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One water catchment: one regional government

By Gavin Putland - posted Tuesday, 11 September 2007


Significance of water catchments

Three prominent types of infrastructure systems, namely water supply, drainage, and sewerage, are partly or fully dependent on gravity, so that watersheds tend to be system boundaries: each system and its effects on site values are confined to single water catchment. Furthermore, a bridge over a waterway connects one part of a catchment to another, and its effects on site values are (usually) similarly confined.

If the government responsible for such infrastructure does not have authority over the whole catchment, some of the related uplifts in site values may fall outside its taxing jurisdiction (the "spillover" problem), in which case the viability of the project may depend on co-operation with some other government(s). As the number of interested governments increases, the probability of agreement decreases. The opposite situation - one government serving more than one catchment - does not cause spillover, but makes government somewhat more distant from the people.

To avoid the spillover problem there should be, at most, one subnational government per catchment. This rule is flexible, not only because of the words "at most", but also because one "catchment" can usually be divided into sub-catchments; the rule implies that all regional boundaries should be watersheds, but not that all watersheds should be regional boundaries.

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Example: the first Don Pedro Dam

In 1923, the farmers in the Irrigation Districts of Modesto and Turlock in California's Central Valley celebrated the completion of the original Don Pedro Dam, which was then the tallest gravity dam in the world (86 metres). Incredible as it may seem to modern Australian readers, this project did not come out of any state or federal pork barrel, but was conceived and funded entirely by the two Irrigation Districts. The up-front cost was met by selling bonds, which were repaid over time by land value taxes imposed within the districts by authority conferred on the districts through state legislation.

The main political obstacle to the project was the need to obtain agreement between the two districts, which were in the same catchment but on opposite sides of the Tuolumne river. The directors of Modesto, who allegedly stalled the negotiations with Turlock, had two of their number recalled by the voters, and were confronted by at least two public meetings of angry farmers telling them to get on with it. If more than two districts had been involved or the voters had been less well informed, the project might have failed.

Significance of urban areas

A new suburban transport route enhances site values in locations serviced by the new route, or by existing routes on which congestion is relieved by the new route. The effect on site values tends to be confined to a single metropolitan area. If the government responsible for a particular project does not have authority over the whole metropolitan area, some of the related uplifts in site values may fall outside its taxing jurisdiction, in which case the viability of the project may depend on co-operation with some other government or governments.

Hence it is desirable to have at most one jurisdiction per metropolitan area. Because of the tendency to build settlements on waterways, one jurisdiction per catchment usually implies at most one jurisdiction per metropolitan area; the exceptions tend to be large metropolitan areas resulting from conurbation or sprawl.

Example: London Underground

Don Riley, a successful property investor, has estimated that London's long-delayed Jubilee Line Extension, which cost the taxpayers £3.5 billion, increased site values within 1,000 yards of the ten new stations by a conservative £13 billion. If 27 per cent of that uplift in site values had been reclaimed through the tax system, leaving the other 73 per cent for the lucky property owners, the Jubilee Extension could have paid for itself without burdening any other taxpayers. Meanwhile in other parts of London, the long-promised Crossrail and Chelsea-Hackney projects remain stalled because of alleged financing difficulties - allegedly caused in part by the cost of the Jubilee extension!

If responsibility for a proposed suburban railway were divided among several local governments, so that no single government could manage the entire project or tax all the ensuing uplifts in site values, the need for agreement between governments could stall the project.

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The continuing delays in the London Underground, however, have a more fundamental cause: the failure of the tax system to reclaim a sufficient percentage of uplifts in site values. If the "sufficient percentage" is again 27 per cent, the implication is that property owners near the Crossrail and Chelsea-Hackney routes, at no cost to other taxpayers, could have received 73 per cent of a multi-billion-pound windfall. Instead, they have received 100 per cent of nothing. Such are the penalties for opposing site value taxation.

Conclusion 

Any infrastructure project that is economically justifiable can be funded out of the uplift in site values caused by the project. If the tax system fails to reclaim a sufficient fraction of such uplifts, projects that are more than capable of paying for themselves will be stalled because of an alleged lack of funding. Even under a well designed tax system, a desirable project may be stalled if some of the related uplifts in site values fall outside the jurisdiction of the government financing the project. But the latter risk can be minimised by having (at most) one subnational government in any water catchment or metropolitan area. These facts should guide all reforms of jurisdictional boundaries, from local council amalgamations to wholesale redesign of the federal system.

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Some parts of this article are based on the working paper "Adequacy of land-value capture for the funding of infrastructure".



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About the Author

Gavin R. Putland is the director of the Land Values Research Group at Prosper Australia.

Other articles by this Author

All articles by Gavin Putland
Related Links
Centre for Land Policy Studies (UK)
On housing affordability, including effects of infrastructure and its funding
On shifting local property taxes onto site values, with no losers
Prof. Mason Gaffney on the decline of land-value capture

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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