Saturday, October 13, 2007

The Puzzling Persistence Of The Sales Tax Increase As The Preferred Funding Solution

Tuesday's apparently desultory hearing by the House Mass Transit Committee into alternatives to an increase in the RTA sales tax and the continued efforts to push for passage of SB 572 with that tax increase in place prompts the question--what is so great about relying on the sales tax as the primary source of transit funding in Northeastern Illinois?

As the CTA points out, its sales tax funding base has failed to keep pace with inflation over the past twenty years:

CTA has grappled with a steep decline in inflation-adjusted funding levels. CTA’s public funding for mainline bus and rail operations trailed inflation by approximately one percent every year. If funding since 1987 had kept even with inflation, the CTA would have received cumulatively $1.6 billion more to operate its buses and trains.

The situation has been deteriorating in recent years:

The CTA’s public funding is growing at a much slower rate than related expenses. Public funding levels only increased by four percent over the past five years and trailed inflation, which increased by 11.3 percent in the same time period. By comparison, CTA has also experienced substantial cost increases in fuel, materials (due to a lack of capital funds) and security.

If that is not enough, the RTA is reducing the CTA's public funding mark for 2008 by $14 million compared to this year's mark, surely a reflection of larger problems with the adequacy of the RTA sales tax as a funding source.

The CTA accounts for about 80 percent of the transit ridership in the region. Pace's financial condition is no better and it is on the path to a doomsday of its own. Even Metra, which for years was living high on the hog with more sales tax money than it could spend on operations, is making dark threats of a 20 percent fare increase and major service reductions. Clearly, the existing sales tax funding base is insufficient to serve the current needs of the transit system.

The inadequacy of the sales tax as the near-exclusive funding base for public transit in this region is illustrated by a simple fact. The RTA system relies on the same sales tax funding base that it did in 1985. Yet, even though that system now carries 20 percent fewer passengers than it did then, it is in a financial crisis. In other words, the same sales tax base cannot support a transit system that is 20 percent smaller than it was 20 years ago.

The inadequacy of the sales tax base is even more dramatic when considering the transit system's market share. Given the growing and sprawling population in the region, transit's market share declined even more sharply than its 20 percent decline in ridership. Clearly, the current sales tax funding base could not support transit's more robust 1987 market share if that market share magically reappeared since it cannot support even today's shrunken market share.

There is nothing wrong in the short term to increasing an already inadequate sales tax. Yet, the same factors that have made the growth in the existing sales tax inadequate will continue to work on the increased sales tax as well. The same cost factors--labor, fuel, pension, security--and possibly a few others that have outpaced the growth in sales tax revenue will almost certainly eat up the sales tax increase before too long. SB 572, if enacted, only postpones the day of reckoning resulting from the region's over reliance on the sales tax to fund public transit.

The real estate transfer tax built in SB 572 is a good starting point to diversifying the public transit funding base. Maybe that tax should be expanded throughout the six-county region under the rationale that travelers and property owners in all counties benefit from the congestion relief and other benefits associated with transit. A parking lot tax, increased auto registration fee, congestion pricing, a gas tax increase, and the like make up a menu of alternatives to a sales tax increase (or supplements to a smaller sales tax increase).

Let's for the moment assume, however, that SB 572 passes as is. How long will it be before the service boards and the RTA eat up the incremental sales tax revenue generated by the tax increase and start rolling out the next set of doomsday scenarios?

Predictions please.


Anonymous said...

About 3 years.

Davey said...

It's hard to discuss this particular tax without getting sidetracked into discussion about the wrongheadedness of all sales taxes as revenue sources. In the case of the RTA tax, it's painfully ironic that when the economy goes bad, revenues for public transportation go down just when people most need the service.

In a rational society, the obvious answer would be a substantial increase in the gasoline tax statewide and parity for the funding of auto infrastructure and public transportation. This would somewhat address the huge secondary costs we all pay to keep the petroleum economy going. Unfortunately the selfish and short-sighted demands of the car-obsessed majority will prevent that from happening. Nobody wants to give up their special subsidies, no matter how destructive they are to larger society.

Short of that, it seems to me we'd be better off with a cut of the state income tax, figured based on the taxes that are generated in Chicago/Cook/RTA region. Or better yet, send all taxes back to the county they came from and let the counties "bail out" the state to save it from "doomsday scenarios".

I'm not sure all the wonking around with funding formulas can have any long-term value as long as the failure of Illinois state government is not addressed and radically changed.

Justin said...

An excellent argument for the inadequacy of the sales tax. Here's another argument against SB572: it puts all the RTA's eggs in one basket.

Practically, any good investor will distribute her capital across a number of stocks or bonds to spread her risk, and transit agencies are no exception. Theoretically, public transportation provides measurable benefits to a variety of beneficiaries, implying that a "rational" or tailored subsidy structure would include a similar variety of revenue sources. Most agencies, like the RTA boards, have some control over their fare revenues, yet depend on others for the rest. To spread the risk of one funding source going sour, transit agencies should seek to derive major revenues from at least two or three different sources, preferably even more.

For instance, the MBTA gets revenues from roughly two sources: state sales taxes, and local assessments which are largely paid from property taxes. Many European transit agencies' funds originate from multiple levels of governmental jurisdictions, many of which share revenues and which are derived from a mix of Value-Added Tax, income tax, and business taxes. New York's operating subsidies come from a wide variety of taxes and jurisdictions ultimately based on the real estate market, businesses, petroleum use, and a sales tax in southern Connecticut, suburban New York State, the outer boroughs, and Manhattan itself. (There's an even an old post on this blog somewhere about the variety of MTA's subsidies, I think).

By contrast, excessive reliance on a single source for operating subsidies is theoretically less than ideal, and risky and frustrating in practice. By continuing to rely solely on the sales tax, the RTA may soon regressing to doomsday.

Indeed, other robust transit agencies have been able to respond to cutbacks in subsidy from one source by substituting other sources. In Europe, these shifts often took place in the context of political decentralization, where the devolution of fiscal autonomy from central governments to regions appears to have caused an increased level of transit capital funding. U.S. transit agencies have responded to the cutback in federal operating subsidies with gradually higher state and local funds.

To echo Davey's comment, discretionary spending on consumer goods may decline quickly during an economic slowdown, yet cities rely on public transit to provide low-cost mobility even in hard times. In addition, sales taxes tend to be regressive, exacting a higher proportion of income from those least able to pay.

I agree with the Moderator that a long-term funding solution should look beyond the sales tax for theoretical and practical reasons. Taxes on real estate, parking, or (even better), road tolling are the way to go. Or the RTA comes hat in hand in a few years to a populace that won't want to hear it.

Anonymous said...

Maybe no one wants to take the parking tax seriously in public, because they're afraid the Mayor will steal the idea for the City's budget.

What is a complete shame is that the Mayor has increased City parking meters and the SUV tax all for himself, without "saving" that for CTA. It doesn't look like to me he wants to fix things.

Anonymous said...

FWIW, a "reform" of the gas tax would also help. instead of taxing each gallon, the tax should be a percentage of the sale price; that way, we won't be left holding the bag when fleetwide fuel efficiency inevitably increases.