Why Higher Fares Would Be Good for Public Transit

If transit is really to thrive in the United States, agencies need to reconsider their reliance on taxpayer subsidies.

Image
Flickr user Mr.TinDC

Low transit fares have a long tradition in American cities. In his 1921 reelection campaign, Mayor John F. Hylan called the nickel fare a "property right" of New Yorkers, even though inflation during World War I had raised wages, and turned what had been a profitable fare for the transit companies into a fare that guaranteed ongoing losses, eventually requiring a government takeover. New York was only somewhat ahead of the national curve. In the 1960s, a variety of pressures put for-profit transit systems in terminal bankruptcy, and public subsidy of transit fares became the norm across the United States. Since then, the price of a transit ride has been a permanently politicized number.

The political focus on the fare assumes that only one aspect of the overall transit experience—the price of a ride—is the overriding concern to a rider. But this isn't always the case. With America's transit systems woefully underinvesting in their own capital infrastructure, it is time to consider whether the interests of the riders themselves are actually served by an approach that prioritizes low fares over high-quality service. And with transportation patterns beginning to break from the car-focus of the last 60 years, it is also time to think about whether we can break from the model of pricing transit in a way that structurally loses money.

Shifting away from subsidized fares offers the promise of several benefits in return: improved and expanding services, more creative management, and the ability of even lower fares for certain riders who need them. Making such a shift would require a radical reinvention of transit as we know it today, but one that has already taken place in many cities around the world.

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Outside of a few expansion projects, America transit systems are failing to invest in their infrastructure. Even worse, the systems with the longest history and the most intensive usage are the ones at greatest risk. Why is it that the older systems—the New Yorks, the Chicagos—don't look as good as the newer ones? It's not actually because they're old. Take a look at a 100-year old building in Midtown Manhattan or a 100-year-old home in Bronxville—or even Grand Central Terminal itself, now 101 years old. They certainly don't look unattractive. That's because they receive regular upgrades, bringing them up to the standards of new construction. In contrast, most of New York's subway stations haven't been comprehensively renovated in a generation. It would be like walking into a landmark office building and finding rotary telephones.

It would seem, therefore, that we're simply not devoting enough public money to transit. But consider that in 2012, $7.7 billion dollars of state and local tax revenues went to New York City Transit, not counting what when to the commuter railroads and other operations. That's a lot—nearly $1,000 for every man, woman, and child who lives in New York City. Why didn't it feel like enough? Because less than half of it, roughly $3.2 billion, was reinvested in the system. The majority, about $4.5 billion, was used to keep fares low by paying operating costs. On average, each New York City transit rider paid only 43 percent of the cost of his or her ride; every $2.50 swipe of your Metrocard gets matched by $3.31 in tax dollars.

What might that $3.31 have done if it had been invested in the system? Well, if the MTA could issue bonds against those subsidies, it could finance a whopping $85 billion capital plan—on top of current spending. The MTA has estimated that the bus and subway system needs $68.2 billion in investments over the next 20 years, which means that the $85 billion could not only meet those needs but exceed them. We could improve reliability by catching up on deferred maintenance, increase frequencies and speeds with new signaling, renovate virtually every station in the system to include platform doors and air conditioning, and renovate key bus routes with dedicated lanes and priority traffic signals.

Overall, it's the kind of money that would revolutionize the experience of virtually every rider, every day, with dramatic benefits for the region's overall economic performance. 

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Now don't get me wrong: If public subsidies were so plentiful as to allow both full investment in transit infrastructure and low fares, I'd much rather take that deal than see the excess public dollars go, for example, to building new roads. But it doesn't work that way. Despite occasional bond issues and other spurts of investment, there is nothing in the record of the last half-century of subsidized U.S. transit that suggests long-term investments will ever be a priority. If riders want quality service—and if our cities and metropolitan economies really need high-quality transit to be competitive—riders may need to act in their own self-interest and develop the willingness to move towards fares that match the cost of providing the service.

Of course, the transit officials reading this are shaking their heads, thinking "doesn't this guy know that transit agencies always need operating subsidies?" The facts are on their side, in one respect: No transit agency in the United States breaks even. The average system recovers about 40 percent of its costs from fare revenues; the rest come from subsidies, as per the latest National Transit Database. The best-performing operation is the New York subway, which covers 73 percent of operating expenses from fares. But because New York City's buses cover only 35 percent of their costs through fares, the overall New York City Transit recovery ratio is only 43 percent. A few systems, especially the newer ones, make only 10 percent of their operating costs in fares.

System Base fare (or peak-hour fare for shortest trip) Farebox recovery ratio Subsidy per base fare Implied base fare for full cost recovery Annual operating subsidies, all sources (in millions) Proceeds from a 30-year zero-coupon bond, at 4% interest, compounded monthly (in millions)
NYC MTA $2.50 43% $3.31 $5.81 $4,895 $85,443
bus $2.50 35% $4.64 $7.14    
subway $2.50 73% $0.92 $3.42    
SF BART $1.85 61% $1.18 $3.03 $228 $3,980
SF Muni $2.00 29% $4.90 $6.90 $493 $8,605
LA Metro $1.50 25% $4.50 $6.00 $1,051 $18,345
DC Metro   46%     $854 $14,907
bus $1.75 24% $5.48 $7.23    
subway $2.15 67% $1.04 $3.19    
Chicago Transit Authority   43%     $735 $12,830
bus $2.00 37% $3.35 $5.35    
subway $2.25 51% $2.16 $4.41    
Table by Rohit Aggarwala (National Transit Database).

But the idea that transit subsidies are an immutable law of nature is flawed. It rests on the experience of the 1960s, the last time American transit systems were organized in a way that attempted to recover operating costs. Back then, the attempt failed. As inflation drove up transit fares, riders abandoned trains and buses. Eventually, in most places, only the poor continued to use transit, and even they left as soon as they could afford a car. Many systems gave up; others adopted subsidized fares as a means of survival. As transit became associated with a poor and often disproportionately African-American ridership, low fares became, legitimately, an issue of social justice.

Thus, there were two reasons to maintain low fares and subsidize them: one, because higher fares would drive riders into their cars, and two, because higher fares would be an unjust and immoral burden on the majority of riders, who were disadvantaged and in need of social assistance.

Commuter rail system Average fare Farebox recovery ratio Subsidy per base fare Implied base fare for full cost recovery Annual operating subsidies, all sources (in millions) Proceeds from a 30-year zero-coupon bond, at 4% interest, compounded monthly (in millions)
Metro-North $7.07 62% $4.27 $11.34 $405 $7,069
Long Island RR $5.99 50% $6.00 $11.99 $642 $11,206
Metra (Chicago) $4.03 41% $5.79 $9.82 $384 $6,703
Table by Rohit Aggarwala (National Transit Database).

In 2014, both of these assumptions require reassessment. As everyone knows, America's cities and highways have changed dramatically since the 1960s. In many places, especially in major cities, people who ride transit don't really choose every morning whether to drive. They've built their lives around the transit system. Given the congestion on the roads, and the preference that many have to spend their commute time on their electronic devices rather than listening to the radio, transit is a positive choice that many riders make. And in a world of $4-or-more gasoline, the price of driving is so much higher than the price of riding that transit seems severely underpriced.

Along with the change that transit is no longer simply a last resort for those without a car, it is also no longer true that the vast majority of transit riders are poor. This isn't to say that all riders are rich, or that no riders are poor (more on that later), but the only reason to subsidize every transit rider, for every ride, is if you assume that the vast majority of riders do, in fact, deserve public subsidy. And this isn't the case. It is especially not the case on commuter railroads, where the average rider earns more than the average resident of their metro area, and it certainly isn't the case in many of the gentrifying neighborhoods of our biggest cities.

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Given these social changes, how might transit fares be set in the future? The simplest way would be to add up annual operating costs, divide by total rides, and set the resulting figure as the fare. That's a useful benchmark, but not a good approach.

Instead, the first task should be to look at what fares transit could charge given potential travel alternatives. Clearly, a slow, infrequent bus service with standing room only offers a less competitive product than a fast, frequent rail service on which everyone gets a seat. The former is a product that few would choose to take aside from economic reasons; the latter is probably far superior to driving or any other option. New transit systems that are just building up ridership would probably need lower fares, just as any new business offers introductory pricing; long-standing ones would probably be most able to capture higher prices.

This kind of thinking raises all kinds of questions that could radically reform how transit is priced. Would it make sense in New York, for instance, to have a lower bus-only fare as opposed to a universal subway-and-bus fare? Would it make sense for an express train to be priced higher than the local? Would it make sense to give a discount to outlying stations, which have some of the longest rides in the city? And would it make sense to give riders a discount if they don't enter the Manhattan core, both because the outer ends of most subway lines are underused, and because intra-borough travel outside Manhattan is far more auto-oriented than travel into Manhattan?

Not all transit riders need a fare subsidy. (ViaNYC Mayors Office)

A second task in setting a fair fare would be thinking about which transit riders do, in fact, deserve public fare subsidies. The goal here would be a discounted price for groups who qualify in terms of need. San Francisco's Muni already does this, and the MTA already offers such a discount for senior citizens (even though age is not always an indicator of financial need) and for students. It should not be impossible to expand such a system to cover recipients of food stamps, the Earned Income Tax Credit, and similar indicators of actual financial need. It could even be the case that newly hired employees or others might qualify. But there is no need for the public to subsidize the well-off riders who board trains every morning in Scarsdale and on the Upper East Side.

A final task would be to ensure that government policies are doing everything possible to equalize the cost of riding transit and driving. A state law should require all businesses to offer their employees tax-exempt transit passes, and at least for state tax purposes (and, ideally, for federal taxes, too), the limit on such exemptions should be removed.

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Moving to a standard approach in which American transit systems covered their operating costs and devoted public subsidies to capital investment would bring our systems into the same pattern adopted in Singapore and Tokyo, and one that London's fast-improving system is moving towards. While it would raise the transit fares that many riders pay—in some cases, dramatically—it might even lower prices for the neediest riders who receive the worst service today.

It would also require significant changes from our politicians and our institutions. Paying full price would make riders less tolerant of poor customer service from the MTA, and it would require the MTA to be less subservient to politicians. It would make clear the fact that increasing the cost of driving—through parking prices, congestion charges, or other approaches—is a more effective way to nudge people onto transit than by lowering fares. And it would call into clear relief the inability of transit operators and transit unions to achieve meaningful improvements in operating efficiently.

But the benefits to every rider would be enormous. In the example of New York, the $85 billion that full-fare pricing would allow would upgrade the system, improve the quality of life of all New Yorkers, increase overall economic productivity, and make our city far more competitive against places like London and Singapore. America's cities are at a moment of great transition in the history of transportation, and transit systems must reflect that transition as well. Cities have been poorly served by the orthodoxy that says low fares are the most important thing for transit systems. Deep down, transit riders know that you get what you pay for, and if they want better transit they need to be more willing to pay for what they get.

This article is part of 'The Future of Transportation,' a CityLab series made possible with support from The Rockefeller Foundation.

About the Author

  • Rohit T. Aggarwala is a professor of professional practice in international and public affairs at Columbia University, and a principal at Bloomberg Associates. He has been the director of New York City's Office of Long-Term Planning and Sustainability and Special Advisor to the Chair of the C40 Cities Climate Leadership Group.