Land Value Capture, Congestion Charges
and Rational Transportation Strategy

Dave Wetzel

[Reprinted from GroundSwell, November-December 2005]

Dave Wetzel, Vice Chair of Transport for London, traveled from England to Philadelphia to make a power point presentation on August 4, 2005 at the Council of Georgist Organizations annual conference in Philadelphia, PA.

Wetzel is also the Chair of the Labour Land Campaign, web site www.labourland.org. He also conducts an international discussion list serve called the Land Café, LandCafe@yahoogroups.com. He may be emailed at davewetzel@tfl.gov.uk.

The following columns were compiled from an audio recording of Wetzel's presentation by GroundSwell editor Nadine Stoner and then were edited by David Wetzel.

Transport for London (TfL) is the London Mayor's transport authority. Londoners make 6 million bus journeys every day and 3 million Underground train journeys every day. But TfL also operates other transits in London, the tram in south London, the Docklands Light Railway in southeast London, and it is developing new train lines and planning to build new tram systems. In December 2005 TfL extended the Docklands Light Railway to the city airport, a small airport that provides regional flights in the UK and across the channel into Europe. TfL is also responsible for passenger boat services, the Woolwich Ferry and street management. Pedestrian activity is encouraged and a part of Trafalgar Square has been pedestrianized. You can now walk from where Nelson's column is to the statue of Eros in Piccadilly because there are no traffic lanes to cross. Cycling has doubled over the last five years since we got established, Wetzel said.

Transport for London spends $10 billion each year. Wetzel and the current mayor of London were socialist activists together in the 1970s. Then in the 1980s Wetzel got elected to the Greater London Council, where Ken Livingstone was already seated. In 1981 a midnight coup made Livingstone leader of the Council. Wetzel , an ex bus conductor, was elected to Chair the Transport Committee. (Wetzel's father was a bus conductor for 45 years in London.)

In 1999, Livingstone, then a "back bench Labour MP", heard that Wetzel had a restaurant in London. He came to the restaurant to write a review for the local evening newspaper, then he asked Wetzel, do you want to help me change London? Wetzel agreed, the rest is history.

Wetzel has made his land tax PowerPoint presentation to mayors and transport professionals across the world, in Dublin, Holland, Spain, Germany, France, Belgium, Shanghai, Athens, Istanbul, and the United States. In November 2004, he was at the University of Minnesota.

The presentation is usually to a totally non-Georgist audience, and to people who are more interested in transport, especially in London's congestion charge. London now charges $13.80 for every vehicle coming into central London.

Wetzel asked the audience to imagine that the planet Earth was so heavily polluted that we could not drink the water nor breathe the air and so 6.5 billion people flew into the heavens on space ships to find a new planet. Finding a new planet, the people needed to be fed, sheltered, employed, etc. The General Secretary of the United Nations directs the oil barons and oil sheiks to find oil, fence it off, and we and our children and descendants would pay them for oil as long as the oil flows. The big mining companies were directed to find where the coal, nickel, diamonds, and minerals were buried and fence that off and we and our children and descendants would pay them for that as long as the deposits last. The rich landowners formerly from planet Earth were to find the best residential sites and find the best sites for cities, towns, and villages to grow and wall off that land and we and our children and descendants would pay rent to them ad infinitum. "Where is my share?" shouts a small lad from the back of the crowd. If there are no changes to the system whereby so few control so much, when the lad grows up don't be surprised if he reaches for a rifle or mixes fertilizer for explosives. [On planet Earth now fewer than 10% of the population controls over 90% of our natural wealth (not including buildings or anything manmade), just what Mother Nature provides us with.] The way the economy is controlled allows it to continue to sow the seeds of unfairness, discontent, and outrageous behavior.

Wetzel showed a view of a tall office block, opposite his restaurant, which has been empty for 20 years and which pays no taxes. They pay no Rates ( property tax), and they certainly pay no land value tax in the U.K. Garbage gets dumped there, there are rats, there have been raves where young people have gone on weekends with loud music, etc. So it drags down society, it drags down the local community, it drags down the local economy, it denies people jobs and homes.

The next slide showed a factory. When this factory was operating they made pumps, huge pumps taller than the ceiling, for ships. It is right in the heart of Brentford. Wetzel was there in 1987 when he was the leader of his local council. Paul Kyle, the owner was 3rd generation; his grandfather had started the business, his father was still chairman and he was managing director. It was called "Wilson and Kyle". Paul Kyle took Wetzel around. He was employing about 300 people that were making these pumps. He was very proud of it, but he said "when my father pulls out of this, I am not going to continue taking business risks, building these pumps and paying all these absurd taxes and things. The site backs onto the river Brent. It overlooks the River Thames. On the other side is the Kew botanical gardens with flowers, trees and plants from all over the world, if this site is sold for residential use, and somebody builds flats or apartments on it, each one with a little balcony overlooking the two rivers, overlooking the gardens, it will be worth a fortune".

Paul Kyle later closed the factory, sacking 300 workers; he told Wetzel he was then rewarded by having his property taxes reduced in half. He sold the building to a Malaysian property company, who smashed the roof so the weather and the rain came in and the building became uninhabitable. They were rewarded then with no rates at all on this building whatsoever. Yet demand for the site for residential depends on all the local services, proximity to the railway, proximity to the underground, local bus routes, police, fire, and other services. And that is the absurdity of the U.K. system.

Wetzel was midwife to the Docklands Light Railway in 1981. He did a deal with a millionaire property speculator who the Tory government had put in charge of Docklands development, and it was agreed to go to government to get $133 million to build this light railway. He wanted it completely computerized, and Wetzel said OK but it must be accessible for people with disabilities, it must have a train captain on every train, and it must also have stations that serve local people with local needs as well as for the business district. On the strength of that it was built. It is now a $1.7 billion plus railway that runs through Canary Wharf.

High rise office buildings did not exist in Canary Wharf when the railway was planned. Canary Wharf employs about 60,000 people today. Those 60,000 people get to the site using the Docklands light railway, the roads which the Docklands Development Corp. built with the taxpayers money, and the Jubilee Line Extension. If that transport did not exist, that land would have almost zilch value, because you wouldn't be able to get 6,000 people onto the site each day, let alone 60,000.

Not satisfied with that, there are now plans to build a new railway called Crossrail to go across London. There will be one branch of the Crossrail going through Canary Wharf and that will allow them to bring 145,000 people onto the site each day. Just imagine what that is going to do to their land values. (Of course if you built a railway in the middle of the Sahara desert and no oasis on either side and no natural minerals to be extracted, it would not add to land values because nobody would want to use it, so it is not inevitable that building a railway puts up land values.)

We know that if we invest in transit and invest in new roads where people want to use them, if you put a railway where the community wants it, then it will increase land values. It seems ironic that the workers that are going to work in these buildings and on these sites are the ones who are going to fork out with their income taxes and their sales taxes to pay for these improvements and yet the owner of the land is the one that gets the biggest benefit.

The London evening paper, the Evening Standard, is a right wing newspaper. They pointed out this gentleman bought a factory to make umbrellas. He paid just over $1 million for the factory some years ago, and in 2002 it had increased to $52 million. He made more money out of land speculation than he will ever make selling his umbrellas. On June 29th, there was a supplement to the Evening Standard, and it tells us that traveling times to London drive property prices. How true that is.

Wetzel then cited a free mike session at the CGO conference three years ago in London, Ontario, Canada. Everett Gross (Nebraska) got up and told a story of how he explains economic rent without using the word economic or the word rent.

Generally what Gross said was that he lives in a small town with a population of about 10,000 people. A gentleman came to the town to build a factory and he chose a woman realtor. He described to the realtor the exact size of the piece of land he needs to build his factory. She said "come with me; I have got exactly that size piece of land". They get into the automobile and drive down the freeway, and drive off the freeway onto a local road, drive off the local road onto a country road, drive off the country road onto a dirt track, and in the middle of nowhere they get out of the automobile, and walk for 10 minutes through marsh, bog, bushes, and eventually they get to this site. She said here you are, this site is for sale, it is $10,000. The factory builder looks around and asks, "is that the only access or is there a nice highway on the other side of the field?". She said, "no that's the only access". He said "have you got any energy coming to the site? Gas? Water? Sewage? Cable?" She said, "No there is none of that out here". He said "are there any housing estates just beyond the horizon with a local bus service? " She said, "no buses, no trains, no local housing estates". She said "you don't look very happy". He said "I am not. I want to build a factory, but I have to bring raw materials in, bring in capital equipment, I have got to employ people, and I have to get my finished goods away from the factory. I even sell some of my products at the factory gate, so how are my workers and my suppliers and my customers going to get here, and how do I get the finished goods away?"

She said, "don't worry. I have got another site, so come with me". So they walk 10 minutes back to the automobile and drive back towards the center of town and half way through in the suburbs they stop at this site, and she said "now this site here on the left is for sale. It is exactly the same size as the first site I showed you. It has got cable, it has got energy, it has water, it has sewage, it has good bus service, there is little crime because the police are up and down all the time, there is a train station, there is a big housing estate, there is a hospital , and there is a school. The road is well made up and looked after by the local authority and it is well lit". He said "yes, this is more like it, and I will pay $10,000 for this". She said, "hold on, this is a good area. The cost is $110,000". He said "but you told me it is the same size". She said "it is the same size, but look at all these wonderful services". He scratched his head a bit and said, "yeah, you are right, it is worth $110,000 to me. Who do I make the check payable to? The bus company, the police department, fire brigade, housing authority, people that run the hospital, the school board? " She said, "no you don't pay any of those. You pay it to the gentleman who is selling you the land. " He thought a minute and then he said "I've got it, he keeps the $10,000 and the $100,000 goes to all these agencies". She said, "no not at all. The landowner is retiring to Florida, and your check is going to be his pension". "So how do you pay for all these wonderful services?" "Well, we wait until you build your factory and charge you a property tax and when you employ staff, you have to pay an employee tax, and when you sell your goods we charge a sales tax ." He said "that is not fair. I am paying twice. I am paying once for this man to go to Florida, and again I am paying for all these agencies".

And that is Wetzel's complaint with what we do. We actually pay twice, once for the services to the person who has given us permission to use the land via rent or mortgage and again when we have to pay taxes.

Wetzel then gave a brief presentation on economic rent, generally agreed to by economists from the left and the right across the board , including people like Adam Smith, particularly David Ricardo with his theory of rent, Karl Marx (volume III of Das Kapital), and Nobel prize winner William Vickrey.

Wetzel used an example of four fields of equal size and equal access, with the same inputs being applied (i.e. the same labour and capital on each field). If the fertility were the same on each field and the total income was sufficient to pay wages and a reasonable return (say 10%) on capital employed then production takes place on all four fields. However, if the income was below this minimal level then production would not take place. However, in Wetzel's example there was a difference between the fields. That difference being the fertility of the soil resulting from Mother Nature. He showed that there was a difference in extra or surplus profit based on the fertility of each field. In practice this surplus profit is collected by the landowner in the form of economic rent. Hence, economic rent is not a cost of production but a surplus collected by landowners in return for allowing producers to use the product of nature.

Britain's government wants again to introduce a tax on development land (the proposed Planning Gain Supplement), which Wetzel opposes. The demand for this arises when people observe that a farmer's field worth $12,000 gains planning permission to build houses, and then rises to $1.7 million an acre or more. The natural reaction is to tax him on that difference. Tax him once in the lifetime of the building and you tax in such a way that they can avoid it. If they don't build the building, they don't pay the tax. Three previous Labour Governments have introduced the same tax in 1947, 1967 and 1977, and on each occasion the tax failed!

Because the effect was that they didn't build the buildings, they didn't pay the tax, and it was like making the U.K. smaller. And of course that increases the land price. But instead of a development land tax, if they had gone for a Land Value Tax, that would have been like making Britain bigger and making land cheaper because more land comes into production where people want it. You don't need the urban sprawl. You don't need the ribbons being built into highways if you use land in your towns and cities more intensively. To avoid the tax you only need to avoid the event. Why should we tax an event we want. We want the development to take place.

In addition, all sites benefit from the activities of the community. Why exclude the other sites from paying towards that benefit?

Wetzel said why tax development sites and not all sites? Why ignore current land values and why ignore future land value increases? So, no to development land taxes and no to the planning gain supplement , and the alternative is to tax all land with the land value tax or site value rating which is the local land value tax or the Location Benefit Levy. (In the U.K. we have been thinking about a different title for land value tax and "Location Benefit Levy" is being considered but not yet agreed).

You may have heard of Robin Hood who used to live in Sherwood Forest in Nottingham in the midlands of England, and he was an outlaw and he would rob the rich but he was a nice bloke because he used to give to the poor. The Inter-City bus network comes through London to Victoria Coach station which Transport for London operates. Transport for London own two-thirds of the land but Grosvenor Estates owns one-third of the land, for which they are paid $396,000 a year. Think about who travels inter-city by coach. Rich people fly; they go by train, they go by car, it is the poor traveler that goes inter-city by bus. And where does the $396,000 to pay to Grosvenor Estates come from? From the coach companies, of course, and the coach companies get the $396,000 from the ticket price. So we have the Hood Robin situation of the poorest travelers subsidizing Grosvenor Estates owned by the Duke of Westminster, the second richest man in the country.

This isn't new stuff, because William Vickrey suggested that the rights to the airwaves for mobile phones should be auctioned. The British government decided to auction leases needed for 3G mobile phones for 20 years -- and raised $38.8 billion. They could have given them away (to the Duke of Westminster, like they have the land). They could have sold them outright like Mrs. Thatcher did when she sold off publicly-owned bus companies and privatized everything including the bus companies' land. As soon as they got the bus companies, the new owners closed the garages in the towns. Those garage sites are now shopping malls, office blocks etc. so with money they got paid for the sites the new bus company owners regained the purchase price they had paid to the Government for the bus companies, and now the garages have all moved out of town onto low value land.

But the freehold for these airwaves wasn't sold, they were rented for 20 years. And the beauty of it all is that in 16 years time, because this was all in 2001, assuming the technology still needs access to the airwaves, we can do the same thing again, to benefit the national economy.

As well as supporting LVT, William Vickrey was also a proponent of congestion charging. Transport for London charged $8.60 and in July of this year it went up to $13.80 for vehicles to come into the central area Mondays to Fridays, 7:00 AM in the morning until 6:30 PM in the evening. But not on weekends. There are exceptions -- buses don't pay; taxies don't pay, people with disabilities don't pay. The Queen has to pay. Some Tory MPs wanted an exemption for the royal family and they wanted an exemption for MPs. The mayor said "No, there are buses around London and trains; they don't need to bring their car. If they bring their car, they still have to pay." TfL did exempt the armed forces, though. The police and the ambulance and the fire brigade are exempted. As a result of this congestion charge, there is an 18% reduction of vehicles coming into central London. O nly half of the vehicles coming in pay, the other half are exempt. Clean vehicles are also exempted, so if you drive a Toyota hybrid Prius or an electric vehicle you don't pay the congestion charge. So it is encouraging the sale of those types of vehicles.

So Congestion Charge has reduced the vehicles coming in every day down from 270,000 to 200,000. Because traffic congestion has been reduced journey times have improved. The proof of that is the buses which always ran late because of the congestion. Now they are all running early because there is no congestion, so the buses will be retimed.

There is also the benefit of fewer road crashes, fewer injuries in accidents, and less air pollution and it is easier for pedestrians to cross the roads. But what the congestion charge demonstrates is really the important lesson that if society charges for a scarce resource, like scarce city road space, people make better use of it. So similarly the effect of a Location Benefit Levy will be to encourage landowners to make better use of their sites bringing brown field sites in towns and cities that lie empty and unused for years into use and avoiding urban sprawl and ribbon developments into the countryside.

Similarly, landing slots at major airports are often scarce. A year ago an Australian airline purchased two slots at Heathrow airport for landing and take-off. They paid $17 million each. So there is big money, rental value, that airlines enjoy. Each airline shows in its accounts the value of its landing slots. A landing slot is permission for a plane to occupy a certain space at a certain time. Airlines haven't invented time and space, so we should all share that natural wealth together. We could use that wealth to insulate homes and our schools from airport noise. We should be doing more on the roads because airports not only create noise and havoc in the sky but also on the roads that service the airport; the people living on those roads suffer.

The interesting thing is that the Financial Times (12 Feb. 2003) understands that buyers who predict new road and rail links can make a fortune. Individuals are making a fortune, and companies are making a fortune, and they are doing it at your expense. Now the press is telling us about hot property and that plans to extend the London tube sparks a house price boom in the east. The houses don't increase in price. The woods for the floor, the tiles for the ceiling, the glass in the window, the bricks and the mortar, they don't increase by more than the rate of inflation. Houses don't go up in price. It is the location that increases in price, not the house itself.

Wetzel's predecessor Frank Pick was the vice-chairman of the London Transport Board. Pick gave evidence in 1938 to a commission called the Barlow commission. He said the moment an underground extension is projected the value of the land is at least doubled. When the railway is built and the stations are opened, the land adjacent to the stations is at least quadrupled in value. In view of the difficulty of maintaining a public utility like the passenger trains from the receipt of fares, there is every reason in the interest of the public why the board should receive its appropriate share from the land values it helps create. The earnings from fares, even after favorable circumstances are not sufficient to repay the capital investment.

A London property developer, Don Riley, has written a book "Taken for a Ride". He describes how a new tube line, the Jubilee Line extension (servicing an area where Don Riley owns properties), has dramatically increased land values.

He describes in the book, how during the construction of the line he was invited to the site to see the men digging the tunnels. He saw that these men were sweating and were working long hours , they were risking their lives, they didn't know where their next job was coming from. And every day when the tunnel got a few yards longer, Don Riley says his land value was increased. He was making money while he slept, and these men were working to create it for him. The statement is unusual for a property speculator, but he calls himself a property restorer because he gets hold of old warehouses and makes them into modern offices with a garden roof and, unusually, he actually advocates the Land Value Tax. Don Riley thanks all the lovely taxpayers because he used to be a millionaire, and now thanks to them he is a multi-millionaire. He has shown that land values have increased by $22 billion around the 11 new stations, and the line only cost $6 billion to build. So the taxpayers paid $6 billion and they put $22 billion in the pockets of land owners.

The Metropolitan line was built over 100 years ago and the underground company bought the land where they were going to build the railway at agricultural prices . They then built the railway and they sold the land to house builders around the station at much higher residential land prices. And they made a nice tidy killing that didn't pay for all the building of the railway but it made a nice contribution. But, of course, a hundred years later we have got to spend more than a $billion upgrading and renewing that line, Wetzel said. And when they built that line, some places like Amersham and Chesham did not exist, and now they all have high house prices. If we said no we're not going to do that rebuild, we are going to close the railway, and by the way the government says we are going to close the main highway into London as well, you can imagine what would happen to the land values in that area. So by spending the money on the highway and keeping it and spending the money on the underground and keeping it, we are making a gift to these landowners. But yet we do nothing to collect the value of the land that our activities are going to create, but of course, we are collecting the money from the people in their sales tax and their income tax. Wetzel displayed another newspaper headline, "The Profit Zone - what your tube ticket says about the value of your house". With London prices rocketing in just five years. If you live near a tube station, you are in the profit zone.

So, land is a natural resource; land values are created by whole communities -- not by individuals, and certainly it is not landowners who create land values. Expenditure on public services usually leads to an increase in land values, but also it is private services as well, and if my country gives permission for planning a new building, that also gives a windfall to landowners, Wetzel said.

And we know from our own experience that taxes on labor and capital act as a drag anchor on the economy.

Land Value Taxation (LVT) is a fair way of paying for public services. It encourages new capital investment. If you can't put your money into a land bank and land speculation, you are going to put it into new machinery and a factory or a new office building where workers become more productive. It makes the economy stronger, it promotes the use of empty sites, it helps prevent urban sprawl. The UK government is going to build new houses near Cambridge University, and when they have built all the houses and have provided all the roads and infrastructure that is needed, they are going to come and say to a bus operator, "we want you to run a bus service". Well, there is a car in every garage and there is a 2nd car on every highway, and some houses have even got a 3rd car out on the road. So if we run a bus not many people are going to use it, so we can only justify one bus an hour and as only about 5 people will use that bus we will need a subsidy. The government will give them a subsidy to run the bus.

Now imagine that empty office in front of my restaurant and the others like it in my area were taxed through a land value tax. The finance director of the company owning that land would soon be on the phone to the chairman saying bring it into use, or we will have to sell it because it is costing us $500,000 a year in land tax. So it would be prudent to use the site. Maybe if used for housing, instead of people living in Cambridge and having to commute all the way to London for their jobs, they can live in Brentford and have an easy ride on the underground or the main line railway into town for their employment. Their families, their kids, would see more of the breadwinner because they wouldn't be commuting for an hour and a half on their long journey.

Instead of having one bus an hour in Cambridge, they could now benefit from three buses per hour outside their front door.

And if they brought with them the subsidy from Cambridge for the hourly bus, there could be four buses an hour outside that site. So everybody on that bus route, not just the newcomers, could enjoy a fifteen-minute service instead of a twenty-minute one all at the same cost outside their front door. So the whole city's economy works better because with LVT, we have avoided urban sprawl and we have made a denser more efficient city for people to live and work in.

Unlike other taxes, LVT cannot be avoided, you can't put land in your pocket and take it to the Cayman Islands. LVT is easy to assess and collect. It would provide automatic compensation -- if a railway is built outside your front door with all the noise and vibration and visual intrusion, your land value goes down, your tax bill goes down. You don't have to fill in forms asking for compensation, it is automatic. LVT facilitates low interest rates and if you doubt it will cure the business cycle there is a book by Fred Harrison, "Boom Bust", and it is sequel to his 1983 book, "The Power in the Land", which predicted that there would be a crash in 1992, and Harrison is now suggesting that there will be a crash, certainly in the U.K. in 2010.

Finally, Wetzel commented on his recent visit to Harrisburg, Pa where a form of LVT (the two-tier tax) has been operating for many years and the city has seen a reduction in empty sites and buildings, massive increases in inward investment, a staggering growth in the business tax roll, more jobs, less unemployment and even less crime, and a Mayor who has been re-elected at every opportunity since 1982!