Sustaining Mass Transit through Land Value Taxation? Prospects for Chicago Christopher Zegras, PhD, Associate Professor Shan Jiang, MCP/MST, PhD Candidate Department of Urban Studies and Planning Massachusetts Institute of Technology 77 Massachusetts Avenue Cambridge MA 02139 [email protected] [email protected] Christopher Grillo, MCP/MST IHS, Inc. 24 Hartwell Avenue Lexington, MA 02421 [email protected] May 2013 Notes: The authors are grateful to the research assistance of Jingsi Xu, who played an invaluable role in gathering, processing, and preparing the data; and Timothy Bates, who provided additional data processing and preparation support. Chris Grillo worked on this project while he was at MIT. This work was undertaken with support from the Lincoln Institute for Land Policy under a David C. Lincoln Fellowship in Land Value Taxation. This work reflects the views of the authors, not the sponsors nor the authors' organizations. The authors take full responsibility for any errors and welcome any comments. Contents 1. Introduction ............................................................................................................................. 1 2. Accessibility, Land Values, and Transportation Finance ........................................................ 2 2.1. Accessibility and Transportation Finance: The Fiscal Federalist Context ....................... 4 2.2. Capturing the Value of Public Transportation Investments and Services ...................... 18 2.3. Value to Capture? ........................................................................................................... 21 3. Research Context and Precedents .......................................................................................... 24 3.1. Transit Finance in Chicago ............................................................................................ 25 3.2. The Relationship between Public Transportation and Land Use in Chicago ................. 29 3.3. Property Taxes Administration in Chicago .................................................................... 31 4. New Estimates of the Relationship between Transportation and Land (Property) Values in Chicago ......................................................................................................................................... 33 4.1. Spatial Hedonic Model ................................................................................................... 34 4.2. Model Specification ....................................................................................................... 35 4.3. Model Estimation Results .............................................................................................. 38 5. Implications for Property Values, Taxes, and Local Transit Finance ................................... 45 5.1. Estimated Property Price Effects of CTA Stations ........................................................ 45 5.2. Estimated “Total” Value Added ..................................................................................... 49 5.3. Examining Public Finance Implications ........................................................................ 53 6. Conclusions ........................................................................................................................... 73 7. References ............................................................................................................................. 77 8. Appendices ………………………………………………………………………………….82 1 1. Introduction Interest in the relationships between transportation and land use remains strong for a wide-range of reasons, including growth management, housing affordability and equity, access to employment, concerns about public health, greenhouse gas emissions, etc. Within a given government jurisdiction, the land use and transportation policy domains often occupy separate institutional spaces, with different organizational structures, values, objectives, and cultures. Nonetheless, transportation and land use are inextricably linked by inter-dependent policy outcomes. Understanding these subsystems’ interactions is thus critical to developing strategies to meet agencies’ goals as well as the broader social and economic objectives and goals of cities and metropolitan areas. In this paper, we focus specifically on the economic link between transportation and land use as exhibited in property values, with the express purpose of viewing how this link should and can be exploited as a transportation finance tool. In particular, we examine the land value created by urban rail transit access. Metropolitan areas face countervailing forces that drive growth patterns – positive externalities of agglomeration draw people and firms together, while negative externalities like congestion push them apart. Public transit offers a partial solution to the congestion problem by creating a mass rapid transportation option for individuals, businesses, visitors, etc. The benefits of transit investments to the local economy should be reflected in business profits, individual income, and property values. We focus on this last source – the one most tangible for local government revenue generation. The idea of “capturing” the land value created by transit development as a source of project finance is not new, but the current lack of sustainable transit finance exhibited throughout the United States underscores the urgency of exploring viable alternatives to the status quo. By the end of the 1970s, as Anas (1982) discusses, a confluence of factors had already led to ongoing public transport financial crises in U.S. cities. Most of the problems then remain today, both in terms of operating and infrastructure costs. Highway competition, land use policies that poorly coordinate development with infrastructure, pressure for greater geographic coverage of transit networks, insufficient fare box revenues, under-priced transportation substitutes, lack of reliable funding from other governments; the confluence of these and other factors make it difficult to efficiently and effectively manage transit services in urban areas. Transit systems persist, however, because they bring value to the residents and businesses that they serve. Identifying those beneficiaries and devising means of making them contribute a greater share of funding can help stabilize transit agency budgets, improving service quality and, ultimately, supporting local economies. We examine these effects and possibilities in the City of Chicago, exploring the relationship between urban rail services, accessibility, and residential and commercial property values. Section 2 discusses the theoretical underpinnings of the relationship between accessibility, land value, and transportation finance; explores different taxing mechanisms; and reviews empirical evidence. Section 3 reviews the context of transit finance in the Chicago Metropolitan Area and previous studies of Chicago transit investment and land value capture. Chapter 4 introduces our hedonic pricing models, through which we estimate the impact of proximity to mass transit stations on property values in Chicago. In Chapter 5, we evaluate the potential revenues that Zegras, Jiang, Grillo Transit Value Capture in Chicago 2 could be generated in Chicago using land value capture to fund public transit and discuss implementation scenarios. Chapter 6 offers concluding thoughts. 2. Accessibility, Land Values, and Transportation Finance Basic economic theory suggests that households and other locating agents make trade-offs between accessibility, land area, and other relevant attributes in their location decisions. Accessibility measures the ease of reaching desired destinations from a given location. Most basically, the value of land, as an immobile asset, partly reflects the relative accessibility (ease and value of movement) to/from that land, depending on the use of the land. This conceptualization finds its roots in the work of von Thünen, who in the early 1800s theorized that land rent for agricultural activities can be explained by the relative productivity of that land (its yield) and the cost of transporting that yield to market.1 Presuming a centrally located market surrounded by farmland, this model leads to concentric rings of agricultural products radiating out from the market center. The amount that a farmer will pay for cultivating land – equivalent to the land value – will vary based on the productivity of the land for a particular product (land use) and the distance to market. Assuming transportation costs proportional to distance, all else equal a farmer will pay a decreasing amount for land rent as distance from market increases, resulting in a set of rent gradients for different land uses, extending in all directions from the central market. Almost 140 years later, Alonso (1964) extends upon von Thünen’s basic model and adapts it to urban land uses, deriving the theory of a bid rent function for urban location choices.2 Alonso bases his model in microeconomic theory, whereby a locating agent’s utility depends upon consumption of a generalized good, property size, and distance to the central business district (CBD). This agent aims to maximize utility, subject to an income constraint – the resulting bid- rent function represents the amount an agent is willing to pay for rent at different locations, with different distances to CBD (and, subsequently, different transportation costs), while maintaining the same levels of utility. The model reveals a