Should We Worry About Highway Subsidies?

I touched on this issue way back when I wrote about the gas tax, but I’d like to expand the thought.

One of the most common criticisms of auto infrastructure from transit and smart growth activists is that drivers don’t pay the full cost of roads – the gas tax and other associated fees have not been increased enough to keep pace with spending new construction and backlogged maintenance. Much of the money spent on highways comes from property taxes, which you pay regardless of if or how much you drive. Counter to this, you have folks like Randal O’Toole, who note that no transit agency in the country covers even its operating costs with fare revenues, let alone capital costs. Transit agencies don’t pay property taxes, but they run buses over roads paid for by those taxes. In addition, the federal government and many states have dedicated part of their gas tax revenues to transit, meaning that drivers subsidize transit.

Still Not User Fees

As I said in my post on the gas tax, I don’t see how transit activists can win under the “user fee” framework. Some, like Cap’n Transit, claim that transit would make money if drivers were forced to pay the full cost of driving. However, given typical farebox recovery ratios on US transit systems (about 25%-50%), I don’t see how that could happen. Assuming farebox recovery is currently 50%, an agency would have to either double the number of people on each vehicle, double the amount of money extracted from each rider, cut unit operating costs in half, or some combination of the three. (Note that just doubling ridership doesn’t cut it if you have to run additional vehicles, since that costs money.)

Realistically, it seems to me that a scenario in which a transit agency has 100% farebox recovery is a scenario in which low ridership routes are eliminated, low ridership stops are eliminated, off-peak service is reduced, and peak service fares are higher. Now, maybe you’re fine with that scenario, but you should back up, read your Jarrett Walker, and ask yourself what you’re actually trying to do with your transit service. Are you ok balancing the transit agency’s books by raising fares on people too poor to afford cars? Are you ok with stranding people who live on low volume routes? Are you ok telling your city’s late-night crowd to suck it up and pay for a cab?

Generally, though, the agency is being asked to provide some minimal level of service to all parts of the region, for some minimum span of service, regardless of profitability. In that context, it’s not consistent to expect the agency to be profitable. There are also many benefits that accrue to society as a whole that the agency can’t capture – for example, if someone chooses to ride transit instead of driving, there are benefits to air quality from less congestion. In that sense, we aren’t “subsidizing” transit, we’re making an investment in the public domain that ought to produce future public benefits exceeding the cost.

And here’s the thing: many of the same arguments apply to roads.

For example, implementing tolls or increasing the gas tax is only progressive at the crudest level of analysis. In general, transit riders are poorer than drivers, but there is huge variability within drivers. Within the driving population, these taxes might be regressive, since wealthier drivers can afford to live closer to work. Like low volume transit routes, it is expensive per capita to provide arterial roadways to rural areas, but we’ve decided that in our society everyone deserves some base services. We also expect roads to produce benefits to society that aren’t directly captured by the government agency in charge of roads – for example, when rubber-tire internal-combustion trucks became available, there was a large reduction in the amount of horse poop lying in city streets. (The memories have faded, so we don’t often think of the horse poop benefits of trucks nowadays.)

Public Services Framework

In fact, both roads and transit could be considered public services like police and public schools, and we certainly don’t expect the police department or elementary schools to fund themselves entirely from user fees.

In that case, why charge drivers anything for road use (or why charge patrons anything to ride transit)? There are two reasons to charge for public goods:

  • Negative externalities (in this case, mostly air pollution and GHG emissions)
  • Overuse (in this case, congestion)

With this framework, the gas tax serves both purposes: it imposes a base usage fee that discourages people from driving for no reason, and it taxes people in proportion to the amount of pollution they create. The gas tax should probably be increased nationally because of the high costs of air pollution and GHG emissions. Some states or metro areas might consider a further increase as a base congestion charge. Managed toll lanes, like exist on the 91 and the 110, should be implemented on a larger scale to help deal with congestion during peak periods.

Another nice feature of this framework is that it’s perfectly logical to charge drivers more than it costs to maintain the road if demand is very high. The surplus can be used to fund other parts of the transportation system. For example, New York charges very high tolls on the Hudson River bridges and dedicates the surplus to transit operations. It’s also reasonable under this system to charge wealthy Acela patrons more than it costs to run those trains, and subsidize other services.

It always seems like a pretty cynical argument to me when I hear transit activists argue that “drivers should pay the full cost of roads”. Under a counterfactual where highway user fees generated more than enough money to cover maintenance of existing roads, would they be arguing that the rest of the fees should be used on roadway expansion capital projects? Of course not. Taking roads and transit to be public services results in a more consistent argument.

What About Overbuilding?

Part of the argument is that if drivers had to pay the full cost of roads, we’d build less roads. True, and valid if your preexisting goal is building less roads. By the same token, if transit riders had to pay the full cost of transit, we’d be building fewer trophy streetcars and suburban LRT lines.

Overinvestment and misallocation of resources is a classic problem of public services. Cities with useless streetcars are no different than rural towns whose police equip themselves with tanks or cities that say they’re going to supply every student with an iPad. In other words, there is no substitute for good governance. While you certainly could curtail some of the abuses by going to a user-fee system, remember the compromises that go with that. Other countries have shown that competent public governance is possible.

However, the more I think about it, the more I’m in favor of getting the federal government out of the capital projects side of things. Our mainline freeway and rail networks are complete, and the federal government seems to make a lot of poor investment choices now that most of the good capital projects are complete. There’s definitely an equity case for some federal involvement in helping out poor states and cities with operating costs and vehicle procurement, and the federal government should help states and cities out by using its low interest rate to borrow, but should the feds be involving themselves in things like Portland’s streetcar extension or the 69 freeway? Probably not.

Are Roads a Public Good?

You could make an internally consistent argument that drivers should pay the full cost of roads if you think that roads are not public goods.

I’m not buying that argument for arterials and neighborhood streets, since having two competing road networks in a city would be a huge waste of land, like having competing gas or electric companies. If arterials and streets were privately owned, they’d have to be regulated like a utility, and you’re right back to the issue of competent governance.

The argument is believable in the case of limited access tollways, where it’s easy to control access at onramps and offramps, and easy to manage demand through variable tolls. If public arterials are available, no one needs to use the freeway. However, I think there are practical limits to that model as well, which I’ll address in a separate post.


5 thoughts on “Should We Worry About Highway Subsidies?

  1. Kenny Easwaran

    You’re probably right that demanding that road users pay the “full cost” of roads is not a good argument for any transit advocate to make. However, I think the fact that road users fall far short of paying the full cost of the roads is still a useful point to make in response to demand by some non-public-transit-riders that transit users pay the full cost of roads, like road users do “through the gas tax”. Somehow, the idea that the gas tax fully funds roads has become very widely held, even though the fact that transit fares fall far short of fully funding transit is widely known. Pointing out that both modes fall far short of directly paying for themselves (but that this is ok as long as their public good aspect outweighs their negative externalities) is very useful in response to this anti-transit argument.

  2. Zmapper

    Two points on transit subsidies:

    1. Overuse: A great problem to have, but still a problem nonetheless. Many transit agencies across the country are experiencing growing ridership yet flat-lining service levels – a combination that will inevitably lead to overcrowding and pass-ups. Ideally, income and service costs should be balanced so that full bus routes/times are cash-flow positive, to allow for expanding service without cutting service elsewhere or going to the voters for a tax increase.

    2. The competition between the “business” and “social service” objective: Suppose a transit agency takes in $10 million in taxes. If they operate fare-free, they have $10 million to spend on service. If they operate at a relatively aggressive (for US operations, anyway) 50% farebox recovery ratio, they have $20 million to spend on service – twice as much service over the fare-free baseline. If all of their main lines operated at full farebox recovery, they would have $10 million left over for social service routes PLUS as much money as the main route customers are willing to pay for in fares. The last scenario is somewhat like the post-Thatcher UK bus system outside of London – private, for-profit operators are expected to make money on what Walker would call “ridership” routes, but the local council can subsidize “social equity” above and beyond what the bus companies would be willing to spend. No link, but if I recall correctly, about 80-90% of the bus companies network is operated for profit, with the rest covered by council subsidies.

    Finally, a dilemma: What benefits the working class customer whose shift ends at 11 pm more – an hourly bus that charges $1.50 and stops at 7 pm, or a more frequent route that charges $3 but operates in some form until very late or even all night. While the “cheaper” bus is more ideal for customers who can align their schedules to the time when the bus operates (such as seniors), for our example customer the choice really is between drive/taxi/walk a long distance, or pay more for a higher quality of service.

    In microcosm, the choice above is between a typical mid-size US operation, or a TTC-style operation, featuring very frequent service through suburbia, but at a higher fare. Based on the results (~20% v. ~75% FRR, ~3% v. ~30% mode share), I would say the TTC-style method of higher fares for higher quality service produces superior results.

    1. letsgola Post author

      Thanks for the comment; I wasn’t aware that TTC has such high fare recovery. IIRC, Vancouver does very well on mode share and fare recovery as well, so the US probably has something to learn from Canadian operators. (It probably doesn’t hurt that gas is more expensive in Canada too.)

      1. Eric

        The big difference is that Canadian cities don’t have freeways running through downtown.

      2. letsgola Post author

        Would you count Montreal as having freeways through downtown? It seems likely Toronto will get rid of the Gardiner sooner or later.

        Canada’s freeway system suggests that the benefits of the US interstate system may be overstated. In the absence of federal funds for “blight” removal in urban areas and 90% funding for freeways, there’s no compelling reason to demolish urban downtowns or build freeways across the prairies of Saskatchewan, so they don’t get built. And it’s not like Canada’s economy really seems worse for it…

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