Funding

Options for Public Transit: A Transnational Review

Andrew Gilbert
Public Transit Lobby Group

Abstract:

Across the world, the need for high-quality transit in large urban centers
is abundantly clear. However, this high-quality service entails large costs that
serve as a major stumbling block towards realizing improved transportation. In
this paper, we will examine a number of funding structures that have been
successfully used across the world, from direct taxation to public-private
development contracts to land easements. In analyzing the holistic effects of each
of these measures, we will produce recommendations as to the best structures to
ensure a stable flow of capital and operational funding for new and legacy
systems, with an eye on practicability in mid-size (<1 million people) urban
areas of the United States. We find that Transit-Oriented Development (TOD) is
the most desirable funding source overall, although in terms of practicality
direct-benefit tax revenue is the most actionable for most cities.














Keywords: Transit, funding, taxes, fares, subsidy, development March 2015

Organization Introduction:

The Public Transit Lobby Group is a non-partisan, financially independent

think tank dedicated to influencing public policy, with the aim of improving the
quality of Americas transportation infrastructure. Since 2015, we have been
leaders in the intellectual debate on how to get America where it needs to go
faster and more effectively, contributing to a prosperous, clean, and healthy
nation.

Board of Directors:

John Doe, PhD
Jane Doe, PhD
Joan Public
Jack Public

Introduction:

Transportation congestion is a serious problem in large urban

agglomerations across the world. Attempts to relieve this congestion via
investment in road infrastructure improvements frequently prove futile, as the
relatively low passenger density of automobiles is insufficient to transport the
large numbers of people entering and exiting major city centers during peak
hours. In addition, the phenomenon of induced demand often hampers any
efforts to alleviate congestion via road construction; such capacity increases
induce an almost-equal increase in vehicle miles driven, negating the added
capacity and increasing the negative externalities of road transport such as air
pollution. [1]
Accordingly, the backbone of many urban areas transportation systems is
comprised of high-quality public transit solutions such as heavy rail, light rail,
and bus rapid transit. These systems have a number of advantages over private
road transportation, namely higher passenger throughput, lower air pollution
and energy consumption, and decreased land footprint. However, similar to the
need for public funding to maintain a modern system of roadways, the vast
majority of modern transit systems are not operated at a profit, and require
public subsidy. [2]
In fact, numerous studies have shown that at a number of levels of
profitability and unprofitability, higher levels of public transit subsidization
improve overall societal welfare. [2] Despite these direct and indirect benefits, it
is often difficult for transit systems to obtain optimal funding levels, and a stable
source of this public subsidy and other economic considerations are often the
primary obstacles to maintaining and expanding transit services. This is
particularly a problem in mid-sized urban areas of less than 1 million people,
where density is typically much lower than the larger coastal cities and
development is much more car-oriented even in the central city. [3] In this paper,
we will review the literature on funding sources for public transit systems both
domestically and internationally, in order to shine a light on the most useful
modes of public subsidy. In particular, we will focus on subsidy schemes that can
be used to improve service for transit systems in these mid-sized urban areas

where population growth is low and relatively little transit infrastructure is in

place. Rather than delve into the minutiae of various policies, this analysis will
broadly consider the welfare effects of each source of funding, and make a
holistic judgment, so that these subsidy schemes can be posed at a preliminary
level as alternatives to the high fare hikes and service cuts that have plagued
transit systems in recent years. [4] [5]

Funding Source Analysis:

The primary difference between funding methods is the source of the

funding, and the degree to which the regulations empowering this funding direct
local activity. This encompasses both at what level of government the funding is
acquired, and the method of collecting the funding. For many systems, fares are
the primary source of funding, at least for operational expenses. The remainder
of funds usually come from some sort of direct or indirect taxation: income tax,
local sales tax, property taxes, and benefit taxes are but some of the different
ways this money can be gathered. There are also more radical systems of funding
transit and driving ridership, from private sector transit-oriented housing and
office construction to land grants, easements, and zoning code changes to
encourage denser, more transit-friendly development. We will consider a broad
sampling of examples of these non-fare funding structures in the literature.
While doing so, we must consider both the negative externalities of each of these
sources of funding, and also the potential consequences for transit demand that
may be effected. [6]

General Fund Expenditures:
Although not the largest source of transit funding, the largest source of
tax funds around the world, especially in the United States, is from general tax
funds. In this way, we will view it as a sort of baseline for comparing to other
funding structures. While it is often possible to obtain a large sum of money from
such funds, it is a very unstable supply of income, as it is dependent on the
political conditions at the local, state, and federal levels, and it is very possible
that the budget may contract suddenly year-to-year. [7] As a non-dedicated
revenue source, it may be advantageous to lobby for funds in years when
revenue from other sources is tight, but in general it is not a good source to rely
on.

Sales Tax:
The most common funding source for transit is sales tax revenue. In many
cities, a specific portion of the sales tax is dedicated to improving local transit
service, and it is generally politically accepted to use sales taxes for this purpose.
[7] This stability provides a major advantage over money from the general fund,
in that it is relatively unchanging year to year. Of course, it may still be impacted
in the long term by changing tax policies. There is even more danger in short
term as economic conditions dictate how much consumers purchase and
accordingly how much tax is collected.

Direct-Benefit Tax Funding:

Although it is generally not considered controversial to use sales tax
revenue for transit funding, there have been a number of referenda on this issue
that have failed. Whether this represents general anti-tax sentiment among the
population or a legitimate distaste for transit funding is an important question to
be raised here. However, there are a number of more targeted taxation schemes
that may alleviate some of the concerns that are raised when measures like these
are protested. While the indirect positive externalities of transit are clearly
demonstrated in the literature, [2] this sentiment nonetheless exists, and must
be catered to. For this reason, taxation schemes that attempt to capture more of
the income of groups most affected by the benefits of transportation, such as
higher property tax rates closer to transit stations, are considered a politically
safer alternative to general sales tax. On the other hand, they can provide a
marked disincentive to invest near transit, especially in regions where the appeal
of transit is relatively low, a relatively common sentiment in smaller towns and
those without a transit riding culture already in place.

Vehicle/Road/Gas Taxes:
In the US, the second most common source of funding for transit comes
from the general transportation funds established with money from vehicle
registration taxes. [8] As mentioned before, one of the positive externalities of
transit usage provides a benefit to the drivers who bear the burden of the tax by
helping to reduce congestion on the roads they drive. By similar logic, other
sources of taxation collected from drivers, such as tolls and gasoline taxes are
also frequently used to establish transit funds. These sources are about as
equally stable as sales tax, but are often more viciously attacked, as the opposing
sentiment expressed against sales tax revenue is even stronger when dealing
with vehicle taxes. [7]
A more extreme form of this taxation can be seen in London, where all
cars entering the central city during weekday business hours are charged a
substantial fee, known as the Congestion Charge, currently 11.50 a day. [9]
This policy not only reduced car congestion and raised substantial revenue, but it
also resulted in an increase in bus ridership 50% higher than projections
estimated before the initiation of the charge.
Note that like sales tax, general tax, and all other consumption- and
income-based taxes, the income generated from this stream is very much
dependent on macroeconomic conditions. This is a weakness that most all
taxation-based forms of funding share, and so it is important to consider some of
the non-tax based funding structures we discuss below as well.

Government-Private Partnerships:
A number of transit projects have recently been developed under public-
private agreements where a firm pays a lump sum to the government for a
license to operate a certain road or rail project for a given period of time. Often,
these projects are structured in such a way that the government either must
subsidize the operation after the payment of the lump sum by the corporation, or
the projects are projected to be profitable enough that the companies are willing
to pay for the right to operate them based on the assumption that it will be a
positive investment. [7] As these proposals are agreed to voluntarily by the

companies involved, it generally involves a net loss for the government, and
introduces an economic inefficiency into the operation of these systems. [10]
However, there are some limited circumstances in which the development of
such agreements can be beneficial. When companies possess specific
technologies that would make the construction or operation of a new transit
system much more efficient, these cost reductions can be passed through the
contract. When there are particular barriers to obtaining funding and the project
will not be constructed otherwise, it may be the only feasible manner to have the
project up and running in the long term. However, for most pre-built projects,
there is little reason to recommend such structures.

Transit-Oriented Development (TOD):
While TOD has become a buzzword in the urban planning community
lately, this form of development can have a number of effects on the funding of
the transit it is oriented around. The best example of large-scale TOD in recent
years is seen in Hong Kong, where the local transit authority, a privatized
corporation known as MTR, has developed hundreds of thousands of apartments,
millions of square feet of retail space through consistently branded malls around
stations, and actively funds transit through income earned on these properties.
While this model is very actionable in cities with little already-existing
transportation infrastructure, and indeed is being widely utilized as a model in
other Chinese cities, it is not a very practical measure for cities where housing
growth is not on the order of magnitude of Hong Kong, where population has
almost doubled since construction of the MTR system began in the mid 70s. [11]

Conclusions:

For cities with high growth rates and relatively little established public
transportation infrastructure, the style of TOD pioneered by the MTR in Hong
Kong is a very attractive example of how to structure development. However, it
should be said that in the US we face much higher barriers to implementing such
a system, as property laws would make the unilateral transfer of the large blocks
of land necessary for this scheme to be effective very difficult. In addition, a
medium sized town will generally not have the density to make such a scheme
practical. Nonetheless, limited TOD around stations is the most desirable way of
funding transit, as it provides a comparatively steady stream of income and
encourages sustainable regional growth and high ridership. It is more
practicable to develop an agreement to increase income taxes on parcels of land
(or negotiate flat fees for this local development permission) in exchange for
rezoning this land to higher density usage types. This avoids the legal and
political challenges that would be faced in emulating the Hong Kong model of
transit agencies building developments.
Such developments are unlikely to provide a sufficient source of funding,
especially in areas where growth is generally restrained. In light of positive
externalities and other benefits of transit, while acknowledging the political
reality that it is difficult to truly develop a socially optimal taxation structure, it is
most feasible in the current political climate to aim for high direct-benefit taxes
to make up the difference. After that, it is best to attempt to raise money through
sales taxes, vehicle/road/gas taxes, and government-private partnerships in that

order. The various tax schemes we roughly rank in terms of stability and political
viability, and government-private partnership we place last, for though it
provides stable revenue in the short- and medium-term, it entails a long-term
obligation that will only worsen local transportation budget crises down the line.
Given these conclusions, a logical follow-up question is how to develop
the political capital and public support necessary to bring about these sources of
funding. The answer to this question is beyond the scope of this analysis,
although it is of interest to note that the literature tends to point to the fact that
this is largely a question of political momentum areas such as Los Angeles with
low transit density have relatively little support for public transit, whereas areas
such as New York with high transit density have high support. [12]

Bibliography
[1] Jr Douglass B. Lee, "INDUCED TRAFFIC AND INDUCED DEMAND," Federal
Highway Administration, 1999.
[2] Kenneth A. Small Ian W.H. Parry, "Should Urban Transit Subsidies Be
Reduced?," American Economic Review, vol. 99, no. 3, June 2009.
[3] "Midsize Cities on the Move," Reconnecting America, 2012.
[4] (2014, May) Massachusetts Bay Transportation Authority. [Online].
http://www.mbta.com/about_the_mbta/?id=23567
[5] Emma G. Fitzsimmons, "M.T.A. Is Raising Fares and Tolls; One Subway or
Bus Ride Will Cost $2.75 ," New York TImes, January 2015.
[6] Todd Litman, "Local Funding Options for Public Transportation," Victoria
Transport Policy Institute, January 2015.
[7] Transportation Research Board, "Local and Regional Funding Mechanisms
for Public Transportation," Federal Transit Administration, 2009.
[8] Texas Transportation Institute University Transportation Center for
Mobility. A Guide to Transportation Funding Options.
[9] Jonathan Leape, "The London Congestion Charge," Journal of Economic
Perspectives, vol. 20, no. 4, Fall 2006.
[10] National League of Cities, "Public-Private Partnerships for Transportation
Projects,".
[11] Dwight Boatman, Kevin Ramirez, Mengxi Du Brandon Bukowski, "A
Comparative Study of Transit-Oriented Developments in Hong Kong," WPI,.
[12] Claudia P. Huerta, "Transit Funding; Why the Politics? A Comparative Study
of Public Transportation Infrastructure Funding in New York City and Los
Angeles," Columbia University., MS Thesis 2012.