Most people never really think about how their transit agency gets its revenue. Funding is what primarily determines how much transit service will be available, so it is vitally important to understand these issues. For this installment of Portland Transit Authority, I will focus on the funding structure of TriMet, the Portland region's transit agency. In particular, I will explore how TriMet is very different from most transit agencies and what impact that has on transit service and investment. We will find that the same mechanisms that have helped create a model transit agency may also be unsustainable in the long run.
Most transit agencies receive the bulk of their funding from sales tax, but TriMet instead relies on a payroll tax of 0.6918% on employers in the transit district. Payroll taxes and sales taxes share the unfortunate quality of fluctuating in response to the overall economy, but it is worth parsing out how they are different. Payroll taxes are not as universal, since they only apply to employed people, whereas sales tax is paid by pretty much everyone. Payroll taxes are also obviously dependent on employment, and thus are arguably worse off in the current jobless recovery in which consumer spending is starting to increase but employment has yet to respond. Finally, the payroll tax is somewhat more regressive than a sales tax, assuming that essentials like food are not subject to the sales tax. After all, a person has a fair amount of control over how much sales tax they pay, while the payroll tax is a flat tax on all employees. The counterargument would be that at least unemployed people do not have to pay the tax, but of course the reality is that many gainfully employed people are still deep in poverty.
TriMet's payroll tax is also different from most transit agencies in that the tax rate goes up by a small amount each year automatically. Over the next 12 years the rate will gradually increase from .6918% to .8218%. This system has been a key to TriMet's success in building out its frequent bus network and MAX light rail system, since in normal times they have been able to rely on a steadily increasing stream of revenue over time. The recent drop in employment, however, has exposed some problems inherent in using a revenue source that only gradually increases.
The main problem is a lack of flexibility. While a Washington transit agency like C-Tran has the option to pursue a ballot measure to increase funding in response to the economic downturn, TriMet is stuck with a payroll tax that increases at such a slow rate that it will take an estimated 10 years to restore recently cut service levels. Another problem is that with an aging workforce, overall wage growth will be much lower than projections in the coming decades. With a smaller percentage of the population in the workforce, reliance on a payroll tax may not make much sense anymore.
One other funding tool TriMet has at its disposal is the ability to bond against future payroll tax revenue. This controversial practice basically involves taking away future operating dollars to use for current capital expenses. TriMet has recently borrowed $60 million in this way for the Milwaukie Light Rail project, and is also planning to use debt to purchase new vehicles over the next several years. This is could prove to be an unsustainable practice in the long-term. Without new revenue sources to pay back these bonds, TriMet will be left using operating revenue to service debt instead of investing in service hours. For the time being, debt service consumes about 5% of TriMet's total expenditures, but this will continue to grow as the agency is forced to borrow to pay for needed capital expenses.
To me it is clear that the state of Oregon needs to grant TriMet a new and different taxing authority. Otherwise the agency will continue to go deeper into debt and transit riders will continue to see falling service hours and rising fares. Highway tolls and vehicle license fees are two options often used elsewhere, and have an added benefit of making transit more attractive as an alternative to driving, leading to higher ridership and higher farebox revenues. Tolls in particular help level the playing field by making the marginal cost of driving approach the marginal cost of taking transit.
Another attractive option would be a small sales tax to supplement the payroll tax. Even a 1% sales tax in the TriMet service area would generate substantial revenue without having a substantial negative impact on area retailers. After all, it would still be far less than the 8.2% rate in neighboring Vancouver, WA. The state of Oregon has repeatedly rejected a state sales tax, but perhaps it would be appropriate look at giving cities and regions a local option to tax themselves for better service. Whatever the solution, something needs to change for TriMet to live up to its reputation as one of the nation's best transit agencies.
Most transit agencies receive the bulk of their funding from sales tax, but TriMet instead relies on a payroll tax of 0.6918% on employers in the transit district. Payroll taxes and sales taxes share the unfortunate quality of fluctuating in response to the overall economy, but it is worth parsing out how they are different. Payroll taxes are not as universal, since they only apply to employed people, whereas sales tax is paid by pretty much everyone. Payroll taxes are also obviously dependent on employment, and thus are arguably worse off in the current jobless recovery in which consumer spending is starting to increase but employment has yet to respond. Finally, the payroll tax is somewhat more regressive than a sales tax, assuming that essentials like food are not subject to the sales tax. After all, a person has a fair amount of control over how much sales tax they pay, while the payroll tax is a flat tax on all employees. The counterargument would be that at least unemployed people do not have to pay the tax, but of course the reality is that many gainfully employed people are still deep in poverty.
TriMet's payroll tax is also different from most transit agencies in that the tax rate goes up by a small amount each year automatically. Over the next 12 years the rate will gradually increase from .6918% to .8218%. This system has been a key to TriMet's success in building out its frequent bus network and MAX light rail system, since in normal times they have been able to rely on a steadily increasing stream of revenue over time. The recent drop in employment, however, has exposed some problems inherent in using a revenue source that only gradually increases.
The main problem is a lack of flexibility. While a Washington transit agency like C-Tran has the option to pursue a ballot measure to increase funding in response to the economic downturn, TriMet is stuck with a payroll tax that increases at such a slow rate that it will take an estimated 10 years to restore recently cut service levels. Another problem is that with an aging workforce, overall wage growth will be much lower than projections in the coming decades. With a smaller percentage of the population in the workforce, reliance on a payroll tax may not make much sense anymore.
One other funding tool TriMet has at its disposal is the ability to bond against future payroll tax revenue. This controversial practice basically involves taking away future operating dollars to use for current capital expenses. TriMet has recently borrowed $60 million in this way for the Milwaukie Light Rail project, and is also planning to use debt to purchase new vehicles over the next several years. This is could prove to be an unsustainable practice in the long-term. Without new revenue sources to pay back these bonds, TriMet will be left using operating revenue to service debt instead of investing in service hours. For the time being, debt service consumes about 5% of TriMet's total expenditures, but this will continue to grow as the agency is forced to borrow to pay for needed capital expenses.
To me it is clear that the state of Oregon needs to grant TriMet a new and different taxing authority. Otherwise the agency will continue to go deeper into debt and transit riders will continue to see falling service hours and rising fares. Highway tolls and vehicle license fees are two options often used elsewhere, and have an added benefit of making transit more attractive as an alternative to driving, leading to higher ridership and higher farebox revenues. Tolls in particular help level the playing field by making the marginal cost of driving approach the marginal cost of taking transit.
Another attractive option would be a small sales tax to supplement the payroll tax. Even a 1% sales tax in the TriMet service area would generate substantial revenue without having a substantial negative impact on area retailers. After all, it would still be far less than the 8.2% rate in neighboring Vancouver, WA. The state of Oregon has repeatedly rejected a state sales tax, but perhaps it would be appropriate look at giving cities and regions a local option to tax themselves for better service. Whatever the solution, something needs to change for TriMet to live up to its reputation as one of the nation's best transit agencies.
Would the 1% sales tax be something the city council would put on a ballot? Could they pass it outright? Not very familiar with Oregon's state/local processes.
ReplyDeleteTriMet would have to get authorization from the Oregon legislature, unfortunately. Personally I think metro regions should have more independence in taxing authority rather than having to constantly ask the state government for permission.
ReplyDelete