An Old New Idea in Transit Financing

Rail transit used to be a dominant mode of transportation in American cities.  Until the middle of the twentieth century, the majority of people in cities lived in neighborhoods where they could easily walk to neighborhood shops and take streetcars to get downtown to work.  And, rail transit was not limited to just large cities.  Cities of all sizes had streetcar networks. 

Things have obviously changed since the streetcar’s heyday.  Only a few US cities have rail transit.  Part of this decline is undoubtedly due to the rise of the automobile and the development of the interstate highway system, but part of it could have to do with the way transit systems are funded.  As noted in a 2010 article in The Atlantic, rail transit systems were often built with largely private funds.  Real estate developers installed lines to help people get out to freshly built homes on land the developers owned.  In this way, transit construction and operation were subsidized by profits from real estate transactions.  The figure below shows how streetcar installation was used to spur real estate development in the Twin Cities.  

These days, most systems are built with mainly public funds, and tax revenues have to subsidize the fares to cover operating costs.   However, tightening public budgets are threatening transit development just as environmental and demographic concerns (i.e., climate change and an aging, less-mobile population) seem to warrant increased transit services.  Given the importance of providing efficient transportation to all people, perhaps it is worth trying to develop a new financing strategy based on the old streetcar strategy.

Essentially, the old streetcar financing method was a value capture method.  This type of funding uses loans (or other capital) to pay for infrastructure with the expectation that the future land value gains resulting from the installation of that infrastructure will allow the loan to be repaid or the capital investment recouped.  The process worked incredibly well then, and the principles underlying the strategy still seem valid today.  It is all based on new transit lines increasing the value of land around them.  In fact, a fairly recent Brookings Institute report suggests that a new lightrail line through Washington DC could increase the surrounding land values by as much as $3 for every $1 spent on construction.  If transit providers could somehow gain access to some of that increased value, they could easily use it to pay back construction loans.

Local governments have long used different forms of value capture to pay for some infrastructure improvements through tools like taxincrement financing (TIF) and assessments, but the scale of transit projects requires a much stronger tool to effectively and equitably collect sufficient sums of money.  Two options present themselves.  First, the government could purchase land along transit routes prior to transit construction and lease or sell the land for development after.  The transit agency in Hong Kong has successfully used this method.  Second, the government could turn transit services back over to the private sector, and real estate developers could use revenue from commercial and residential development to cross subsidize transit services.  Japan has successfully taken this route.

Transit development is currently threatened by a weak economy and an anti-tax political fad.  It is time to look for new funding strategies, and the old streetcar strategy seems to offer an option worth exploring further.