Transport Subsidies Lead to Bad Decisions

Trains Magazine Passenger
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Under “What Would You Build” I was asked whether I would eliminate all transportation subsidies. Discussed below in some length, because the subject is complex, is my answer.

Over a reasonable period, say five years, all transport subsidies, with the possible exception of some start-ups, should be eliminated. Doing so would result in a better allocation of scare economic resources and help rationalize transport choices.

Subsidies may be appropriate for new commercial activities that benefit society as a whole, but once they have been weaned, the subsidies should be phased out. Unfortunately, those who receive them, as well as the politicians who grant them, become addicted to them. It is nearly impossible to get rid of the subsidies.

Users would be required to pay the taxes and the fees, which are mainly embedded in the price of fuel, to cover the cost of the facilities and services that they use. The earned income tax credit would be expanded to help the working poor, as well as the mobility impaired, etc. offset the burden of higher transit costs.

Airports, train stations, bus stations, transit systems, etc. would pay property taxes. There is no rational reason why they should be exempt. Most of them use local services, i.e. police, fire, sanitation, etc.

Subsidies frequently send the wrong pricing signal. As a result, buyers and sellers make sub-optimum choices. Most motorists, for example, don’t know how much it really costs to drive. As a result many of them buy larger than needed gas guzzling vehicles that contribute to a chain of negative outcomes. They cause the U.S. to import more foreign oil. This acerbates the balance of payments problem, which is a factor in the decline of the U.S. dollar. The weakened dollar is a significant factor in the dramatic run-up in the cost of petroleum, which in turn feeds inflation. It h

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Samantha:

The vested interest that would oppose your idea the most is the tourist industry. At those prices I would never visit our national parks and other attractions. (another subsidized item).I am afraid that without subsidized transport that what cheap transport has enabled would disappear and a gradual balkanization would occur.

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Blue Streak

Entrance fees do not cover the full cost of running the National Park Service. It gets an infusion of general funds. It should. It is not a commercial enterprise, and I don’t think that it should be, although one could make an argument for privatizing it.

My concern is masking the true cost of commercial activities with subsidies and, therefore, distorting the price, which frequently leads to sub-optimum behavior as per my post.

If you are a middle class person who pays federal income taxes, owns a home and thus pays property taxes and owns a car, or at least drives one; you are paying the full or nearly full cost of driving. If you don’t pay federal income tax, or pay a very low rate, then your driving is subsidized by more affluent motorists.

If the powers that be rolled the federal subsidies, cost of county roads, cost of city streets, etc. into the price of gasoline, as opposed to hiding them in transfers and other taxes, the price of gasoline would reflect its true cost. But governments would be able low their tax rates, i.e. a very small lowering of federal and state income taxes, a more substantial reduction of county and city property and sales taxes, that would offset the increase in the price of gasoline.

If the price of transport reflects the true cost of each transport mode, users are likely to make better decisions about which one to use. A likely outcome would be increased of rail use in short corridors with a corresponding decrease in driving and flying.

Higher fuel prices would result in some poorer citizens being unable to drive to tourist attractions, including the national parks. If society agrees that everyone should be able to travel to these sites, less affluent persons could be given a tax credit so that they could get to them.

Heaps of people would oppose changing the current system of subsidizing transport. The only

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Samantha-

An interesting idea - though I’m not sure how well it would go down with cities and states. There’s a lot of history of direct subsidization of transportation - particularly construction - by cities and states.

The Erie canal was built to enhance commerce at the port of NYC. The Boston and Albany RR was built to keep Boston in the game with NYC. The disateroust Main Line canal in PA was built to keep Phila in the game.

The National Road was built by the Feds to open the west to development.

Every toll road in the east prior to the interstate system was built by a state authority. Every major bridge in the country was build by a state or joint gov’t authority.

All of these were done to enhance commerce in the area - the idea the net commerce increase less the cost of doing the project was a net “win” for the state, city, area.

Would you cast a fairly wide net in capturing costs? i.e. would you try to capture environmental and health costs directly with the user fees/taxes?

Would you try to get the user fee to be exactly proportional to the cost or would “what the market will bear” be the guide?

How would you apply emminent domain to a parallel start-up, private venture toll road or airport? Would you charge a fee to compensate those who wind up near the wake of the road, railroad or airport?

Would this prohibit a city/state/region from undertaking a subsidized transportation project to improve local commerce? e.g. “you built your auto plant here and we’ll build you an interstate interchange for free”.

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I think from a good economics point of view subsidies to any industry always create bad decisions. They are awarded to prop up inefficient industries and distort the market so I understand where you are coming from. I would see the problem with transport however is that we have moved so far away from a free market that I’m not sure we could ever get back to it. Of course you could simply just remove subsidies (phased of course) but due to subsidies our entire transport infrastructure is lopsided. How do we take account of history? I am personally in favour of spending money to correct mistakes. I view government subsidies in the past that have made countries road dependant as a mistake. Perhaps that’s just becuase I’m a rail fan!? I hope not. Anyway I feel that the best way to respond is to invest in rail to correct past mistakes. By investing significantly rail can capture enough of a market share (it is a great way to travel after all!) to be profitable to some degree - you’d have to eliminate all subsidies to make it truely profitable. This is the case in Britain where more and more rail companies are moving towards profitability. An amazing example is my local Scotrail. The company has routes which would make your Amtrak long distance look like the honey pot. However they have a good mix of routes which allows an overall balance. However the key point is to get to a stage of no subsidies you have to put in serious money to really make the rail network viable. I think it’s worth it based as I said on the unfairness of past policies. I don’t however see anyone in America who is willing to spend that kind of money and until they do it will always be a conflict between subsidies and no service at all.

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Samantha:

Let me see if I understand your meandering logic.

Businesses don’t pay taxes, their customers or clients do by virtue of being the business’ source of revenue. Therefore, the customer is actually paying their share of road subsidies when they make a purchase.

That means that my purchase, which also pays the salary of the checkout clerk, therefore is paying the checkout clerk’s income tax, so I am paying the clerks share of the road tax that comes from the general fund. That isn’t fair.

But wait. Some other poor schnook is paying MY salary by virtue of their purchases, so I am not really paying MY own taxes, or for that matter the profits of the store.

But then THAT person … oh never mind, my head hurts.

Mass transit benefits society in general. It is an apropriate use of tax dollars.

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Samantha is taking the Libertarian position of “let’s start with a clean slate and try and reduce all subsidies, in transportation and other industries, in an effort to reduce market distortions, rather than throwing up our hands that ‘all modes are subsidies’, placing subsidies on top of the existing subsidies to try and correct those distortions.”

I was going to respond that I don’t subscribe to the pure, Libertarian, subsidy-free view, if for any other reason that as long as the government provides some services, through taxes, through grant of regulated monopoly, or other means, there is probably enough interdependence in the economy that the Libertarian ideal of purely free markets is a theoretical construct.

On the other hand, I feel confident enough in presenting this opinion that I don’t have to ask “if I understand (Samantha’s) meandering logic” when I don’t really believe that Samantha’s logic meanders at all, merely that I am uncomfortable with it because it challenges my world view. I would not say “oh never mind, my head hurts” when my head isn’t really hurting from mental exertion, but again, were my head to hurt in some metaphorical sense, it would be from guarding my head from the entry of thoughts against which I am prejudiced rather than have reasoned arguments.

What is so complicated about anything Samantha, Paul Milenkovic, Don Oltmann, or Phoebe Vet is saying? Samantha takes a hard line against subsidies, Paul and Don are more accepting of subsidies but want to take a critical look at how they are spent, and Phoebe and others take the view that an entirely inadequate amount of subsidy is directed to trains. There are arguments pro and con on each of those positions, no one’s logic meanders, and no one’s head hurts from any of this.

I am certainly not against Amtrak subsidies, but when I am in the train advocacy circles where the “All modes are subsidized”

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Paul:

I didn’t say a word about subsidies.

The logic with which I took issue was the claim that businesses don’t really pay taxes because their revenue comes from their customers.

Unless they are counterfeiters, everyone’s revenue comes from someone else. I just carried it to it’s absurd conclusion.

Perhaps the sarcasm made it hard to understand. I will try speak more clearly in the future.

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Whether business customers pay their share of the road costs or subsidies depends on their tax bracket and lifestyle. If they buy goods and services from a viable business, they are paying a small portion of the entity’s tax liability, which goes into the general fund, from whence transfers to the Highway Trust Fund, in the case of federal taxes, are drawn.

Salaries, wages, interest, etc. are taxable to the recipient. If a person works for a business, as an example, his salary is paid by the entity’s customers, as are all business expenses. He is responsible for filing a personal income tax return for the compensation received. Employee compensation has nothing to do with the taxes paid by a business, other than it is a deductible expense.

Businesses with taxable income; that is to say, those that make a profit, pay federal income tax and state income tax in those states that levy a business income tax. They pay other taxes as well, e.g. inventory taxes, payroll taxes, franchise taxes, etc. With one exception the tax, which is a business cost, is included in the price of their goods and services. Thus, the customers really pay the tax.

If a business has an inelastic price curve, the owners (stockholders, partners, proprietors, etc.) pay the taxes. An inelastic price curve means that the business cannot raise its prices high enough to cover the taxes and pass them on to its customers. There are many reasons why a business might not be able to raise its prices. One could be loss of market share in a market where a minimum market share is necessary

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[quote user=“Samantha”]

Whether business customers pay their share of the road costs or subsidies depends on their tax bracket and lifestyle. If they buy goods and services from a viable business, they are paying a small portion of the entity’s tax liability, which goes into the general fund, from whence transfers to the Highway Trust Fund, in the case of federal taxes, are drawn.

Salaries, wages, interest, etc. are taxable to the recipient. If a person works for a business, as an example, his salary is paid by the entity’s customers, as are all business expenses. He is responsible for filing a personal income tax return for the compensation received. Employee compensation has nothing to do with the taxes paid by a business, other than it is a deductible expense.

Businesses with taxable income; that is to say, those that make a profit, pay federal income tax and state income tax in those states that levy a business income tax. They pay other taxes as well, e.g. inventory taxes, payroll taxes, franchise taxes, etc. With one exception the tax, which is a business cost, is included in the price of their goods and services. Thus, the customers really pay the tax.

If a business has an inelastic price curve, the owners (stockholders, partners, proprietors, etc.) pay the taxes. An inelastic price curve means that the business cannot raise its prices high enough to cover the taxes and pass them on to its customers. There are many reasons why a business might not be able to raise its prices. One could be loss of market share in a market where a minimum mar

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Oltmannd

The builders of the IRT, BMT, and IND may have been motivated in part to build their systems because it would enhance their land holdings. But the key point is that they developed and operated their systems for many years using funds raised in the capital markets as opposed to relying on taxpayer handouts. Much of the money, by the way, came from Europe, since the U.S. was a net debtor nation until after the turn of the century.

They were forced to sell the systems for a variety of reasons. Fares became a political issue, as was the case in most cities, and the owners could not generate enough revenue to cover their costs. Unions were another problem. No business could have withstood their abusive labor practices. I lived in New York during the Quill era and saw them first hand. It was during this time - 1966 - that the transit unions brought the city to a standstill through an illegal strike. The only thing that saved Quill from going to jail was that he died three days after the strike was settled.

One could argue that building the North River tunnels, as well as the East River tunnels, and Pennsylvania Station was done to further the interests of the stockholders of the Pennsylvania Railroad. Of course! That’s what business is all about. It is the best argument for the free market system. It produces more winners than losers, but there are losers.

Conquering Gotham by Jill Jonnes, which I just finished, provides some valuable insights into the building of the tunnels (North and East Rivers) and Pennsylvania Station. I recommend it.

I would eliminate all subsidization of commercial activities, as well as cultural and entertainment subsidies, with the exception of start-up activities that are essential for the welfare of the body politic as a whole. I have been around long enough to realize, however, that

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[:)]

Well, we have connected all the subsidies in a very complicated set of linkages that no one of us can understand. For example, transportation subsidies connect to real estate subsidies (using tax policy to subsidize individual home ownership), which yields a map of where people live and work that makes efficient transportation much more difficult.

Maybe we are looking at it from the wrong way. Maybe we should ask for less transportation in general, rather than seeking more efficient transportation.

What would happen if the govt somehow encouraged people to live near where they worked? Or encouraged businesses to build near where they knew there were available workers?

What happened to the “cluster” concept from 1950, where we would live and work in huge skyscrapers and take an elevator to work? To visit other clusters we would take a train. To visit areas between clusters we would pass a debit card over an unattended car and “borrow” it, with fuel and insurance, etc., to self-drive us. The space between clusters would be woods/desert/farms/parks/mines/lakes/airports/etc.

Why do all cities/counties aspire to “growth” in the face of universal historical evidence that larger cities/counties impose ever larger taxes/fees on their people for ever less satisfactory services/living conditions?

[:)] [:)]

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Don Oltmannd

Outlined below are my answers to the questions shown. I addressed the others in another post.

Would you cast a fairly wide net in capturing costs? i.e. would you try to capture environmental and health costs directly with the user fees/taxes?

User fees should capture all the costs associated with a commercial type activity, whether it is run by private enterprise or a government enterprise fund. They should include the incremental environmental and medical costs associated with the activity. They should also include other ancillary costs, e.g. gasoline should include the cost of the U.S. Naval presence in the Middle East that is devoted to keeping the oil sea lanes open.

Would you try to get the user fee to be exactly proportional to the cost or would “what the market will bear” be the guide?

If the activity is a not for profit operated for the benefit of society, i.e. highways, airways, transit systems, etc., because private enterprise cannot make money on it or government won’t permit it, user fees should be sufficient to recover the cost of the facilities, including local property taxes, environmental impact fees, etc.

A commercial activity, i.e. airplanes, buses, trucks, trains etc., should pay user fees, usually embedded in fuel taxes, that are commensurate with the shared cost of using any common facilities. The facilities should pay local property taxes, etc. if they are not otherwise captured in the user fees.

How would you apply eminent domain to a parallel start-up, private venture toll road or airport? Would you charge a fee to compensate those who wind up near the wake of the road, railroad or airport?

Utilities in most states use eminent domain to obtain the easements necessary to construct power lines, gas lines, water lines, etc. They have to make a convenience and necessity case for the

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Samantha: I really hope you didn’t work for ENRON or one of its subsidies. What a mess that was in LA in 2001

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I am really worried about the trend of some posts that only give the the well off ability to travel and use transport. The eldery who can no longer drive, Handicapped poeple including a lot of Iraq veterns. The veterns are taking enough bad treatment and neglect. This is not my problem but I never know if it could or any of you posters.

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What is to say that accomodation for the elderly and the disabled is restricted to trains. What is to say that a given amount of subsidy dollar spent on lower seating densities to accomodate the wheel-chair bound or simply less able might go farther on airplanes or perhaps buses. What is unique about trains that makes a low seating density affordable in the rail mode?

A good measure of the advantage ascribed by the advocacy community to trains over even buses is the low seating density. It seems you get what you pay for. Trains, by historical tradition have much more leg room, a little more elbow room, considerable room to “stretch your legs and walk to the lounge car for a snack.” Trains with these amenities, however, cost multiples of what bus travel does, and even with traffic congestion, the schedule keeping is only better in rare instances (NEC, maybe the Hiawatha).

People keep coming back to how much nicer trains are than buses, but maybe thats because trains are subsidized at a dollar for every dollar in fare, and the fare is still higher than the bus. Maybe if we subsidized buses the same way we might even get more seats with more legroom for the same subsidy dollar?

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Pure capitalism, which some of the posters seem to advocate, is survival of he fittest and is controlled by natural selection. The example cited in this thread would be the demand that each form of travel should be totally paid for by the individual people who actually use it.

Concern for the life quality of others get’s immediately labeled “Socialism”.

MOST, but not all, of us realize that a humane and workable society actually exists somewhere in the middle.

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My original post contained the following sentence: “The earned income tax credit would be expanded to help the working poor, as well as the mobility impaired, offset the burden of higher transit costs.”

If society decides that low income people, seniors, mobility impaired, etc. should be able to travel anywhere via whatever mode of transport is appropriate, there are a variety of mechanisms that can be implemented to make it possible. The earned income tax credit is one way to do it. Another way is to discount the price for select groups, i.e. seniors, students, mobility impaired, etc. Most common carriers, e.g. airlines, bus companies, Amtrak, transit systems, etc. give discounts to seniors, students, as well as the mobility impaired.

The advantage of discounts is that they are not hidden in the cost structure, thereby keeping the true cost and price of a service in view. Subsidies mask these vairiable

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Concern for the quality of life of others can be termed “social justice” and the primary method of achieving it is debatable. Is it the will of the people working thru gov’t or is it the will of the people working directly ala Habitat for Humanity, World Vision, United Way, Red Cross, etc or is it a hybrid - gov’t as the catalyst for direct action?

The how, why and who of social justice in the realm of transport is an interesting question…

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I have never advocated a pure capitalistic approach, and I have never advocated doing away with Amtrak subsidies. Perhaps Samantha is the one person advocating a somewhat more capitalistic, L