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Transport Subsidies Lead to Bad Decisions

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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 hits the poor and elderly the hardest.  This is just one example of the upstream and downstream impact of subsidies.The matrix of subsidies in the U.S. is so complex that few people understand it.  Here is an example.  Motorists pay federal fuel taxes and fees to fund the federal highway system.  But the taxes and fees don't cover the cost of the system.  So the Highway Trust Fund is subsidized by transfers from the general fund.  In 2007 it was nearly $34.5 billion.  Well, actually it was approximately $39.1 billion; the difference being for public transit, etc., which has little to do with highways.  But this is only the beginning of motorists' subsidies.The price of gasoline and diesel does not reflect the cost of maintaining a naval presence in the Middle East, which is there, at least in part, to keep the oil sea lanes open.  Nor does it include the cost of the environmental damage or incremental medical costs associated with burning prodigious amounts of fossil fuel for transport.  Moreover, the price of gasoline does not reflect the cost of building and maintaining county roads or city streets.  Nor does it include all of the costs of policing the nation's roadways or picking up the pieces after a traffic accident or the free parking for some employees in large cities.  Wow, motorists get a lot of government subsidies.  Or do they?In 2007 there were an estimated 204 million licensed drivers in the United States.  The majority of them paid personal federal income taxes.  And almost all of them paid at least a small portion of the business federal income taxes.  Businesses, as a general rule, don't pay taxes.  Their customers pay them.  Every time someone buys a good or a service from a business, he or she helps pay the entity's federal taxes.  Income tax revenues go into the general fund from whence the Highway Trust Fund shortfall is drawn.  Thus, motorists as a group subsidize themselves, although they don't know it, because the subsidy is not reflected in the price at the pump.  There is, however, a caveat in this.  Wealthier motorists pay more in federal income taxes than less affluent motorists and, therefore, cross subsidize poorer motorists.  In effect, because of their large base, motorists pay the cost of driving one way or the other.  The same is largely true for the 678 million airline passengers carried in 2007.  In the case of rail passengers, including transit riders in most locations, a relatively small percentage of the population uses the trains or public transit.  Accordingly, they are more dependent on funds paid by people who do not or cannot use the system.  Amtrak's long distance trains are the worst example.  Their passengers get one of the highest subsidies of any common transport carrier in the United States. If users paid directly (at the pump or ticket counter) the full cost of their transport mode of choice, they would know what it is really costing them to go.    What they want and can afford would bubble to the top of the transport priority list.  Although no one knows how the elimination of subsidies would change the transport scene, there are probably three or four plausible scenarios.  In the most likely one for commonly used public transport, airplanes would be used for long distances, trains for relatively short high density corridors (commuter and intercity), and buses in lightly populated areas.  Personal vehicles would remain the choice for most trips, e.g. commuting, shopping, leisure activities, family vacations, etc.  If the full cost of driving was rolled into the price of gasoline, it would push up the cost significantly.  How much?  I don't know.  Nor I suspect does anyone else.  But let's assume that it went to $5.50 per gallon.  This would push the estimated direct cost of operating my Toyota Corolla to more than 35 cents a mile.  Light rail riders in Dallas pay $1.50 per ride and get an average subsidy of $3.66 per trip.  If the subsidy was rolled into the fare, it would be $5.16 a ride.  That's pretty steep.  But on a per mile basis it could be less than driving.  For a passenger riding from Plano to downtown Dallas, which is approximately 19 miles, the cost would be 27 cents per mile.  Hm, that's considerably less than driving, especially for people who drive big SUVs and pick-ups.  In fact, the end points differential might be great enough to attract private investors, since they could earn a return without charging as much as the per mile cost of driving.  Of course, load factors, labor costs, parking variables, politics, mind sets, etc. would have to be factored into the question of whether a private operator could make money on the system. Would shifting all of the costs of driving to the end user result in a light rail line instead of another lane of highway even if the cost was less?  Not necessarily.  People are motivated by more than cost.  In a nation as rich as the U.S., at least in the aggregate, the people might opt for another highway lane, even though it would cost considerably more than building a rail line, because they can afford it.  But without the mish mash of subsidies they would have the data to make a true cost comparison of the options and hopefully make a rational choice.  What is the probability of eliminating or reducing the matrix of U.S. transport subsidies?  Not very high! Too many entrenched interests in the current system!  But change is possible.  Melbourne, Australia privatized all of its commuter rail, tram (streetcar) and bus services approximately 10 years ago.  The contract operators are able to deliver a better service than the government provided.  They still require a subsidy, but the red ink is less than before privatization.  How did they do it?  The contract operators created a business like work environment that resulted in better productivity.  How do I know?  I lived in Melbourne from 1999 to 2004.  I saw the results every day.
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