How to Fix Transit Financing

» Moving transit funding towards a sustainable source – in and out of economic downturns

The budget crisis affecting American public transportation agencies – a result, principally, of a decline in tax revenue – confirms the need for both a more stable source of income and tighter control over expenses. In this post, I’ll take New York’s Metropolitan Transportation Authority as an example, and compare it to a significant foreign peer – Paris’ RATP, which runs the city’s métro and buses. In the process, I hope to give some explanations for the crisis in which many U.S. transit agencies find themselves, and provide some structural remedies for the problem.

The MTA is facing a $1.2 billion shortfall, which depending on the outcome of the deal I discussed yesterday, may or may not be reduced to a $750 million shortfall. This deficit comes at a time of record subway ridership and is therefore not the result of declining fare receipts but rather the result of fewer tax revenues than the agency had expected when preparing its budget in previous years. About 3/10 of the agency’s total revenue for its operating budget comes from dedicated taxes or fees, with the other 7/10 the product of fares, tolls on MTA bridges, and local and state subsidies.

Half of the taxes that fund the MTA come from New York State’s Metropolitan Mass Transportation Operating Assistance Program (MMTOA). In this year’s budget (PDF), the agency expects revenue from MMTOA to decline from $1.7 billion in 2008 to $1.4 billion in 2009, though both numbers are way up from the $982 million recorded in 2005. MMTOA funds come from a 1/4¢ sales tax, a corporate tax surcharge levied in the New York metro region, and a petroleum and transportation industries tax.

MMTOA represents the bulk of MTA revenue and the biggest explanation for why its balance sheets are so far in the red, but the MTA will also lose revenue this year from the Urban Tax (from $557 million in 2005 to $500 million in 2009) – a fee on real estate transactions – and the Mortgage Recording Tax (from $745 million to $380 million), a fee recorded on mortgages made in the city.

Other components of MTA revenue have remained relatively flat over the same time period. State and local operating assistance, which provides a total of about $400 million each year to the agency, remains the same; meanwhile, receipts from the Petroleum Business Tax, a part of MMTOA, have inched up from $561 million in 2005 to $626 million in 2009. Revenues from tickets have increased from $3.6 billion to $4.2 billion with a fare increase; toll revenue from bridges and tunnels, transferred to mass transit as a subsidy, has increased from $1.1 billion to $1.3 billion in the same period.

Thus, MTA’s overall budget has been able to rely on stable funds from fares, toll collection, and the tax levied on gas-based businesses. On the other hand, revenue from sales taxes, corporations, real estate transaction taxes, and mortgage fees have fluctuated wildly in recent years with the rise of the real estate boom and now its quick fall. Relying on tax revenue that changes with the state of the economy makes managing the transit system difficult. Transit agencies need to provide similar services every year, no matter whether the economy is up or down. If the MTA is to establish a stable funding program, it must be able to rely on a stable source of revenue.

Let’s compare the MTA’s revenues and expenses with those of a foreign peer that does not face similar fiscal difficulties – Paris’ RATP, which remains in the black, even during this economic crisis. RATP runs the city’s métro, tramways, and buses, as well as some of its RER regional express trains. It is funded by a regional organization run by elected leaders throughout the Paris region called Stif that collects tax revenue and government subsides for the entire region; in 2008, its total budget was 7.5 billion euros, making it equivalent in size to the $10 billion MTA. Most of Stif’s funds are distributed to RATP, though some are given to SNCF, the national train company, as well as to a few private bus operators in the city’s suburbs. The chart below compares the RATP’s expenses with those of the MTA, and Stif’s revenue with that of the MTA.

mta-stif

The chart demonstrates that both Paris and New York get about 2/5 of total revenue for running transit services from fares. But while New York’s system relies on income generated from tolling the city’s bridges and tunnels for a large percentage of total revenue, Paris relies much more on local taxes and government subsidies, which contribute about 3/5 of total funds, versus only about 4/9 of the MTA’s.

I won’t be discussing expenses much in this post, but the chart demonstrates that MTA is overloaded with payroll expenses as compared to RATP, suggesting either that MTA pays its employees too much (especially in overtime), or that it has too many workers. RATP’s spending is more evenly distributed, and lower in cost per passenger mile provided. I’ll let others come to conclusions about how MTA can reduce operating expenses.

The real question for us, then, is how Paris’ Stif is able to maintain fiscal balance: how is it funded, and why does its system work more efficiently than that of the MTA?

About 2/5 of Paris’ transport funding comes from the versement transport, a tax collected on salaries in the Paris region. The fees are highest – at 2.6% – in Paris and the neighboring rich département (similar to a county) Hauts-de-Seine; they’re lower, at 1.7%, in two poorer neighboring départements, Seine-Saint-Denis and Val-de-Marne. In the four départements on the edge of the region, the rate is 1.4%. Having the tax rate vary by location, with people who are more likely to be able to take advantage of public transportation paying more, makes a lot of sense. The region’s decision to tax the poorer départements bordering Paris at a lower rate also serves as a social equalizer, attempting to encourage investment in less-well-off areas.

The versement transport was first instituted in the full Paris region in 1991, and the amount charged on salaries has risen four times sense. The tax only applies to people working for companies with more than nine employees; it is designed to give a break to small shops and enterprises.

One-seventh of total Stif funds in 2008 came from government subsidies, far higher than the 1/12 of funds the MTA is likely to receive for its 2009 budget. 51% of Stif’s funds come from the regional body, 30% from the city of Paris, 7.7% from the Hauts-de-Seine département, and less than 3% from each of the other départements. The national government also contributes some funding, especially for subsidies for transportation for the poor and the young.

So, on the surface level, Stif appears to be funded much like the MTA, with funds coming from dedicated taxes and from government subsidies. There are two important differences, however: one, revenue from the taxes that pay for transportation in Paris are less likely to vary significantly during economic downturns; two, the government subsidies are designed to compensate when tax revenue falls short.

MTA’s reliance on sales and real estate transfer taxes puts it at a great risk of loosing expected funds, because consumption of consumer products (sales tax) and of property (urban tax) decreases dramatically during recessions; so do the balance sheets of corporations, which the MTA also taxes. On the other hand, taxes on income do not see changes that are nearly as significant, especially in France, where firing people is incredibly difficult. As a result, Stif can be confident that it will continue to receive funding from taxes, even during bad economic periods.

Just in case, however, government contributions are designed to make up for tax shortfalls. As the chart below demonstrates, the government subsidy to Stif remained at around $1 billion Euros between 1990 and 2004, while funding from the versement transports increased from a little above $1 billion Euros in 1990 to $2.5 billion in 2004 (data from Stif). This increase was due to inflation and also because of the increase in charges on income over the years – the government has made a priority to focus revenues for transportation on salaries, rather than from general revenues. The stable increase in income generated from this tax, even during the early 1990s recession, is demonstrated below.

Though salaries in the Paris region have not hit a serious downfall since the versement transports was instituted, local governments are mandated to increase subsidies if needed. If the transit agencies in the Paris region, such as RATP, need to increase service to provide for demand but tax revenue can’t keep up, the regional body and the governments of the city of Paris and the départements are required by national law to make up the deficit.

stif-funding

Paris’ system for transit financing provides an instructive look into how American public transportation systems could go about finding more efficient and stable sources of revenue. As we have seen in recent months, the sales tax revenues most agencies rely upon have collapsed in the past year, and the result, all over the nation, are service cuts and increased fares. Those aren’t solutions when more than ever we need transit service to provide the alternative mobility the American people need.

Therefore, a funding system with a stable tax base that is not as likely to fluctuate with economic problems is a necessity. In addition, government entities at the local and state levels must make a financial commitment to ensure the continued funding of transit agencies, even when recessions hit. Making an effort to incorporate the fiscal advantages of the French system detailed above will bolster the health of our own transportation networks.

15 Comments | Leave a Reply »
  • anonymous

    “suggesting either that MTA pays its employees too much (especially in overtime), or that it has too many workers”

    Try telling that to the transit workers’ union.

  • anonymous

    MTA’s reliance on sales and real estate transfer taxes puts it at a great risk of loosing expected funds, because consumption of consumer products (sales tax) and of property (urban tax) decreases dramatically during recessions; so do the balance sheets of corporations, which the MTA also taxes. On the other hand, taxes on income do not see changes that are nearly as significant, especially in France, where firing people is incredibly difficult. As a result, Stif can be confident that it will continue to receive funding from taxes, even during bad economic periods.

    In New York City we used to have these things called “investment banks”, they made a lot of money and therefore a lot of tax revenue from profits and incomes for the city and state. Those are now gone in the blink of an eye.

    Real estate prices have perhaps not dropped as dramatically here as elsewhere but in any case there is widespread aversion to raising property tax levels.

    And any raise in local income, corporate or property taxes has the potential to drive more companies and households out of the area.

    A remaining solution is to raise sin taxes. These of course have the added benefit of reducing undesirable or unhealthy behavior, but unfortunately the better they work at that purpose the worse they work at raising revenue, and vice versa. They also tend to have a strong impact on those with low income.

    The real solution to transit funding is to simply mandate that the funds be gotten from whatever source possible each year, to set aside extra money during boom years (rather than spend it all) to prepare for fiscal droughts, and to including some federal funding in addition to hedge against local funding anomalies.

  • Michael

    The difference in payroll between the agencies could come from a lot of places, but I suspect that it’s, in large part, related to benefits, esp. health care.

  • Health care is broken out separately, in the chart.

  • Vin

    While income tax revenues are undoubtedly more stable than those from other sources, I wonder if the stability of Paris’ system is related to the difficulty of firing people in France – as you suggest. Case in point being that the U.S. federal government runs up much greater deficits during recessions, even though most of its revenues do come from income taxes.

    An income tax component for MTA funding is a good idea, but it’s not a complete solution, and the Paris comparison is less-than-instructive due to the differences between the labor markets in France and the US.

    How, then, to fund the MTA?

    1) As has been pointed out, a mandate, combined with setting aside cash during good times, would be quite helpful (the latter really should be done, anyway).
    2) Congestion pricing. Though this was not the case in Mayor Bloomberg’s proposal, far as I know, ideally most, if not all, proceeds from any congestion pricing scheme should be funneled directly to the MTA.

    Both of these are things that should really be done all over the country.

  • dmcquown

    Fascinating. Do you have any similar data for the Chicago Transit Authority? I would love to see it.

  • as

    Thank you for doing an analysis based on comparing an American system to one outside the USA. I think we have a lot to learn from looking beyond our borders for better approaches- yet, we seldom do so.

  • Bayer

    Re: the difference in payroll costs. What is the difference in system-wide miles per hour? The lower the MPH the higher the operator labor cost. Other costs per mile will not be affected.

  • Thanks for the good analysis! Very informative blog.

  • Norman Brown

    Minor correction Vin, the revenues from congestion came to be dedicated to the MTA though that was not the original proposal as I remember. Personally, I feel that was one of the many reasons congestion pricing went down without a vote though. Had congestion pricing been allowed to stand or fall on its own merit, and it had enormous productivity value for bus service operated by the MTA without a penny of dedicated money, it might have passed. The MTA’s role as a permanent scapegoat in NY politics precluded it from being an attractive political magnet for congestion pricing.

    This was a great piece on comparative financing. I am personally of the belief that the parliamentary form of government is really at the root of the superior financing history. And, that same difference in their form of government has kept Paris an independent political base in national government. With regards to urban political power France is really a “bizarro” universe (obligato to Superman). The rich live in the center of Paris, the working class and the poor in very high density complexes in the suburbs (periphery).

    Look at our nations capital for example, entirely castrated politically, ghettoized no control of anything. Paris is the capitol of France and the political leader, and the biggest city with almost complete control of its own destiny with regards to authoritative allocation of values and resources. United Europe only made it more so.

  • France doesn’t have a parliamentary form of government. It has a presidential system, with some parliamentary influence.

    Also, Paris became capital of France precisely because it was the largest city. If the US had kept the capital in New York, instead of building DC to appease the South, you could say the same thing about the US.

  • Jack

    Imposing a tax, even a minor one, during times of economic downturn is sure to garner mounds of opposition.

  • Norman Brown

    If thats your correction then I stand corrected. They have a parliamentary legislature, yes they vote for president as well unlike say, Italy. Still, there is a parliament that has authority to allocate values and resources and it is pretty close to one person one vote. My point is not that France is a perfect democracy and ours imperfect but that parliaments are more likely to develop good long term mass transit systems than the Senate in the US structured to project political balkanization and states rights (read, slavery).

  • A propos France:
    It has a presidential system, but it is possible for the legislature, under opposition control, to run the government entirely… this has happened three times in recent history, and it’s called “cohabitation”:

    - From 1986 to 1988, when the legislature was controlled by the right, even though the Presidency remained in the hands of Socialist François Mitterand
    - From 1993 to 1995, when the legislature was controlled by the right, even though the Presidency remained in the hands of Socialist François Mitterand
    - From 1997 to 2002, when the legislature was controlled by the left, even though the Presidency remained in the hands of conservative Jacques Chirac.

    In each of these periods, the Prime Minister became the de facto leader of the nation, not the President, who does not have veto power in France. Recent changes in election dates (as well as the reduction of the President’s term from 7 to 5 years) have made cohabitation less likely than before.

  • The difference between France and the US in spending priorities isn’t the form of government, though. When the President and Prime Minister are of the same party, the President is the one who makes the decisions. Even when they are of opposite parties, they will share power – for instance, both will attend G-8 meetings, where ordinarily only the President does.

    The true difference is that France has a more centralized decision making system. Its government is unitary, not federal, so local interests are weaker. Interest groups don’t compete with one another as in the US, but instead sort into tripartite negotiations among business, labor, and government. This is similar to Japan, which was a leader in HSR as well.

    Note that Germany and Canada, which have parliamentary governments but strong regionalism and interest groups, have not been able to build anything like the TGV or Shinkansen. Germany has a longstanding tradition of commitment to rail services, but its emphasis on strong states has compelled it to spread its HSR money thin. Its ICE system serves more corridors than the TGV, but each corridor gets less money, so the trains usually run on legacy track and only reach 250-270 km/h, rather than 300-320 as in France.

    Of course, German rail is far better than American rail. This shows that even within a fragmented political system, it’s possible to have reasonable HSR. I’d say the main difference between the US and Germany is that the US is more averse to the public works spending required to create competitive passenger rail. This is why Switzerland, whose political system is extremely fragmented, has top-notch rail, while the English-speaking world, including not only federal countries like the US and Canada but also unitary Britain, does not.

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