justifying transit “subsidies”

Dennis Byrne recently published an opinion piece in the Trib asking why taxpayers pay half of transit’s costs (but not half of drivers’ costs), and thus saying that fare increases are in order. Here’s a really long reply.

In the course of writing this, I found that Sweden’s carbon tax amounts to $1.61 per gallon of gas — far higher than the ~$0.49 in tax per gallon levied in Chicago (ostensibly to pay for roads). And now that I look at it, I should’ve used the “free rider” term to describe positive externalities — and used the example of how non-drivers subsidize parking at supermarkets, since the store just wouldn’t exist without those other customers. Oh well. A few more edits are in [brackets].

Simply looking at the line item figures for transit and driving does not provide an adequate accounting of the costs that we, as a society, will end up paying.

All economic actions have “externalities,” which are costs or benefits that are outside the direct transaction. For instance, let’s say that I run a paper mill next door to your house, and dump the sludge into a stream that runs downhill into your yard. The noise, smell, and sludge don’t bother me [or my customers], since I profit, but they will cost you dearly.

It turns out that driving is an activity which has low internal costs (once you own a car, gas is practically the only marginal cost) and very high external costs — whereas transit has high internal costs [principally labor] but even higher external benefits. Even worse for transit, its external benefits are very widely diffused, while driving directly and obviously benefits the driver.

For example, direct proximity to transit typically improves property values much more so than access to a road; this is especially the case in downtown Chicago, and you could even say that access to railroads is what built Chicago in the first place. Yet all that property value created by the railroads largely did not accrue to the railroads — it benefited third parties. Similarly, properties in the Loop (which generate untold billions in property, sales, income, payroll, and other taxes) wouldn’t be generating nearly as much economic activity in the absence of transit; after all, that’s how half the people get there. In fact, that’s why most of America’s streetcars were built by property speculators, and why the world’s only profitable subway system (in Hong Kong) is a subsidiary of a huge property corporation.

In the past, Dennis, you’ve doubted whether downtown Chicago is an anachronism. I’ll tell you that it’s not. Even as old face-to-face standbys like the trading pits disappear, industries remain concentrated downtown due to what are called “agglomeration economies.” More than half of the region’s office space is downtown, and that proportion is actually increasing — as it is in Washington and New York City, the nation’s two other “fortress downtowns.” More importantly, offices rent for 30% more downtown, and apparently firms think it’s worth the premium. In fact, transit is the big reason behind that: three-fourths of downtown executives surveyed in 2002 cited access to transit (and, more importantly, the huge labor pool it moves) as the biggest factor in their location.

Like participation in the arts, use of parks, or attendance at public schools, transit is a public service that all of us benefit from even if we do not consume the service. In particular, transit makes the compact urban form of downtown and of many neighborhoods possible — you could not re-create a great walking neighborhood like Lakeview or Wicker Park with adequate parking for every visitor, since the parking lots would push everything out of walking distance. Without transit, and without the compact urban form that transit generates (both downtown and in the neighborhoods), Chicago really has little to recommend it over Atlanta or Indianapolis or Phoenix. I don’t even usually commute by transit, but I appreciate that the endlessly fascinating city that’s right at my doorstep is made possible by transit. In LA, where my family lives, there are also two baseball teams, an opera house, and great restaurants — but they might as well not exist, since it takes hours of hand-to-hand combat on the freeways to get to any of them. That’s not so in Chicago, thanks to transit.

On the other hand, driving is an activity that benefits pretty much only the driver while imposing considerable costs on the rest of society. Every additional car on the road costs every car behind it time, and that adds up. Surely, as a transportation reporter, you’ve heard of the Texas Transportation Institute’s annual Urban Mobility Report. Well, those guys calculate that transit in the Chicago region saves every single rush-hour driver 22 hours of traffic jams a year — that’s time worth nearly $1.6 billion a year, just in productivity savings to rush-hour drivers! (As you might know, that figure is nearly twice the RTA’s annual taxpayer subsidy.)

Others have attempted to calculate the full external costs of driving to Americans, and to the Chicago region in particular. (Cars impose higher external costs in cities than in the countryside.) A 1995 study looking just at the rather direct fiscal costs of roads to local governments found that Chicago-area governments spent one-third more on roads than they received in taxes and fees from road users. A number of studies have attempted to quantify a number of fuzzier costs to the public purse, like health care (to treat crash victims or asthma sufferers like me), securing oil supplies from the Middle East and elsewhere, and environmental degradation (half of all tailpipe emissions worldwide come from American cars). Six different studies from the 1990s — before, I might note, we had a set price for carbon dioxide [and before our recent Iraq escapade!] — estimate that each car costs society anywhere from $2,000 to $5,000 a year, over and above what the owner pays to operate it. On a per-gallon basis, those estimates range from $3 to $7 per gallon in social costs. So yes, in fact, we taxpayers do“pay half a motorist’s costs when he drives to work or goes shopping.”

So, there you go: one economic argument for why we “subsidize transit.”

Oh yeah, and NYC Transit and Metrorail cover more of their costs from the farebox because their boundaries are more tightly drawn — neither of them operate money-losing suburban buses.


13 thoughts on “justifying transit “subsidies”

  1. I’d forgotten to note a May study by the Economy League of Greater Philadelphia about what would happen if SEPTA went through with $100M in cuts (similar magnitude to CTA’s proposed cuts). The direct cost to passengers and drivers would be over $220M a year; nearly 60,000 jobs with payroll of over $2.5B would be lost, costing the state $27M in income tax and the city $60M in payroll tax; and depreciate property throughout the region (especially in the city and near suburbs) by over $5B, with a typical house losing nearly $7,000 in value. Not a very effective way to “save” $100M, really. If anything, similar cuts in Chicago would have greater impact: a greater proportion of CTA riders are “choice” riders, our downtown employment base far larger relative to the region, and regional property values much higher.

    The most interesting thing, I think, is the property depreciation figure; at a 2% property tax, there’s $100M in tax revenue right there. Again, transit increases property value, and lack of it can decrease value as well.

    Another interesting economic perspective: even without taking into account the multiplier effect of improved productivity economy-wide, investment in transit supports more local jobs than investment in any other industry. That’s because transit is a very local business, which can’t outsource many jobs out of the region. Contrast that with the auto alternative and you’ll get some interesting figures — like these for Portland, from CEOs for Cities’ Joe Cortright.

  2. about carbon dioxide, and based on the Philadelphia figures.

    The CTA service cuts planned for this year will result in Chicago area drivers emitting an additional 59 million pounds of carbon emissions annually. It would take four and a half million new trees to offset that amount of pollution — that’s like planting an area nearly twice as big as O’Hare Airport! (Needless to say, we’d have to plant countlesss more acres of green roofs to absorb that much carbon dioxide.)

    Even before the CTA cuts, Chicago’s transportation system produces an unacceptably high amount of carbon dioxide. Our per capita CO2 emissions from transportation are 8% higher than New York’s, 67% higher than Toronto’s, and 183% higher than Munich’s.

    The city could solve CTA’s deficit on its own either by levying the proposed real estate transfer tax, through a 2% citywide gas tax, or through a combination of measures.

    (CTA’s current deficit for 2007 is $71.9M. Chicago will collect $60M in 2007 with its $0.05 per gallon tax; from that, we can surmise that 1.2 billion gallons of gasoline are sold. [This is about 23% of Illinois’ total of 5.2 billion gallons in 2005, which seems about right given the city’s proportion of the state population.] At $3 per gallon, that’s $3.6B in sales; 2% of that is $72M.)

  3. Pingback: Built Chicago » Blog Archive » Transit in Chicago: Worth It?

  4. at Capitol Fax Blog

    @VanillaMan, my great-great grandparents died before the 20th century arrived. Not sure what you’re trying to say with that, since no one is even implying that the state wants to force you from your car or your suburban home. We just want to ensure that everyone in the metro area — you and me both, and all our neighbors, too — have choices about how we can live and work. Most of the government subsidies paid to transit are on the ledger books and therefore subject to public scrutiny, while the subsides paid to drivers are off the books — my asthma medication, Deep Tunnel to prevent road runoff from flooding basements, etc.

    Some people have noted how expensive “L” reconstruction will be. Well, just imagine how expensive and popular (not to mention polluting, ugly, noisy, and property value destroying) triple-decking Lake Shore Drive would be, since that’s the alternative to rebuilding the North Side Main. Also, the cost of essentially demolishing the existing city to rebuild another, more car-oriented one in its place will not be cheap. Indeed, as an owner of a zero-parking apartment, my property values (like many other residents’) depend on having good transit service nearby.

  5. left at Ask Carole.

    @anon 12:58: I, too, bike to work year round, but what I’d really worry about is whether you’ll have a job to bike to soon. The system will collapse on January 1; by my rough calculations, we’ll be left with per-capita transit ridership on par with Atlanta (!). Traffic jams and parking prices will result in downtown employers stampeding to the exits, moving offices to the suburbs or out of state.* The shops, restaurants, and other services will soon follow. Let me tell you, Palatine and Warrenville aren’t an easy bike ride away.

    Oh, and my biking-distance-to-downtown condo? Guess that prime location won’t be worth very much after half a million jobs decamp for Naperville, Nashville, and points beyond.

    * Three-fourths of downtown executives recently surveyed said that access to transit was their #1 reason for locating downtown. If that access disappears, so does their big reason for staying.

    nb. calculation for Atlanta level service: sources were APTA figures on unlinked trips and Census 2000 PMSA populations, comparing per-capita transit rides per capita and conservatively assuming a 35% decrease in ridership.

  6. another blog response, left to comment on paleoreactionary nut Cal Skinner’s post at Illinoize

    The problem with looking at transit “subsidies” per se is that transit receives government help “above the line,” on the ledger books, and benefits the public in a widely dispersed way, off the ledgers. Driving is exactly the opposite. Let’s look at some examples:

    The Texas Transportation Institute calculates that mass transit saves every rush hour driver in NE Illinois 22 hours of sitting in traffic a year. That’s a productivity benefit worth $1.6 billion a year to those drivers alone. Note that RTA’s current annual subsidy is about half that amount.

    New York’s Fiscal Policy Institute calculates that “public spending on mass transit has by far the highest economic multiplier among all industries in New York State”: every $1 spent on transit yields $3.40 in direct local economic output, even before calculating the increased productivity in other economic sectors that transit provides. (“Multiplier” measures the economic effect of an industry outside the industry itself.) In other words, if Illinois is looking to support regional jobs, the best bang for the buck is in transit.

    And speaking of economic benefits, our region faces severe cuts in transit service without additional funding. Cuts of similar magnitude proposed this year (but averted by state legislation) in Philadelphia were estimated to cost that region’s economy $2.5 billion in wages and $5 billion in property values — with a typical house losing nearly $7,000 in value, in a region with lower property values and lower job growth. I don’t know about you, but that sounds like a pretty bad bargain to me.

    Regarding air pollution, it’s interesting that you should mention that. The public subsidies to drivers aren’t direct (in the form of reduced user costs), but indirect and downstream, mostly for the traffic congestion, air and water pollution, crashes, and road maintenance that drivers cause and demand. The largest single subsidy: air pollution. Americans spend over $56 billion to manage the health effects of autos’ air pollution, including, say, the cost of my asthma medication (which I seemingly only need when I bike to work on polluted days like today).

    One estimate showed that transit in Northeastern Illinois keeps over 2,500 tons of three key air pollutants (VOCs, NO, and PM) out of the air that we breathe. (Also, the buses you see on Sheridan are nearing the ends of their runs. Look closer into the city and you’ll see the same buses packed with riders most of the day.)

    All told, estimates of the “social costs” of driving, those not paid by drivers, range from the hundreds of billions of dollars to well over a trillion dollars a year in America. By some estimates, drivers pay less than half of the total cost of their driving.

    I hear a lot of people whining about “good mass transit.” Such transit costs good money, too: the assorted government subsidies for regional transit in Paris amount to five times more than what RTA gets every year. Even Hong Kong and Tokyo, which are so crowded they make the Gold Coast look like a country retreat, invest huge capital subsidies in transit service.

    Let’s also take another look at Cal’s graph via the Tribune. I think it pretty much demolishes any argument from the collar counties: we Chicagoans will send 61% more money into the RTA (through two! new taxes) than we will get out of this in additional CTA operating funds.

    Really, the proposed legislation is a small price to pay for to keep Northeastern Illinois’ economy moving along. Without transit, which is where we’ll be on January 1 without this, our region’s economy will be in huge trouble.

  7. at Zorn’s blog. Where do these ignoramuses come from?

    Okay, I’m officially beyond tired of pointing this out several times a day: the Texas Transportation Institute pegs mass transit’s time savings to Chicago area drivers at $1.6 billion a year! That’s twice as much as the region spends “subsidizing” mass transit — and doesn’t even begin to count countless other benefits of mass transit that you take for granted. For instance, state spending on transit generates far more local economic activity than spending in any other sector of the economy. In fact, a recent study about transit service cuts in Philadelphia calculated that “saving” $100M through transit cuts would cost local governments nearly twice as much in lost tax revenue.

    Your gas taxes pay for roads, but they sure don’t pay for my asthma medication. (The asthma hospitalization rate for neighborhoods along the Dan Ryan is four times higher than the national average.) Gas taxes also don’t pay for fire trucks and hospital bills when a child gets run over in a hit-and-run. Gas taxes don’t pay to mitigate the 19 pounds of carbon dioxide produced by that gas — just that one cost is worth $1.61 (per gallon!) under Sweden’s carbon tax. Gas taxes don’t pay to keep aircraft carriers stationed in the Persian Gulf. Gas taxes didn’t pay for the Deep Tunnel sewer system, which was only needed after suburban sprawl paved over the whole of Cook County. Gas taxes pay for roads that could be 90% smaller if all they carried was commercial and emergency traffic. Your gas taxes and tolls, according to any fair study of “the full costs of driving,” amount to a small fraction of what driving costs our society — the taxes should be anywhere from $1 to $5 more per gallon if they did.

    Why shouldn’t fares go up? Perhaps they should go up some, but since you don’t ride transit, you’d never realize that the cost of a CTA cash fare (assuming “doomsday”) has gone up nearly 60% since 1998, even while the cost of driving (according to AAA) has actually declined 10% since then. We as a society (and thus our government) have an economic, environmental, and social interest in not only providing transit, but in fully utilizing that investment (i.e., convincing people to ride it) — raising fares while the cost of driving declines sounds like a stupid way of doing that.

    I don’t even ride transit all that much, but having lived in cities that weren’t built around transit, I appreciate that having transit allows Chicago to be the compact, lively, interesting city that it is. If I wanted to live in a sprawling, traffic choked dump — and if mass transit collapses, that’s what we’ll be left with — you think I’d have chosen to move here?

  8. at the Reader, at the indirect invitation of Luke. Wanted to mention somehow my discovery of I-180, the world’s most useless freeway (from Princeton to Hennepin, Ill., and carrying 2,000 ADT!), but it didn’t fit in. Another deleted phrase: “moving passengers typically does not return high profits. Warren Buffett, ruefully looking back at his investment in USAir, noted once that ‘if a capitalist had been present at Kitty Hawk… he should have shot Orville Wright… the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business… You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success.’ ”


    I don’t think I’ll ever be able to convince you, and frankly I’m beyond sick of wasting my time responding to online inanity, but I come to defend my good name. I only need the asthma meds on muggy, smoggy summer days. Where does the smog come from? Car tailpipes. Who pays for that inhaler? I do and my boss does; I bicycle, he takes the ‘L.’

    Simply put, there are internal and external costs and benefits to all actions. Driving has high internal benefits and high external costs (although you write them off, these are in fact well proven). Transit has high internal costs and high external benefits — there are many “free riders” who gain economically from transit, even if they don’t use it. Thus, transit’s balance sheet looks a lot worse: its benefits mostly accrue off its own balance sheet. Some of what we as a region gain from transit is enhanced productivity and incredible land value. It’s hard to untangle these benefits, but suffice to say that the existence of Chicago (and thus its suburbs) can be seen as a singular external benefit of railroads (or at least the I&M Canal, which was financed through selling land alongside the canal). Most of the railroad companies that serve Chicago long went bankrupt — including the old street railway companies! — but the properties that they gave access to have continued to appreciate in value. Hence, the world’s only profitable subway system is Hong Kong’s — not coincidentally a subsidiary of a giant real estate corporation.

    The CTA’s costs were shown by the Auditor General to be roughly in line with its peer systems, although they are rising quickly and service quality is lower. However, contract privatization (again, it’s never going to make money) has not proven a panacea wherever it’s been tried, whether the Hired Truck Program here or Railtrack or Metronet in the UK.

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  11. A unique way to look at subsidies. I’m personally a champion of the positive effects of urban rail transit, and never quite made some of these connections. Thanks for the write up!

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