Funding Urban Infrastructure: Value Creation, Property Tax and other Revenues

The common idea underlying new approaches to funding urban infrastructure and other city facilities is that they create value which can be used to finance their provision. Two types of arrangements are possible for this: by capturing the land value they generate; or by increasing their ability to generate additional revenues, e.g. from retail outlets. The former approach has been strongly advocated by economists. However, that recommendation is based on an assumption of perfect capitalization, which does not usually occur. The experience of major airports illustrates the latter approach. It appears necessary to clarify the assignment of funding instruments in an urban context: what roles should be assigned respectively to land value capture and to the development of new revenues from shops and additional services? To answer these questions we consider a standard monocentric urban model but we do not assume perfect mobility between cities. This allows us to analyze situations with incomplete capitalization of the benefits of the projects into land rents. Moreover, we take into account the fact that, in actual tax systems, the property tax is a source of distortions since its tax-base includes the value of buildings. This places limitations on the funding urban infrastructure by property taxes. However, additional revenues should not be viewed primarily as financial tools for covering its fixed costs. Local taxes remain the most natural tools for that purpose, the development of other activities being conceived as an element of a strategy for global value creation.