A significant portion of New York City property owners may soon find themselves giving the Metropolitan Transit Authority more money to fund new construction. Thanks to a provision in Governor Andrew Cuomo’s 2019 budget proposal, the MTA may soon be allowed to tax not only properties that will benefit from new construction going forward but also ones that have financially benefited from any major infrastructure project in the past 37 years.
The MTA has borrowed more than half of its funding for recent capital projects, according to a New York Times investigation, or about $15 billion in the past six years. Paying off that debt has become a significant line item for the transit authority’s budget, with debt service accounting for $2.6 billion, or 16 percent, of the agency’s budget — more than the Long Island Railroad and MTA buses combined.
To address this massive debt, Cuomo’s office has proposed something that looks an awful lot like value capture, a common funding mechanism that, as the Village Voice has previously written, works under the “If You Build It They Will Come” theory of urban development. When a new subway station gets built, property values around that station rise. Under value capture, the resultant higher property taxes go toward paying off the cost of that subway station.
Traditionally, value capture is not a new tax, but a tool for directing new property tax revenue toward paying off a specific project. The logic is that the tax revenue would not exist if the new project was not built, so it’s only fair for that revenue to pay for the project.
Value capture is widely popular because, when designed well, it funds development without raising taxes and is paid off by the property owners who benefit the most. It plays into the “consumer model of government,” says Lauren Fischer, a doctoral student at Columbia University who has done extensive research on value capture, “whereby people who pay more in taxes deserve more direct benefits from the government.” When it comes to mass transit improvements, value capture provides a palatable alternative to raising fares or increasing taxes.
According to Fischer, though, “the devil is in the details with value capture,” because it’s often the specifics that make or break the project. Sometimes, market conditions change, resulting in a shortfall; this is what happened with the Hudson Yards 7 line extension, where the city ended up having to spend hundreds of millions of dollars to make up the difference. Other times, people mistakenly expect value capture to work like magic, as was the case with Mayor Bill de Blasio’s erstwhile BQX streetcar project. The streetcar would have had to single-handedly boost property values by 17 percent to pay off the $2.5 billion project. If it didn’t, the money would have had to come out of the city’s general fund.
But Cuomo’s budget proposal is “not what people typically think of when they think of value capture,” according to New York City Independent Budget Office deputy director George Sweeting. The proposal allows the MTA to create “transit improvement subdistricts” of up to one mile in radius around capital projects that cost $100 million or more. The agency would then have the authority to add a surcharge, up to 75 percent of the increased property taxes.
Although the proposal’s broad outline fits the narrative of making those who benefit from infrastructure improvements the most pay for them, it differs from more traditional conceptions of value capture in several key ways:
Unfortunately, the proposal is light on specifics, meaning there are a lot of details still to be revealed. Because it’s so broad, it gives the MTA a lot of power to issue a tax on many property owners in New York, far more than traditional value capture proposals, which tend to be limited to the area surrounding a specific project.
Due to the relatively low cost barrier for the tax, the fact that it could be applied to any project from the last three and a half decades, the large radius to where it could be applied, and the fact that the proposal doesn’t specify whether the radius extends from a single point or the entire line of a project, a significant portion of the city could potentially find itself subject to such a tax.
On the one hand, this would mean a lot of money for the MTA’s capital projects, which is the whole point of the proposal. On the other, Sweeting described the one-mile radius as “very big” by value capture standards, particularly for transit-dense areas like Manhattan. To take East Side Access as an example, a one-mile radius from Grand Central Terminal would stretch from East 62nd Street down to 23rd Street and across to Ninth Avenue. Then again, that is just the upper limit; the MTA could well set the subdistrict much smaller than that.
Giving the MTA a dedicated revenue stream for capital projects so it doesn’t have to borrow billions of dollars is critical for reforming the beleaguered transit authority — particularly since the budget includes no trace of Fix NYC’s congestion pricing plan, which called for all revenue to go directly to the MTA — but it must come in conjunction with internal reforms on how the MTA spends its capital budget. A recent Regional Plan Association report found “the entire process of designing, bidding, and building megaprojects needs to be rethought and reformed top-down and bottom-up” and conservatively estimated basic reforms could save the authority 25 to 33 percent on capital projects. The New York Times recently reported that the East Side Access project is expected to cost seven times more per track mile than the average project of similar scope elsewhere in the world.
Money not spent on capital projects or paying off debt from previous ones can be allocated toward other endeavors, such as maintaining the crumbling subway system, upgrading its antiquated signals, and other critical initiatives. But more money will only fix the problem if the MTA learns how to spend it.
Clarification: This article initially described the new tax surcharge as being “up to 50 percent of the increased property taxes.” In fact, while the estimated property value increase is capped at 50 percent of the current land value, the new tax surcharge can be levied at up to 75 percent of the share of increased property taxes attributable to the MTA project.