-deal-for-motorists-agenda/1964949.aspx

Sorry to segue a bit off the direct topic. I guess, from a punter’s view, it’s frustrating to see the Opposition not using their political capital (or at least, the lack thereof in the current government) to commit to a clear position.

Alphonse
Alphonse
11 years ago

Ted, I fear they have enough political capital (in the sense you describe) not to have to commit to any position.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
11 years ago

Thanks for the link to Station Access Fees. As a payer of SAFs I’d not known of this particular idiocy. I’m surprised there aren’t escalator access fees (with the escalators built by another company), with elaborate contracts prohibiting the building of stairs or other means of access.

Joe Langley
11 years ago

It is unfortunately that Richard Green failed to undertake the minimal investigation into Tax Increment Financing that he so righteously criticises Mike Baird for not quoting. A quick Google search of the term would have provided him with a wealth of research from over 50 years of experience with this method in North America. Innovative to Australia, Richard, not the US.

And given his outdated perspective on the origin of this very successful urban renewal funding model, it must be assumed he doesn’t fly on Boeing aircraft, use Microsoft products or own an Apple computer.

Investment in infrastructure and urban renewal in Australia in general and in NSW in particular has failed to maintain much less upgrade our communities to the levels necessary and possible given our resources. We need as many good ideas as we can possibly find to overcome this deficiency. Tax Increment Financing is a successful, widely used model that must obviously be retooled to work in the Australian context. But that shouldn’t stop us from considering it. Mr. Green would serve a much higher purpose by giving this concept serious consideration than by so quickly disparaging it.

Joe Langley
Crows Nest, NSW

Tel
Tel
11 years ago

Why exactly are station access fees more idiotic than other fees for a service such as toll roads, various airport taxes, or parking fines?

Why is it that future PPP’s are sure to fail? Plenty of them have not failed. Nick Greiner’s project for the M4 reached a very satisfactory conclusion, with the very excellent outcome that removal of the toll was part of the whole contract process and government were not in a position to just milk it forever (like they do with the Harbour Bridge toll).

The important point is that it is not government’s job to be taking onboard risk. Firstly, they are risking other people’s money, against the will of the people who hand over that money, and secondly government are almost universally bad at assessing risk or taking responsibility for outcomes.

Why did the cross city tunnel fail so badly in Sydney? Because contracts were signed in secret, because the government promised road closures in order to seal the deal (without public consultation) and then got cold feet at the backlash when citizens discovered they had been stabbed in the back. We still don’t know exactly how big the penalties are on this.

Why did the airport line not make money? Because passenger estimates were way too high. These estimates would still have been just as badly wrong if government had borrowed money for the project — it would have made no difference to the outcome. The only convenience about government borrowing in these situations is that it makes it easier to fudge it all into one big consolidated slush fund, hiding tracks and defeating accountability. The wrong is still wrong, but the illusion can be moved around a bit more easily.

But risky ventures are necessarily just that — risky. Why do people find “risky” difficult to understand? Some people win, and some people lose. That’s what risk is. The right and proper way for this to proceed is when private people voluntarily take a risk, with access to the best available knowledge at the time of what they are getting into. If they lose, they lost of their own free choice, if they win, they deserve the reward.

As PPPs continue to fail, the deals have to be made sweeter and sweeter at the expense of both the quality of infrastructure and of the taxpayer.

No they do not. The only requirement is that the people involved behave honestly, tell the truth, and deal openly so the voters know what the deal is. That’s it. That’s all they need to do. Not asking much, but you go find me one single NSW voter who would expect honest dealing from the current lot.

marie
marie
11 years ago

nsw – a failed state. regardless. largely ruined by the labor party politics. my parents would turn in their graves. rusted on. ‘political’ parties…what is a ‘political’ party these days anyway….

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
11 years ago

Thanks Joe L,

Would you mind explaining what the policy is?

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[…] of that infrastructure to the repayment of a bond or to a third party (such as a PPP). I gave a very negative response. Shortly afterwards I decided I was making some assumptions, and it was only sensible to get a […]