Public Transit Creates Value but Fails to Collect

Published February 1, 2008

Like many transit agencies around the nation, Illinois’ Regional Transportation Authority (RTA) and its service boards (Chicago Transit Authority, Metra commuter rail, Pace suburban bus) have been in financial difficulty for a long time.

Transit officials say they’ve reached the point where huge increases in public funding are needed to avoid (or minimize) service cuts and fare increases.

RTA says it needed $226 million (in addition to existing subsidies) just to balance the books for 2007, more to balance in 2008, additional sums to meet backlogs of repair and maintenance, and still more to expand service where a demonstrable need exists. To get transit on a sound financial basis, something in the neighborhood of $2 billion every year (plus fares) would be needed.

Subsidies now come mainly from a 1 percent sales tax in Chicago and Cook County, a one-quarter percent sales tax in the five other RTA-area counties, federal capital grants, and sometimes other sources.

Transit agency advocates have proposed further increases in the sales tax to obtain the desired funding. Other proposals also have surfaced, including increases in taxes on auto registration and gasoline.

In the meantime, short-term infusions of cash from the state have staved off service cuts and fare increases threatened by the transit agencies.

Does this mean transit just isn’t worth what it costs, so we need to cut it back to what can be supported by fares? No, and we can readily see why.

Broad Benefits

Only part of transit’s benefit goes to those who pay fares. The whole community benefits from transit. Where do those benefits show up in the economy?

As dozens of studies across the globe have shown, the benefits of transit show up as increased land values. Land served by public transportation is worth more than land not served. The amount varies, of course, depending on the quality of service, type of development, general standard of living, etc., but the effect is large.

A study published in 1997 for RTA, “The Effect of CTA and Metra Stations on Residential Property Values,” by Gruen Gruen & Associates, implies that just the existing rail system adds land value in excess of $1.6 billion a year.

Another study, published in Regional Science and Urban Economics in 1995, considered land prices before and after construction of CTA’s Orange Line and calculated the line added 17.4 percent to land values.

Potential Job Losses

This research sheds light on the question, Who should pay the transit subsidy? Should it be consumers, motorists, or landowners?

To some extent these are the same people, but the economic impacts of taxing them aren’t the same.

A sales tax, especially when it covers food and drugs, is regressive, burdening poor people the most, and it tends to drive commerce out of the area. A study I wrote in October 2007 for the Henry George School of Social Science, “Retrieving Transit’s Benefits,” estimates the sales tax increase proposed for RTA would cost more than 30,000 jobs.

Increased auto registration fees may be a little less regressive than a sales tax because many of the very poorest people don’t own cars. But in the Chicago area, almost everyone needs a car, including low-income families who cannot afford to live in the areas with good transit service. Why should the person whose residential and work locations make it impractical to use transit pay as much as (or more than) others who can ride transit, or who benefit from the reduction in traffic congestion?

And how can authorities effectively prevent evasion by people who register their cars at the address of a friend or relative outside the region?

Land Tax Advantages

We can avoid these difficulties by taxing the value of land.

A land value tax is like the real estate tax we all know, with at least one important difference: All buildings and other improvements are entirely exempt from taxation. Only the value of the land itself is taxed.

If you own a home, you would pay no tax on the house under land-value taxation. The tax on your land would be based on what the land would be worth if it were vacant.

A land tax isn’t regressive because many poor people own no land at all, and if they do own land it is of relatively low value. A land tax can’t be evaded because land is visible and real estate tax information is public. A land tax for transit is fair because transit service increases land values and those who benefit the most pay the most. And a land tax can’t drive away jobs because it isn’t a tax on economic activity.

$40 Annual Tax Hike

How much would a land tax cost the average homeowner? The answer depends on how much revenue is needed. The Henry George School study estimates that to generate $400 million a year–enough to avoid Chicago’s transit “doomsday” service cuts for years to come–would cost an average homeowner about $40 a year. It’s likely to be a lot less expensive than a sales tax increase.

Although I’m not aware of any public transit service subsidized exclusively from land value, several transit services do obtain funds from a real estate tax, and some have benefited by selling land after its value has increased.

In Japan, private railroads provide passenger service funded, in part, by the increased value of lands the railroads own.

Management Still Key

A successful public transportation system requires adequate funding, which can be raised by a land tax, but it also requires competent management. A transit system used as a dumping ground for disgraced political insiders or seen primarily as a source of patronage jobs, or that just isn’t efficiently managed, may cost too much to justify even when the land value increases are taken into account.

Unless the higher land value created by public transit is captured to fund transit, it is unfair to expect passengers and taxpayers to cough up more.

Chuck Metalitz ([email protected]) is director of the Henry George School of Social Science in Chicago.

For more information …

This essay was based on the Henry George School’s recent Research Note #5A: “Retrieving Transit’s Benefits”:

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