Public transportation systems are notorious money-sinks that rarely, if ever, earn back their operational and maintenance expenses. This does not mean public transportation provides no value, but that transit systems, at least in the US, are very bad at capturing it. This forces public transit authorities to rely on other sources of revenue, and even then, many systems’ revenue falls short. Even the New York MTA operates at a multi-billion-dollar deficit, despite operating the most used transit system in the country and receiving a significant public subsidy. This raises the obvious question, how do we close the funding gap?
This is not a question about the value of public transit systems. They clearly add value to riders and cities by improving safety, mobility, traffic, and more. It is a question about how to capture that value. If transit systems could capture the value they create, they could establish dedicated funding sources. With dedicated funding, transit agencies can avoid competing with other politically popular programs. This guarantees funding for operations and maintenance, preventing the pitfalls of deferred maintenance. It could also secure funding for expansion, enabling transit systems to grow and spread their benefits.
Public transportation increases the value of land near stations. This increase depends on many factors, including the transportation system used. Commuter rail causes the largest increase, while bus stops may not cause any. The zoning and demographics of the neighborhood, along with the connectivity of the transit system, also make a difference. This increase in land values can be an asset for public transit agencies.
The simplest way to capture more value for public transportation is through higher fares. This is unlikely to happen, however. Almost all transit systems in the US are public, and thus subject to political pressure. Raising fares could be very unpopular, especially in areas dependent on public transit. Many also view transportation as a public service and are thus reluctant to extract value from riders. The elasticity of demand for transit systems also limits this option. If transit agencies raise fares too high then less people will ride, limiting potential revenue from fares. Moreover, transit systems serve disproportionately low-income communities, understandably making policy makers even more reluctant to raise fares.
Some of this value is captured by governments through higher property tax revenue. Transit stations raise the value of land around them which, assuming a constant tax rate, naturally produces more property tax revenue. The Washington DC Metro, for example, estimates it enables the collection of an extra $3.2 billion in property tax revenue, more than enough to cover its expenses. However, this revenue typically flows into general funds, rather than the transportation system itself. Transit systems may buttress local budgets, but not necessarily their own. Additionally, this method may only capture a fraction of the value produced.
One way of more thoroughly capturing this value is with a special tax on land or development near stations. Developers could pay an extra tax on their land, justified by the increased land value given to them by government services. This follows the principle that beneficiaries of services pay for them. However, such a tax might disincentivize development. Many developers might be willing to pay the tax considering the benefits of building near public transit, but if the tax is too high, it might discourage the development it seeks to enable.
Transit systems could also simply own the land near their stations and profit from the increased rents. The government could operate the transportation itself at a loss while the system remains profitable. This is not merely using land to subsidize unprofitable transit: the transit system makes the rents valuable. This follows the principle that those who benefit from a service pay for it without increasing the burden on riders and without disincentivizing development.
The Hong Kong MTR follows this “rail plus property” model. It not only breaks even but turns a profit thus subsidizing other public services. When it builds a new station, the MTR is granted development rights, which it can lease to developers. The money from the lease is used to fund the MTR. This enables the MTR to earn a 170 percent profit and operate with a 99 percent on time rate while keeping fares relatively low.
Like any funding model, this one is not without drawbacks. It might impact the type of development; the needs of transit agencies may differ from the needs of the city. For example, transit agencies might prefer higher rents from office or retail space compared to housing, which could raise housing costs. This risks gentrifying cities, pricing out the people most in need of public transit. It also necessarily restricts private development around rail stations, which limits the opportunities private developers could bring to cities. On the other hand, this enables public transit agencies to plan for and integrate development with their stations.
Public transportation provides immense value to cities. By enabling these systems to capture some of this value, we can protect their financial health, enable their growth, and increase the benefits they provide. Changing the financing of public transit systems towards a land-value-capture model can ensure their financial sustainability
Written by Patrick Conrad, Public Policy Intern
The Alliance for Innovation and Infrastructure (Aii) is an independent, national research and educational organization working to advance innovation across industry and public policy. The only nationwide public policy think tank dedicated to infrastructure, Aii explores the intersection of economics, law, and public policy in the areas of climate, damage prevention, eminent domain, energy, infrastructure, innovation, technology, and transportation.