It’s not that we don’t have money for it. It’s that it’s not a priority.
Last week, I posted a fantasy transit map for the state of Ohio. The reception of the map on twitter was surprising. Honestly, I thought that like four nerds would be interested in it, but apparently it struck a chord. I was blown away by the comments, which were overwhelmingly positive. A lot of folks said things like, ” This is AMAZING. I’d move back to OH.” or “Greatest idea ever” (while I appreciate the sentiment, that can’t possibly be true – peanut butter and chocolate is clearly the greatest idea ever.). One of the responses that really stuck out was: “This would change my life.” There were actually quite a few of those.
Good transit would certainly improve folks’ lives, and it is a worthy investment of public dollars. It would help people get access to better healthcare, jobs, healthier food options, and education, or just make it easier to go visit family and friends. There are also knock-on effects like healthier people (because you walk more) and better social institutions (because you interact with people more – check out Palaces for the People, if you want to learn more about how social institutions improve lives).
Despite the life-changing possibilities, another fairly common response was something like, “Yeah – this is all well and good, but how will you pay for it?” Initially, this was frustrating. We don’t ask how we’ll pay for bypasses and highways, and we’re willing to throw down hundreds of millions of dollars for those projects every year without ever wondering how to get the money.
In reality though, it is a good question. It’s not a small price tag, and we shouldn’t spend money on things unless we know they are going to be worthwhile. I estimate that the rail network I shared would cost around $9 billion or $450 million for 20 years, but it would probably be more once you factor in rolling stock, operations, and maintenance. Moreover, we would want to seize the opportunity and ensure that there is good infrastructure around the new stations. Cities would need to add bike lanes and bike parking, more buses, and possibly parking structures (which would charge market rate). At the same time, we could also build other new public infrastructure – libraries, parks, community centers, day care, and even public housing in and around stations – all of which have enormous benefits (but also costs). Train stations could become central to a city or town’s development, especially in smaller places.
Although highways generally don’t turn a profit, we can build them because we have dedicated funding sources that fuel those projects. So how can we create dedicated funding sources for even better transportation projects? In the sections below, I’ll list out the ways Ohio could create similar dedicated funding sources for big non-car transit projects. For now, these solutions mostly ignore politics and assume that we already have 1) funding for campaigns, 2) a coalition of transit voters who reliably show up to the polls, and 3) politicians running with transit as a major plank of their platforms. (all big assumptions). Here goes:
Federal Dollars
Steven Higashide says it best in his book Better Buses Better Cities (go buy this book if you haven’t read it):
States have the ability to “flex” their federal funds, transferring up to half of the money they get through most federal highway programs to a transit agency in the state.
This means every governor has the power to execute radical redistribution of transportation funding. Imagine for a moment, that you want to upend transportation in Ohio, which gets $1.4 billion in highway funds and less than $200 million in transit funds from the federal government. You could order Ohio’s Department of Transportation (ODOT) to ship more than a half-billion of its dollars to transit agencies across the state. Furthermore, you could mandate that ODOT use its leftovers to build bus lanes on state roads, fund a statewide bus shelter program, and construct new transit centers and intersection changes to speed up buses.
Better Buses Better Cities by Steven Higashide, page 118
First of all, thanks Steven for choosing the great state of Ohio as an example. He also give Columbus a lot of shoutouts throughout the book on the efforts to improve COTA. I think we should consider honorary Buckeye status for him.
Steven is talking about transferring federal money to create better bus programs, which we should 100% do. We could also transfer some of the money to a rail network. These funds are not 100% fungible, but in my ideal world, at least half of the funding for the rail network would come from monies that were formerly federal highway dollars. In effect, we would replace highway spending with much better rail, bus, and transit spending. Any grants that could not be used directly on the rail network should go to cities and counties so that they can build better bus routes and other infrastructure to serve areas around the new stations and in communities that aren’t getting train stops.
Federal Dollars: up to $500,000,000 annually
Net Revenue & Municipal Bonds
One of the really cool things about building a rail network is that it could actually turn a profit (again, unlike highways). In fact, most high speed rail lines do turn a profit. Indeed, the 2007 plan for the Three-C line estimated an annual $45 million in net revenue in 2025 (look on page 6) if they had started building it in 2011. In addition to fares, there are other revenue sources: seat upgrades (let people pay for first class but keep coach affordable), food and beverage sales on the train, and by renting publicly-owned space to vendors at stations.
Having profits means that there are interesting opportunities for financing. The operating agency could issue bonds on the expected future profits of the train to get money for capital projects now. It works like taking a loan out on a business that you haven’t started yet. The bank expects that you’ll make money, so they give you a loan up front in exchange for a cut of the future profits. Financing would also get moneyed interests literally and figuratively invested in the project, which in our current political environment is important.
It would actually be possible to pay for the entire project with bonds. You would essentially promise to pay out the profits for a long time in order get the all of the initial start-up money. While I don’t think we should finance the project 100% with bonds, it is a significant source that we should tap for some portion of the project.
Municipal bonds could help to cover the initial start-up costs of the project, but ultimately, they would depend on future profits from fares, sales, and rents. I’m not going to pretend to know how to estimate those, so I’ll use the estimates from the 2007 Ohio Hub Plan:
Municipal Bonds & Net Revenue: At least $45 Million per year OR start-up money
Property or Land Value Taxes
A rail network like the one I proposed is going to increase property values around the state. While I don’t love the the idea because I think we’re too obsessed with home ownership in America, it’s probably one of the most persuasive arguments in favor of building a big capital project. You hear it when it’s time to pass a levy, “Good schools mean that your house will be worth more” (framed that way, it also means more segregation, but that’s a separate post). Properties in and around stations (or whatever you’re funding with the levy) would increase in value because of the increased services, so it makes sense to capture some of that value in the form of a tax payment. Put another way, if property owners are going to receive benefits (in the form of increased values) from public services, well, they should pay for it.
I think there are three approaches:
- A half mil levy on all property in counties that would get a rail station
- The 1.75 mil levy on all land in counties that would get a rail station
- Some mix of one and two
I’ll get to the distinction in a minute, but let’s start with number one.
If you’re unfamiliar with a mil, it basically means 0.1%. For a 1 mil levy, you pay $100 annually in property tax annually for every $100,000 of property value that you own. In our half mil levy above, the homeowner of a $100,000 home would pay $50 annually.
In the counties that would get a station, a half mil levy on property adds up to ~$213 million. (if you’re curious about how it would affect your community, Ohio values property values for all tax districts here). That amount represents 48% of the $450 million total estimated annual cost of construction (check my numbers here).
Now let’s get to that land tax. My proposed 1.75 mil tax on land works the same way as a property tax, except that it would ignore the total cost of the building on the property and only tax the value of the land on the property (ie: total property value minus building improvements equals land value). This would be a new type of tax in Ohio, and it would affect folks differently. The average homeowner for example would probably pay less. Typically the land value of a home is 20% of the total value. So for our homeowner above, with their $100,000 home on a $20,000 plot of land, a 1.75 mil property would equal a $35 annual tax.
A brief primer on the philosophy of Land Value Taxes
Again, applying this tax to only the counties that would get a station, a 1.75 mil land value tax would equate to ~$199 million, or about 44% of the total annual construction cost. Either with a property tax or a land value tax, we could fund a significant portion of the annual construction costs.So, why bother with a land value tax at all? If you’re unfamiliar with the 19th Century Economist Henry George, you should stop now and google him (or check out more here, here, and here). Here’s a summary of his work though: George put forth the idea that a land value tax was the best possible way to fund government. It starts with the idea that land has a natural value – it grants things to humans for free.
As the state does things (builds roads, water pipes, airports; enforces rule of law; or any other number of things), it provides services to the community which increases the overall value of the property. But, it’s not the value of the property per se that increases, rather it’s the value of the land under the property that increases in value. People want to live near a train station because of the access to the station, not necessarily because of the specific house or apartment on the land. So, by taxing only the land, you create an incentive for the land user (the renter) to find the best use of the land. Using George’s land value tax, if you’re in downtown Cleveland, a parking lot (ie: property with very little improvements) would get taxed the same as an apartment building (ie: property with a lot of improvements) on the same sized. The land user is more likely to build the latter in order to lower their taxes relative to their potential profits – they are incentivized to build more useful things (like apartments) in lieu of less useful things (parking lots).
http://landreform.org/bob/how-land-value-taxation-can-be-applied/
Okay. Back to financing transit projects
While it’s probably hard to sympathize with a parking lot owner, a land tax would hit farmers pretty hard (who have an outsized influence on governance), so at the end of the day, I would think we should leave it up to counties to decide whether to implement a normal property tax or a land value tax. Whatever the county chooses, the state should match the money raised from this tax for local transit improvements within the county (ie: on bike lanes, buses, etc). Counties that aren’t getting a station could also pass a levy and the state could also match funds so that counties could create a bus to the train or build better transit generally. If a county decided not to pass the tax, that’s fine; they would lose their train stations and the state matching funds. Vote yes, or miss out on the opportunity of a lifetime.
Whatever the counties decide, the tax would raise a significant amount of money for the project, and those tax dollars, like revenues from operations could be bonded and used to cover upfront capital costs.
Property or Land Value Tax: ~$200 million annually (+ more as lines go online and land values go up)
Other Taxes
Of course, there are a variety of other ways we could raise money for a big transit project like an Ohio Rail Network. Here are a few listed in descending order of how much I like the idea (this is my plan, after all):
- Gas Tax – A gas tax would probably require an amendment to the Ohio Constitution, but it would disincentivize driving as we are building out alternatives to driving. The recent 10.5 cent increase will raise $865 million annually. We should spend at least 20% of that on transit (80-20 sounds good, right?); that’d be $170 million annually for transit.
- Inheritance Tax – Inheritance taxes brought in $334 million to Ohio in 2009, but Ohio repealed its estate tax in 2013. We could (and should) bring it back. Sure, folks could choose to move their wealth elsewhere, but we’re trying to make Ohio a thriving awesome place that people want to live in, and if people make money off of the things the state does to make Ohio awesome, the state should get a cut.
- Capital Gains Tax – In Ohio, we tax capital gains at a lower rate than regular income. We shouldn’t.
- Luxury Tax – A sales tax paid on items over a certain value. If you’re buying a yacht, the sales tax should be higher than if you’re buying a washing machine.
- Corporate income Tax – If we build a dope transit system, corporations will benefit from it. They should pay for a share of the system.
- Hotel Tax – A rail network would probably increase tourism, so we could capture some of the revenues that hotels would make on the increased number of stays.
- Income Tax – Workers would have more access to jobs, so presumably we’d see incomes rise. At the end of the day though, I don’t think we should use workers’ incomes to fund these sorts of projects. If we were to set aside some income tax dollars for operations or maintenance, that’d be okay though.
- Sales Tax – A regressive way to raise revenues. We shouldn’t have sales taxes except on luxury items.
Other Taxes: $? million ($504 Million if we brought the estate tax back and applied 20% of the new gas tax to transit.)
Bottom line: how to finance it
There are a variety of ways we could cover the costs of a rail network and of general transit improvements in Ohio. We should do most of those things. Some of the approaches would have little to no direct cost to Ohioans. In the case of shifting federal dollars to transit, it’s literally just a change in priorities which could (in theory at least) be done quite easily over the course of a budget cycle. Other ways involve leveraging the future revenues from transit to help raise money to build it now. Still other ways are direct taxes, either on property and land or on inheritance and wealth.
Here’s the way I would propose to raise the revenue:
| Description | Amount (annually) |
| Shift federal dollars from highways to transit | $500 million |
| Future revenues of the system | $45 million |
| Land value tax or property tax | $200 million |
| Shift some of the gas tax to transit | $170 million |
| Bring back the estate tax | $334 million |
| Total | $1.25 billion |
By shifting some priorities, adding an estate tax, adding a small property/land tax, and diverting revenues back into transit we could raise over $1 billion annually for transit.
So, how does that stack up? Well, according to my estimate, we’d need $450 million per year to build a statewide rail network. This plan gets us that that plus another $800 million to build out more transit projects like bike lanes around stations, better pedestrian infrastructure, and awesome buses everywhere. The stations we build could provide more than just transportation services for their communities – we could fund a whole host of projects in and around stations: libraries, community centers, day cares, parks, and public housing. With $1.25 billion annually, we can truly transform Ohio and its communities.
Why aren’t we doing this? Obviously, the politics aren’t lined up currently, but this is something that is possible. Better transit would make a huge impact for Ohioans, and while we’re at it, we can build social institutions that will make our communities stronger. We need to shift our priorities. We need to stop throwing money at highway projects that serve very few people and will only kill the planet. We have to be willing to invest public dollars into good public services.
We can totally do this. The future is on the line. It’s time to act.