Instead of describing the general question, let me give a concrete example. Suppose in a city they want to extend a metro line but they don't have enough budget for it. Could the city designate a locality which would mostly profit from the extension and say that in the next 10 years any flat sold or rented in the area would have an additional 10% sales tax which would go to the metro building funds? I'm thinking that this way the residents would also profit financially (even those who don't use the metro), as due to the metro extension they could sell their flats for, say, 20% more, so about half of this increase would go to the city, the rest to the residents. What would be some issues with such a tax?

Ps. Of course there are several variants, like whether the tax starts only after the extension is completed (from a bank loan), how long the tax needs to be paid (fix years or until enough money is collected), should it be also for rents or only for sales, should only the first sale of each flat be taxed or also subsequent sales, how should the boundary of the tax be determined (possibly with several zones, like some paying just half the tax), which politician should steal the money etc. I'm mainly interested in why the main idea has never been implemented, AFAIK.

  • $\begingroup$ What you describe is fairly close in spirit to a land value tax: en.wikipedia.org/wiki/Land_value_tax $\endgroup$ – Ubiquitous Nov 22 '18 at 21:45
  • $\begingroup$ You may be interested in the political economy of Georgism which explores land taxation. $\endgroup$ – Samuel Russell Nov 23 '18 at 5:37
  • $\begingroup$ I don't think this has anything to do with land tax. $\endgroup$ – domotorp Nov 23 '18 at 9:27


What you are describing is called value capture. There are a variety of forms of the tax, each with their own pros and cons. The general idea is that infrastructure, particularly transport infrastructure, disproportionately benefits parties closest to the line.

A good example is happening in Western Sydney in what was semi-rural land. An international airport and substantial extra development. Large land-owners found that their property is just down the road from a planned town-centre and they can build apartments on their paddocks. There was massive value uplift which was not captured by the government, but could have been.

I'm not aware of a reason why the policy shouldn't work, but it is politically tricky.

  • $\begingroup$ It seems that this is quite similar to what I'm asking, except that in most cases they impose a yearly tax on the locality. I think this could be harder to meet for residents than a sales/rent tax, as in the latter case they cannot lose financially (if the numbers add up). $\endgroup$ – domotorp Nov 23 '18 at 9:53
  • $\begingroup$ I can't find a source for this... I'm pretty sure that it doesn't matter if it is up-front or paid annually... An up-front tax has the disadvantage of hitting a bunch of landowners with large debts. Probably politically challenging. This is why a land tax is preferred, it encourages better utilisation of land. $\endgroup$ – Jamzy Nov 25 '18 at 21:53
  • $\begingroup$ But that's the whole point of paying only a sales tax that nobody would be put in debt. In an ideal scenario property prizes rise by 20%, and the tax is just 10%, so whenever you eventually sell your property, you're still 10% in with the whole metro scheme. $\endgroup$ – domotorp Nov 26 '18 at 8:42

Perceptions of inequity between different localities can be a significant obstacle to such schemes, making it difficult for them to gain sufficient political support.

Taking the metro line example, it may seem fair that residents (and/or property owners) in the locality that will benefit from the line should contribute to its cost via an additional tax not levied on residents in other parts of a city. If the locality is the first suburb of the city to have a metro line, then residents may perceive that the arrangement is fair. If however other suburbs already have metro lines, perhaps built and paid for many years ago, and already benefit from use of the lines and enhanced property values, then the locality's residents will very likely focus on the unfairness of paying an extra tax for a facility that other localities already have for free.

Addressing the comment by domotorp, the locality's residents are unlikely to accept that their only options are a) a metro line paid for by an extra tax on the locality only, and b) no metro. Other options they might try to persuade the city government to adopt are metro paid for by: c) an extra tax (at a much lower rate) on the whole city; d) additional borrowing; e) reducing or cancelling other expenditure (expecially if the metro is just one of several proposed large infrastructure projects).

  • $\begingroup$ Given that their option is either no metro or metro with tax, they might still prefer the former, even if other suburbs got it without tax earlier. I think it is fairly common that government support stops in some cases. For example, in Hungary highways were built by the state and free until the 1990, but the ones built later by companies had a toll (for about 10 years, since then all highways have the same toll). $\endgroup$ – domotorp Nov 23 '18 at 9:32

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