One Way To Save Transit

Michael Lewyn's picture

In much of the United States, day-to-day transit service is under assault as never before; state and local treasuries have been depleted by the recession, and the federal stimulus package is unlikely to be helpful because federal dollars are more likely to flow into capital programs (English translation: shiny new railcars) than into preserving existing service (1). Thus, Americans will have the worst of both worlds: billions thrown at transportation while existing bus routes get whittled away.

How can we save public transit? One option might be to increase federal subsidies for transit agencies' operating expenses- but this may not be politically viable, since Congress has traditionally been reluctant to support operating expenses, and the enormous cost of bank bailouts and stimulus package may have sated Congress' appetite to increase government spending.

However, tax cuts are generally less controversial than spending increases: Republicans are nearly always willing to support tax cuts, while moderate Democrats are willing to support some tax cuts in order to appeal to more conservative voters. Moreover, tax bills are generally not filibustered, so 50 Senate votes rather than 60 will be sufficient to pass a tax cut.

So why not a tax cut for transit? Specifically, I propose the following: a $1000 per year tax credit for weekly and monthly transit passes. Transit agencies in need of revenue could raise the cost of transit passes, and could inform riders that they would be able to get the money back when they paid their taxes. As a result, more people would buy transit passes, and transit agencies would no longer be drowning in red ink.

In addition, a transit policy based on tax credits rather than subsidy increases would empower consumers rather than empowering bureaucrats. One common argument against subsidizing operating expenses is that federal subsidies are wasted by bureaucrats, and thus never really benefit transit riders. By contrast, under a tax credit plan, a transit agency's interests would be aligned with those of riders: the agencies most able to appeal to riders would get the most funding, while less competent transit agencies would get less.

How much would such a plan cost? Roughly 5% of American workers, or about 7 million Americans, regularly commute via public transit.(2) Assuming that this number of Americans spend $1000 per year on transit passes(3), the credit would cost $7 billion - not very much in the context of a $3 trillion federal budget. If transit ridership increased so much that the drain on the Treasury significantly exceeded this amount, Congress could always reduce the size of the credit.

It could be argued that increasing the cost of monthly passes would harm low-income transit users, who can ill afford to spend $80 a month for a transit pass. But in fact, even these riders would benefit in two ways. First, increased use of passes would enable transit agencies to protect existing service, thus protecting lower-income riders from losing bus service altogether. Second, the extra revenues received by transit agencies would enable them to hold daily fares down, also protecting low-income riders.

To be sure, some cities' riders would benefit more than others: in the best transit systems (such as those of New York and Washington) the cost of a monthly transit pass is higher than $1000 per year, while in more automobile-dependent cities, transit passes are currently far less expensive.  But this is an argument in favor of a $1000 cap.  Given that resources are scarce, surely it is more important to ensure that people in car-dependent cities have a minimally adequate bus service than to give gold-plated service to people who already benefit from America's best transit systems.  

(1) For one of many articles on this subject, see

(2), Table 1060.

(3) It may be that more Americans would purchase transit passes, since (a) a number of transit riders are too old or young to work, and thus do not count as "commuters" and (b) this plan is likely to increase ridership. On the other hand, some transit riders will not purchase passes, either because they cannot afford passes or do not ride often enough. And a few other riders will simply be too careless to take advantage of the credit. My somewhat educated guess is that these groups will cancel each other out, and that the total number of credit users would be about 7 million.

Michael Lewyn is an assistant professor at Touro Law Center in Long Island.



Why a Subsidy Might be Better

If the Feds gave the various transit agencies a direct subsidy for operating expenses it would; first, preserve existing jobs for transit operators and second, if it were big enough, allow the agencies to expand and increase service to the maximum they could with existing equipment. Think more and better mid day, late night, and weekend service. This would require the hiring of additional operators, and creating new jobs in the process. All of this could take place in a matter of weeks.

nice idea, but...

It is essentially in operation now. Section 132(f) of the tax code allows for the pre-tax use of dollars to pay for transit passes (up to $230/month, thanks to the stimulus package). That amount is eligible to the employer, the employee, or both in combination. There are a couple of catches to this allowance, however. First, the employer must be purchasing the pass directly. The employee cannot purchase the pass on their own and apply the benefit. Second, the $230/month is an allowance, not a mandatory amount. Should an employer choose to apply the benefit at a lower level, they can.

Obviously, this does nothing to allow for passes purchased by the unemployed or by those whose employers choose not to apply this benefit at all, but the allowance for this sort of opportunity is already there.

Michael Lewyn's picture

I should have mentioned...

The Sec. 132(f) deduction - but of course, the catches in sec. 132(f) mean that it in no way, shape or form does it resemble a tax credit.

As cwsjd points out, the biggest catch is the fact that the employer has to purchase the passes- so if the employer is hostile to or uninterested in transit (as is nearly always the case in my experience), Sec. 132(f) is useless.

An individual tax deduction for transit would be much more effective, since transit users are far more motivated to buy transit passes than are most employers.

Moreover, there is a huge difference between a deduction (which Sec. 132(f) is in highly watered-down form) and a credit. A deduction merely reduces your pretax income- which means even if you are in the highest-tax bracket, your taxes are only reduced by 35 percent. By contrast, I am proposing a credit- a dollar for dollar setoff of your transit fare against your taxes. So if I spend $1000 per year on tax deductible transit passes, I am still out of pocket $650. Under my proposal, I am out-of-pocket zero.

Employer Hostility to Transit

Michael is right on this one. I worked for several companies that refused to even let us buy the transit passes with pretax dollars. They claimed it was too complicated.

And one well known beloved organization, the Public Broadcasting Service (PBS) for years refused to allow employees the benefit of transit passes while offering those who drove free parking. They were located just a few feet from a Washington DC METRO stop all the time.

Employer ambivalence and some ideas

I worked for a transit agency that didn't even use the pretax program - how sad is that. We had passes for our own system, but many employees used one of 3 other underlying bus systems to connect with the train we operated. I shelled out hundreds of dollars for bus passes that should have been covered, and it would have reduced both the agency's tax burden and mine, but alas - Laziness reigns in 21st century America.

I actually think Michael has hit on a sweet spot here. Direct subsidization of operating costs will always be a tough sell, but a credit to riders is something that pols should be able to get behind. Even those who are less friendly to transit can't claim it is wasted money because it would only be claimed by people who use it. It's a great idea and thank you for bringing it up.
The commenter who wants late-night and weekend service with federal dollars would quickly lose that money because the feds are interested in productivity and those are the worst possible times for transit to generate ridership - and I'm not saying we shouldn't provide it, just that it's the hardest time to try and convince someone else to pay for it.
The federal government needs to do a few things in addition to Michael's idea. If they get serious about subsidizing operations then do it equitably based on ridership. (Obviously this will lead to counting fraud and that's probably a big deterrent to the feds doing it.) Assuming we can get accurate reliable counts, this would incentivize efficient operations and pass usage and put downward pressure on fares. The other option is to match local revenue generated by dedicated taxes, but I think that is a better role for states than the feds. The federal government is awash in so much debt now that it can't possibly take up slack in the local willingness to fund transit. The gas tax needs to be raised to pay for anything, but there's no will to do it. Will power has to come up from the local level - DC doesn't have it.
The other thing the feds can do to prevent future crises like the one we are in now is to apply capitalization requirements similar to those being imposed on banks. Local transit agencies face a tremendous amount of political pressure to spend everything when times are good or to save less than is prudent, and then when times get worse, they are left with insufficient reserves to smooth out operations expenditures. The current recession has been long and deep enough to overtake even the agencies that did a good job of banking money away for a rainy day, but by far, the agencies in the worst shape are the ones that did very little to prepare for a loss of revenue from variable tax sources. A reserve requirement could help smooth out future downturns. It should be required of everyone taking fed funds.

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