The RTA Sales Tax And Its Limits: Lack Of Diversification

The following comment to a recent post on the risks associated with fixing the current transit funding problem with more of the same--namely, a hike in the RTA's sales tax--struck me as right on:

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). [Old post here.]

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.