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To understand transportation policy, it is important to understand how private and public transportation are financed. In terms of direct costs, private transportation is largely self-financed. Vehicle purchase, fuel, maintenance, insurance, parking, and other costs are paid directly by vehicle owners and operators. Roads and highways are, by and large, paid for by a variety of taxes and charges levied on motor vehicle users.

The federal government imposes an 18.4 cents per gallon excise tax on gasoline and a 24.4 cent tax on diesel fuel. At present, gasoline consumption is in the range of 130 billion gallons per year and diesel consumption is in the 40-billion-gallon range. Thus these two levies bring in over $30 billion. The federal excise taxes go into the Highway Trust Fund which has been in place since the beginning of the Interstate Highway System in the 1950s. All the states levy a gasoline excise tax and some levy other taxes as well. In the lower 48 the highest combined federal and state burden is 71 cents per gallon in California. The lowest combined burden is 31 cents in New Jersey.5 In addition to taxing fuel, the states also charge a variety of user fees, most importantly for drivers' licenses and vehicle registrations.

The last time the federal tax rate on gasoline was adjusted was in October 1993. From then to 2015 the consumer price index went up by about 69 percent. Thus just adjusting for inflation would require raising the rate to about 31 cents per gallon. Recently there has been much discussion about the state of the U.S. infrastructure. In a 2013 report the American Society of Civil Engineers assigned grades to the state of various categories of infrastructure. They gave roads a D and bridges a C+.6 One obvious source of funding to pay for road and bridge infrastructure improvements would be to adjust the gasoline and diesel fuel taxes upward. That is probably not possible politically at this time, but it is certainly a possibility for the future. The real (inflation-adjusted) value of fuel tax receipts is not only subject to erosion from inflation but also rising automotive fuel economy which will probably decrease fuel sales in years to come.

Traditionally, federal expenditure on surface transportation was provided by omnibus funding bills with a typical duration of five years or so. Almost two decades ago political contention in Congress made a passage of long-term bills impossible and the federal contribution—mostly grants to lower levels of government—was provided on a shorter term basis, making it harder for state and local officials to plan.

On December 3, 2015 to the surprise of some observers, a generally contentious Congress managed to reach agreement on a long-term bill, the Fixing America's Surface Transportation (FAST) Act and sent it to President Obama who signed it into law the next day. The bill provides $305 billion over a five-year period. Although the bulk of the funding is for highways and related infrastructure like bridges, the bill does also provide some funding for public transportation, a variety of minor items like bicycle ways and, a sign of the times, some funding for research on self-guided vehicles.

Given Congress's reluctance to raise taxes, some of the funding comes from atypical sources such as an accounting change which dips into surpluses in the accounts of the Federal Reserve System and one-time receipts from sales from the Strategic Petroleum Reserve. Critics can thus claim that long-term questions about federal funding for transportation funding have not been resolved. Nonetheless, the bill does at least for the next five years direct considerable funding to transportation infrastructure and it gives state and local governments the ability to plan for the long term.

The financing of public transportation is radically different from that of private transportation. One very basic fact is that providing public transportation is expensive. Buses, the most widely used public transportation mode, cost an average 90 cents per passenger mile. One reason for this very high cost is that it is a very labor-intensive service. Direct labor costs amount to about 55 percent of total bus costs and about 68 percent of bus operating costs. Demand response (para-transit) has total costs of $3.01 per mile. It is even more labour intensive.

Rail-based modes are less expensive, but still not cheap. Light rail (what used to be called streetcars or trolleys) averages 64 cents per mile. Heavy rail (subway, rapid transit, metro) is the least expensive at 39 cents per mile. It is more capital intensive but much less labor intensive than the other modes. It is only feasible where the number of passengers along the route is extremely large so as to carry the very large up-front capital costs.

With the exception of commuter rail, public transportation does not generally serve an affluent class of people. Couple that with its high per-mile costs and it is inevitable that public transportation has to be heavily subsidized. In 2011 total public transportation costs in the United States were $60 billion.7 There were about 10.3 billion trips for an average cost per trip of $5.63. The average fare was about $1.31. Of the $60 billion, fares provided $13.6 billion. The rest of the $60 billion was provided by government. Government covers essentially all of the capital costs of public transportation, of which the federal government is the largest contributor. About 62 percent of operating costs are also covered by government. Here, the shares provided by federal, state, and local governments are roughly equal.

For the public transportation agency there is no way out of the financial box. Cutting fares would produce a less than proportionate increase in ridership and thus a net revenue loss.8 Raising fares to a level that would make the system self-sustaining is not feasible either, because the huge increases which the above numbers suggest would cause demand to collapse and, well before that point was reached, would impose an enormous hardship upon millions of people who cannot afford or cannot use private transportation. There is no way around the need for heavy subsidization.

One can justify the public subsidization as support for public service that is essential to millions of people. One might also note that a number of downtown business districts could not survive without it. One can also argue that subsidizing public transportation benefits people who may never use it by reducing automobile traffic and thus decreasing driving times in urban areas.

It has been argued that public transportation reduces the nation's total release of carbon dioxide footprint and also the emission of other pollutants. That argument may lose some force as automobile mileage goes up and emission controls continue to improve. Finally, a common justification offered is that it represents an income transfer to lower-income people because they constitute a large number of its patrons. That is undoubtedly true, but it must be admitted that it is not a very efficient form of income redistribution. Many people who are not poor also use public transportation and many people who are poor do not use it.

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