“Location, location, location.” As any good real estate agent will tell you, a property’s location significantly impacts its value and desirability, sometimes even more than its physical characteristics.
For example, two identical properties, one with good road access, and another without, will be valued very differently. The direct relationship between local road access and property value is why in most states, local governments are assigned the responsibility for constructing and maintaining local roads. Given that property taxes are the main revenue-raising tool of local governments, ensuring that the construction and maintenance of local roads is funded at the local government level creates a direct relationship between the economic benefit generated by public roads (increase in local property values) and the cost to the public sector of constructing and maintaining these roads.
The underlying economic principle that the costs and benefits of government action should be linked, sometimes called the ‘Wicksellian link‘, ensures that people get value-for-money from the public sector. The practice promotes responsive and accountable decision-making by public officials and prevents government officials from investing public funds in places where the return-on-investment for the public sector is below the cost of the investment.
The Commonwealth of Virginia is an outlier in road ownership and funding
The Commonwealth of Virginia is an outlier in road ownership and funding in the United States.
In a typical state, the federal government owns the interstate highways and U.S. routes that connect the state to other states, while the state typically owns the minor highways that connect different localities within a state. This leaves the majority of public roads–the local roads and streets–to be owned and operated by local governments. On average, local governments own and operate 74.4 percent of the road network in the United States. In Virginia, the percentage is a mere 18.0 percent.
The history of road funding in Virginia
The current state of affairs has a long history. Close to a hundred years ago, Virginia was largely a rural economy, with about two-thirds of the state’s labor force earning their livelihoods in agriculture, thus facing the need to haul farm products to market on county roads. Most county governments faced considerable challenges properly maintaining the local roads for which they were responsible. Few counties had engineers on their staff, and not many had the necessary equipment. As a result, most county roads were in extremely poor condition.
In 1927, as part of a reorganization of state government, the Virginia Department of Highways was formally established as a state agency. It was against the background of the Great Depression that the General Assembly in 1932 approved a means by which counties could relieve themselves of the fiscal burden associated with road construction and maintenance. The Byrd Road Act authorized the establishment of the state “secondary” road system and gave each county the option to transfer the responsibility for its roads to the Highway Commission. The intent of the act was to improve the state’s rural road network, while at the same time reducing the tax burden on rural communities. With the exception of four counties, all counties in the commonwealth joined the new secondary system in 1932.
The status quo today: virtually no county role over local roads
Fast forward almost 100 years. While the economic structure of Virginia’s economy has fundamentally changed, the basic approach to funding local (county) roads across the commonwealth remains highly centralized. Today, only two counties—Arlington and Henrico—continue to operate their own local roads. In addition, Virginia’s 38 independent cities are in principle responsible for maintaining their own roads. The remaining roads—close to 80 percent of the total road network in the state—falls under the responsibility of the Virginia Department of Transportation.
According to the current Code of Virginia, “[t]he control, supervision, management, and jurisdiction over the secondary state highway system [which basically includes all non-urban roads in the state] shall be vested in the [Virginia] Department [of Transportation], and the maintenance and improvement, including construction and reconstruction, of such secondary state highway system shall be by the Commonwealth under the supervision of the Commissioner of Highways. The boards of supervisors or other governing bodies of the counties shall have no control, supervision, management, or jurisdiction over such public highways, causeways, bridges, landings, and wharves constituting the secondary state highway system.” [Emphasis added].
While a more in-depth discussion of the distributional implications of road funding for residents in different parts of the commonwealth is a topic for another day, for now, it suffices to say that the current arrangement creates a major disconnect between the local government’s role in promoting local economic development and the fiscal tools it has at its disposal to do so.
An example of how the centralized funding of roads is inefficient and inequitable may be illustrated by the following example. The Virginia Department of Transportation (i.e., funding provided by taxpayers from across the entire state) funds the expansion of a rural highway in a peri-urban county. The improved local road access encourages a farmer to sell a plot of land to a developer, who constructs a subdivision of new homes. Due to the high cost of housing in the adjacent metropolitan area, and thanks to the improved road access (which neither the farmer or the developer paid for), families buy the houses at a premium. The public (i.e., taxpayers) pay for the road while the landowner and the developer get rich. Meanwhile, the road which was funded by the common weal is soon congested.
Unlocking local economic development using land-value increment financing: Restoring the link between local infrastructure, land value, and taxation
Land-value increment financing presents a mechanism to restore the link between local infrastructure, land value, and taxation. It aims to recoup some or all of the private gain from public investments in order to reduce the overall demand on the general fund resources.
More specifically, land-value increment financing is a financing tool where a local government designates a special tax district to capture the future increase in property values from development to pay for the public infrastructure and improvements needed to spur that development. The baseline property value is established, and the additional tax revenue generated by new development is then dedicated to a special fund to repay bonds issued or finance the project costs, while the base value’s tax revenue remains with the local government for general use.
In the scenario above, as the state and local government contemplate the expansion of the rural highway, they recognize that he improved access will make the land surrounding the expanded highway more valuable. Therefore, instead of making taxpayers across the state pay for the road infrastructure, new residential properties in the area will be subject to a small property surtax or betterment levy administered by the county, which will help repay the bonds that fund the road project. The price of the new homes will be slightly lower than without the surtax, as the new homeowners will be expected to pay for their own road infrastructure over time.
Concluding thoughts
The link between transportation access and land values in not new. In fact, when the very first suburbs were built in the United States over a hundred years ago, entrepreneurial developers would even construct—at their own expense—the public transit system needed to connect the new subdivisions to the city center.
Likewise, the concept of tax increment financing is not new. For decades, the Lincoln Institute of Land Policy has been a thought leader and proponent of practices that focus on the ways that land policy—including the management of land and its uses—shape and are shaped by a community’s human, economic, and natural resources.
Unfortunately, land-value increment financing only works when local governments—the government level responsible for land use controls and property taxation—is also responsible for funding local roads and local transportation. Without this alignment, it is likely that road infrastructure will create inefficiencies and inequities.
In Virginia, ensuring greater efficiency and greater equity in the way road infrastructure is funded—in a way that reduces the burden on state taxpayers–would require county governments across the commonwealth to take back ownership and responsibility over local roads, in line with the practice in most of the United States.
