Saturday, March 3, 2007

Developing Efficient Taxing and Pricing Strategies


The issue brief entitled "State Policy Options for Funding Transportation," discussed in the previous post, and this transcript of recent testimony by Martin Wachs of the Rand Corporation, have a common theme that transportation funding sources should promote the efficiency and lessen the environmental impact of the transportation system. In other words, transportation funding sources should be closely tied to transportation usage so that the costs and externalities associated with the transportation system are absorbed by those paying the taxes or user fees funding that system. As Wachs states:

Direct transportation user fees, such as tolls, fare, and motor fuel taxes, are the preferred ways in which to raise money to support the transportation systems because they align our payments directly with the services for which we are paying. When travelers are presented, through user fees, with the true cost of additional travel, they have a financial incentive to make additional trips only when the private benefit that they receive exceeds the social cost imposed by the travel. This helps to reduce congestion and promotes greater overall efficiency in our collective use of the nation's transportation system. In contrast, charges not related to the use of the system--such as general taxes and fees like income or sales taxes--are regarded as the poorest ways to charge for the use of the system.

. . .

Reliance on income taxes or sales taxes to pay for transportation decouples users from the payers . . . and also provides no encouragement or reward for more desirable behavior. This in turn decreases the overall efficiency of society's use of the transportation system.

(Pg. 4-5 of 10).

Wachs' research shows that "over time we are raising less money from user fees and more from instruments not related to system use, such as sales taxes." (Pg. 5 of 10).

Wachs goes on to survey currently available GPS technology that allows accurate tracking of actual vehicle miles traveled (VMT). This technology is now available for roughly $100 per user. It is currently being tested in Oregon. The technology allows drivers to be charged for their actual usage of the highways through VMT tolling. Wachs argues that VMT tolling is a superior alternative to funding instruments not connected to transportation use as well as other instruments such as fuel taxes that are more closely associated with transportation use:

A compelling advantage of VMT tolling is that the revenue stream is not inherently dependent on the fuel economy of the vehicle. In contrast, motor fuel taxes grow weaker with improved fuel economy, necessitating periodic rate hikes that have become increasingly unpopular in recent decades. At the same time, VMT tolling functions effectively regardless of fuel type, whereas current motor fuel taxes are well-equipped to handle rapidly developing alternatives such as electricity, bio-fuels, or hydrogen. Another benefit of VMT tolling is that the revenue stream is fairly stable, varying only with the number of miles driven by the population. Because the demand for road maintenance and new construction also varies with miles driven, the supply and demand for highway revenues should track one another fairly well.

(Pg. 9 of 10).

Implications for Public Transit Funding

The funding streams for the operating subsidies for the RTA and the three service boards (CTA, Metra and Pace) are not closely aligned with transit use. Most of the revenue comes from the RTA sales tax, which has no close relation to transportation usage. The stay-at-home trust funder who walks to Michigan Avenue boutiques and shops heavily contributes more to the public transit system than the frugal commuter who has a 75 mile round-trip commute by car or public transit and thus consumes far more transportation resources. (Of course this effect may not be all bad from a social equity perspective.) The State's PTF match of the RTA sales tax revenue and its other financial contributions to the region's public transportation system come from the General Fund and have even less of a tie to system usage.

The Final Report of the RTA's Moving Beyond Congestion effort lays out a list of possible funding sources. (Pgs. 91-92). Many of these proposed funding sources have little or no relation to use of the transportation system and thus do not incentivize efficient usage of the transit system. Save for a statement that "revenue sources tied to transportation uses, congestion mitigation and the promotion of transit use should remain as a vital component of transit funding (pg. 94)," the Final Report does not examine how closely calibrated its proposed funding measures are to promotion of efficient use of the public transit system. When you are desperate you cannot afford to be discriminating.

At least customers must pay a fare when they use the public transit system. This is the kind of user fee that Wachs and others say promotes efficient use of the system, with its associated congestion relief and environmental benefits. The user fees charged on the transit system fall short of covering the high cost of transit service, however.

On the highway side the link between use of the system and revenue instruments is arguably more attenuated. With exception of a few toll roads, the State and local governments give away valuable highway capacity for free. No wonder we have such highway congestion. While fuel taxes do reflect highway usage to some extent, the variance in vehicle fuel efficiency levels weaken the link between use of the transportation system and user contribution to funding that system. A thrifty hybrid vehicle eats up just as much highway real estate as a thirsty Hummer.

Implication for Public Transit Pricing

While public transit riders do pay a portion of the cost of operating the system, public transit pricing in the region appears to be quite inefficient. There is no peak period congestion pricing and, for 85 percent of the public transit customers, there is no incentive to take shorter transit trips rather than longer trips.

Peak Period Pricing

Like the highway system, the public transit system is challenged by travel demands during the morning and afternoon rush hours. These peak period demands define the scope of the capital investment needed to build and maintain the system. The lower the rush hour demand peaks, the smaller the capital investment needed for the system to function effectively. Likewise, peak period staffing imposes extra operating expense. Smoothing the peak demand can reduce those operating costs.

Peak period travel premiums--i.e., higher fares--push demand from peak periods to other parts of the day, allowing more efficient use of the capital plant and human resources. Those who continue to travel during peak periods pay a premium and this extra money helps compensate the transit agency for the higher marginal cost of providing service during peak periods.

Despite these facts, the RTA and the service boards have not adopted peak period (i.e., congestion) pricing premiums for transit and are not proposing such adoption as part of the financial bailout plan they have offered the State. This stance against congestion pricing for transit is bewildering because the Final Report lauds the benefits of congestion pricing for highways (e.g., pgs. 50-60) and even list highway congestion pricing as one of the possible revenues sources for the financial bailout it seeks for the public transit system (pg. 87).

Transit systems are neither immune nor exempted from the market. They face the same challenge of high levels of peak time travel as does the highway system. If the highway system will function more efficiently with congestion pricing in place, then so will the transit system. The RTA's failure to extend its analysis of the benefits of congestion pricing to its own transit system just underscores the correctness of the assessment of recent editorials (here and here) that the RTA's Moving Beyond Congestion plan is little more than a plea to pump more money into an inefficient transit system.

Trip Length Pricing

The public transit pricing system is also inefficient because for the most part pricing is not tied to distance traveled. Only Metra has a fare structure where charges increase with distance travelled. For the CTA and Pace, riders who travel long distances pay the same as those who hop on the bus or train for a trip of only a few blocks.

Transit costs are tied to vehicles miles traveled. Fuel consumption, vehicle operator compensation, maintenance expense, and capital costs (e.g., need for vehicles) are all tied to distance traveled. The CTA's and Pace's failure to charge by distance travelled thus promotes inefficient use of the system. If people know that they can travel across Chicago or a wide swath of a suburban region for the same price as a transit trip of a few blocks, they have no incentive to ration their use of the system for long trips. Nor do they have an incentive to cluster their trip origins and destinations in a way that will reduce system usage from a VMT perspective and, incidently, promote transit supportive land use.

Tying public transit fares to distance traveled can be done through use of the smart card technology like that now being rolled out by the CTA and Pace. (Such technology is akin to the I-PASS technology already in use by over 2.5 million vehicles in the region on the Illinois Tollway.) Users swipe their card when they enter the system (e.g., get on a bus) and when they leave the system (e.g., exit a rail station). They are charged for the distance traveled between the swipes.

It certainly can be argued that the ability to travel across cities or suburban regions for the same flat fare is convenient. If we assume that low-income people on average take longer trips than wealthier people--just an assumption at this point--then the flat fare policy may have a beneficial wealth transfer effect.

The poor financial condition of the RTA and the service boards suggests that we no longer can afford the convenience of the flat fare policy. The wealth transfer effect of the flat fare policy, if well be reaped by well-off professionals traveling from neighborhoods such as Sauganash or Pill Hill and paid by those less well off who live in a neighborhoods closer to the Loop such as Pilsen.

A much better approach is to take advantage of recent technological advances and use the fare cards and their accompanying accounts to target only those people whose travel we want to subsidize. Such people, for example, could receive credits deposited into their fare card accounts that would assist them in paying for longer distance transit travel.

Implications for General Assembly

When considering the menu of revenue possibilities, the General Assembly should focus on measures that are associated with use of the transportation system such as gas taxes and parking taxes. These funding measures will encourage people to be more efficient in their use of the highway and transit system. When people bear the cost of their usage of the transportation system they will use that system more efficiently by, for example, combining more tasks into one trip and sharing rides. Over time, people will make adjust their choices of residences and jobs to reduce the amount of transportation they consume--ergo, a market-driven impulse towards transit-oriented development.

If it chooses to adopt new revenue measures to provide more funding for the region's public transit system, the General Assembly should look for measures that provide incentives for people to use the highway/transit system more efficiently. The General Assembly should step in where the RTA and the service boards have failed and insist that the region's transit providers (a) adopt peak period premium pricing and (b) move to tying fares to distance traveled. These measures will reduce the capital and operating needs of the transit system by promoting more efficient use of the system. This will help maximize the value of the increased investment in public transit that the General Assembly is authorizing.


Anonymous said...

Transit has often shied away from peak pricing for a number of valid reasons, mostly because the public does not view transit as a separate market from roads.

--If you think transit is a congestion relief mechanism for the road system, and that transit should be subsidized according to the congestion relief benefits it provides, then you face the peculiar situation where transit fares should actually go down as road congestion goes up. Even if transit ridership is flat, the value of that ridership can increase purely because road congestion worsens.

--If peak pricing on roadways ever really happens, transit will be seen as the fallback alternative to those who are priced off of the roads. Establishing peak pricing on transit in that situation will be a nigh impossible political sell. In fact, a peak transit discount might be the only way to package road congestion pricing.

--Peak pricing will indeed encourage peak shifting from on- to off-peak, but the peak price will fall heaviest on those who have no flexibility in their arrival and departure times – highway or transit. To the extent that lower-income people have less flexible hours for jobs, this could be socially destructive and is the impetus behind sloganeering about "Lexus lanes." By contrast, some researchers think that lower-income people will actually benefit from congestion pricing by avoiding late fees from day care, etc.

--Transit “peak” pricing ideally should not be based on distance traveled (à la WMATA). Theoretically, transit should be priced at the point where the marginal operating or capital costs are actually incurred by the agency – the peak load point on a rail line or bus route. For example, say that the CTA’s Red Line’s peak load point in the AM is southbound at Grand station – the CTA sets their peak-of-the-peak schedules, and plans their fleets and signal systems based on the frequency required to meet that load. The passenger that boards at Howard and gets off at Addison at 8:15am has a marginal cost to the CTA of zero. In fact, only the passengers onboard the train at Grand should be allocated peak costs, because if the load at Grand were to decrease, the CTA could save a train. In serving the peak load point at Grand, the CTA would be providing the Howard-to-Addison capacity anyways, so that passenger should pay no peak charge.

However, explaining true marginal cost pricing like this to normal passengers would be exceedingly difficult. Distance-based fares are a much easier sell. My point is only that peak pricing on transit isn’t as clear-cut as peak pricing on roads, and that transit’s substitutability to auto travel might actually require the opposite of peak pricing in a political package.

Last, is it really fair to ask transit riders to pay more efficient prices and leave prices so misguided and distorted on the auto side? I say, fix the price of auto travel first – this would stimulate demand for transit-friendly urban development, and who knows, as you say, we might even get the revenues from a road congestion pricing scheme dedicated to building more transit.

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