10. Taxation and Revenue to the Public from Freeway Right of Way Improvements.
Tax revenue can be a selling point for freeway cap proponents and an incentive for local and state agencies. However, are freeway caps taxable? Yes, but the path is a little indirect. Additionally, such taxation will require removal of the federal and state deterrents to private development over freeways.
Land and property over which the U.S. Government or its subsidiaries and agencies have jurisdiction, as well as private property located on federal land, is exempt from state and local taxation. The same is generally true with regard to state owned land, although it depends on each state’s laws. For example, California Revenue and Taxation Code § 202(a)(4), exempts from taxation any property owned by the state or local governments.
Despite this exemption, there is good news for freeway cap advocates who wish to promote the state and local tax benefits of their project. Even though interstate highways were built under the Federal-aid highway program established in 1916 with federal funding (at least in part), each state owns its portion (i.e., the portion within the state’s boundaries) of the interstate highway system. Therefore, each state’s laws determine the taxability of private property in the freeway right of way.
An interest in real property that is less than a fee-title interest is often referred to as a “possessory interest.” Taxation of possessory interests on land over which the state has jurisdiction varies state by state. However, most states – possibly all – tax some possessory interests on state controlled land, which would include private real property in an interstate highway right of way. Nevertheless, it bears confirmation prior to making it an assumption of one’s private freeway ROW project.
California’s taxation of possessory interests is the oldest and broadest – with the fewest exemptions. In California, a private party’s “possessory interest” in real property in a freeway right of way is taxable. Possessory interests are valued for property tax in a similar fashion as fee-title interests in real property. Assessors will use, as appropriate, the sales comparison, income, or cost approaches to value. However, with possessory interests, the finite duration and the reversionary interest must be taken into account.
 McLaughlin, C., Local Taxation of Private Property on Federal Land, Coate’s Cannons, NC Local Government Law (blog), University of North Carolina School of Government (Sept. 8, 2011) retrieved on Oct. 9, 2017 from https://canons.sog.unc.edu/local-taxation-of-private-property-on-federal-land/ citing S.R.A. v. State of Minnesota, 327 U.S. 558, 562-63 (1946); Surplus Trading Co. v. Cook, 281 U.S. 647, 657-58 (1930).
 See also Article XIII, §3(b) of the California Constitution, which exempts from taxation any property owned by local governments that is located within the boundaries of that local government.
 U.S. Dept. of Transportation, Federal Highway Admin. Highway History, Interstate Frequently Asked Questions – Who built the Interstate System? Who owns it? Retrieved Oct. 9, 2017 from https://www.fhwa.dot.gov/interstate/faq.cfm#content
 For example, Possessory interest in California is defined in California Revenue and Taxation Code § 107 – and is limited to real property (i.e., personal property is excluded)
 Burke, M.F. and McLees, M., Possessory Interest Essentials: Classes of Property, Potential Exemptions, and Valuations. Institute for Professionals in Taxation, 38th Annual Conference (2014). Retrieved on Oct. 9, 2017 from https://www.ipt.org/iptdocs/Files/Papers/2014AC/033BurkeMcLees.pdf
 Oregon: 2015 ORS Vol. 8 Chapter 307 Section 307.110; Colorado: Colorado Legislature: 39-1-103 (17), C.R.S.
 Possessory interests in California are taxable under California Constitution Article XIII, Section 1.
 Sacramento County Assessor, Frequently Asked Questions: Taxable Possessory Interests in Public, Non-Taxable Property, Retrieved on Oct. 9, 2017 from http://www.assessor.saccounty.net/FrequentlyAskedQuestions/Pages/TaxablePossessoryInterestsFAQs.aspx ; See also Los Angeles County Office of the Assessor, Guide to Taxable Possessory Interests, Retrieved on Oct. 9, 2017 from https://assessor.lacounty.gov/possessory-interests/
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