Could a tax on land rezoning capture value uplift for the greater good?

Harrison Grierson’s national land development manager and experienced engineer, Campbell McGregor, discusses the vexing issue of infrastructure funding as urban areas grow and intensify, and considers whether some ‘value capture’ tax mechanisms being used over the Tasman could be applied here.

There’s much debate around the level of infrastructure deficit New Zealand currently faces and how we can remedy it.

Increasing council rates only touches the surface of the $106bn shortfall we’re currently facing and if we continue to only invest at the current rate, we’ll be a further $106bn shortfall in 30 years’ time (in today's prices).

To manage and renew our existing infrastructure, the Te Waihanga New Zealand Infrastructure Commission in its 2021 report says $120-$180bn is actually needed for three water assets over the next 30 years alone.

This leads to further debate around affordability and the ever-increasing costs of servicing developments as a result of urban sprawl as well as the dilemma around how we meet the costs of replacing an aging infrastructure asset base in brownfield areas.  

The hot catchphrase relating to brownfield development and aging infrastructure is can we better capture value uplift?

The changes to the Auckland Unitary Plan for example have been successful in driving intensification of housing across the city. A recent article in The Economist on growing support for YIMBYism supports this view.

But I do believe, that in some part, the Plan failed. There was no way to capture value uplift created by zonal changes.

It added value for existing homeowners, effectively making them wealthy overnight. But it didn’t provide a mechanism to capture any portion of this value uplift to fund infrastructure upgrades (local, trunk and social infrastructure) which would be required to service a more densely-populated area.

The Plan made a small proportion of society imminently wealthier through no action of their own yet our policy and regulatory settings provided no ability to capture any portion of this land value uplift to then fund the infrastructure and amenity improvements needed to achieve successful urban intensification.

I recently joined other engineers, town planners and developers on a tour of Melbourne with the Urban Development Institute of New Zealand where we learned more about the Victorian Government’s Windfall Gains Tax (2023).

While there are several exemptions and carve-outs from the tax, as of July 2023 any land that was subject to a government rezoning resulting in a taxable value uplift to the land of more than $100K was subject to a Windfall Gains Tax. The taxable values were significant set at 62.5 per cent for any uplift between $100K and $500K and then 50 per cent for any uplift over $500K.

Any land areas in single ownership over two hectares are exempt as well as primary production land, amongst other things.

The tax is focused on capturing value uplift in a brownfield setting to aid redevelopment and intensification of their cities. We have similar challenges in funding infrastructure to support brownfield development and intensification here in New Zealand. While it’s cheaper for communities to intensify in the long run, it’s generally riskier and more expensive for developers to fund brownfield redevelopment upfront.

We’ve seen over the short term it’s expensive to upgrade roads and services within a “live” urban environment given the costs of traffic management, locating and removing old services, contamination management etc. Yet, it’s generally well worth incurring these short-term urban regeneration costs when the “whole of life” costs over the long term are considered.

It’s more cost-effective for councils, or council-controlled organisations like Auckland Transport and Watercare, to maintain assets within a compact network that serves a higher-density population, than it is to maintain an ever-expanding asset base with lower overall population density.

While I am not generally in favour of more taxes, the Victorian Government’s taxation response does provide an interesting example of a mechanism that has been implemented to capture value uplift from rezoning.

While the concept will be unpopular for some, we have to do something differently to achieve urban outcomes that work for the greater good and to create better, well-connected, well-functioning and more vibrant communities.

This article is a part of a three-part series. Read the other articles in the series:

• Land aggregation and the role of government