Betterment Levies

Betterment levies are a form of tax or a fee levied on land that has gained in value because of public infrastructure investments. They are considered the most direct form of value capture (Peterson 2009). Whereas impact fees and developer exactions work from the cost side of budgets, betterment levies try to capture part of the infrastructure investment already incurred by the government.

There are various ways to implement betterment levies. Indeed, many countries have at one point or another experimented with different variations of this tool. In the United States, many cities used a variant of betterment levies called special assessment districts, which are covered later in this chapter. These districts levy a special assessment on the increment in land values caused by public infrastructure improvements. This assessment is then used to repay the debt incurred from capital markets. For instance, at one point, Great Britain imposed a betterment tax equivalent to 40 percent of the land-value gains that could be attributed to public infrastructure investment (Peterson 2009).

One developing country that has widely—and arguably successfully—used betterment levies to help fund public infrastructure is Colombia. According to a Lincoln Institute study of Colombia’s use of betterment levies (known as contribucion de valorizacion), in 2011 Bogotá had made about US$1 billion worth of investments in public works from this levy. An additional eight smaller cities combined had obtained another US$1 billion for public infrastructure. The collection of this fee has been generally accepted by taxpayers. Again, according to the Lincoln Institute study (Greenstein and Sungu-Eryilmaz 2004), it had relatively lower default rates than compared with property taxes. Controversies have surfaced, nevertheless, over how the charge is calculated (Borrero and others 2011).

In practice, betterment levies have proven challenging to implement. The main challenge comes from the fact that it is difficult to quantify the land value increment resulting from infrastructure investments. Even in countries with up-to-date property data, recorded land values commonly account for two-thirds or less of the observed variation in the prices of land parcels (Peterson 2009). It is even harder to identify the portion of value increase due to infrastructure investments. Different studies and ex post analyses by academics to determine increment land value increases can differ by as much as 300 percent. These variations are attributable to differences in the way aggregate land value changes are distributed among different parcels. Overall, it seems that the cost of administering parcel-by-parcel betterment levies could be high compared to the collected revenue (Peterson 2009). In sum, this challenge makes it administratively difficult to implement a betterment levy scheme.

For developing countries, in particular, this tool is more problematic. Critics of betterment levies consider this tool to be regressive in nature. They argue that having residents pay for a large portion of public infrastructure results in procurement of infrastructure in the wealthier parts of the city by those who can easily pay for the services. However, evidence from Lima, Peru, suggests that the low-income households are more eager to pay for the public infrastructure and services than the wealthy. In the early 1990s, the city launched a successful program featuring 30 projects that used a contributory tool for financing public services. It was better received by the poor communities than by the higher-income households. Another challenge with betterment levies is the fact that their implementation often meets resistance from public opinion (Greenstein and Sungu-Eryilmaz 2004).