Ideally transit agencies should not have to be in the position of directly alleviating income inequality. They should play a supporting role by getting people to opportunities; federal and state policies like taxes, minimum wage and benefits laws, and guaranteed income programs should be addressing the outrageous inequality and poverty in the US.

If poverty was addressed in other areas of public policy, then transportation policy could focus on using pricing to shift behavior to address congestion and emissions. The US should have high quality transit at a low to no cost to users to make it competitive, and be partially funded by making the cost of driving reflect its true social cost. But unfortunately we are far from this reality, so transit agencies are often in the position of trying to solve multiple policy problems with limited tools.

Means-testing is at the center of progressive public policy- just usually we think about it as income (individual and corporate) taxes. But transit agencies don’t have the power to levy income taxes. So means-tested fares are one of the few tools they have to raise revenue in a progressive manner (value capture is another idea often discussed).

Multi-modal agencies like the MBTA use mode as a proxy for income in their fare policy with lower bus fares and higher commuter rail fares. But this can be a self-fulfilling cycle reinforcing the existing usage of bus by low-income riders and exclusion of low-income people on commuter/regional rail. It has become a greater concern with the suburbanization of poverty. (Addressing housing affordability is critical, but again one that many transit agencies have limited control over.)

Free transit for all and means-tested fares are popular policy ideas for addressing transit affordability, but let’s continue to remember the root cause of the problem is policies that create vast income inequality. How equitable either idea is in part depends on where the lost fare revenue will come from. For example, replacing all fare revenue with sales tax revenue is likely more regressive than means-tested fare system where higher income riders pay fares. All calls for free or means-tested fares should be associated with a funding source that ensures low-income people aren’t just paying in a different form (and additional funding to increase service since people’s time is also a cost!).

The mix of funding sources for every major transit agency in the country is different. In 2019, the MBTA reported a 44.6% farebox recovery ratio to the National Transit Database while the Los Angeles Metro reported 14.6%. The differences are both local funding sources, rider demographics, and types of services offered. LA Metro doesn’t run the regional rail while the MBTA does.

This means that a one-size fits all policy at the transit agency level isn’t possible. From a funding perspective what works in LA, won’t necessarily work or be equitable in Boston. However, the affordability arguments for free fares or means-testing are universal. The farebox recovery ratio is meaningless to a rider trying to make ends meet every day in LA or Boston or anywhere in-between. And whether a person has to ride a bus or a train to get from A to B (and who operates it) also doesn’t matter.

To me this is a clear indication of the need for federal policies to address both income inequality and public transit funding. Transit agencies only survived COVID because the federal government passed three rounds of emergency funding (totaling ~$70 billion). But this was the first major federal funding for transit operations (not capital) since it was cut by President Reagan in the 1980s.  A return to regular federal transit operating assistance, funded by a progressive (and true cost of driving) source, could allow agencies to increase service and either lower fares or implement means-tested fares.  

A weedy postscript on fares and federal tax policy

Deep in the weeds of the MBTA’s fare revenue there was a golden egg…

There is another way that the federal government subsidizes transit and that is through the pre-tax deduction for transit fares (and parking at transit lots). While this benefit primarily goes to individuals who work in higher paying jobs whose employers participate in these types of programs, transit agencies benefit as well.  I only know the details at the MBTA, and it is worth exploring the COVID impacts and thinking about what changes are needed.

Before COVID the MBTA’s corporate pass program was the golden egg of fare revenue. People could only sign up for monthly passes on a reoccurring basis and the cost was subsidized by the pre-tax payment and often by employers. This allowed the MBTA to set higher commuter rail pass prices. It also meant that often high income riders bought passes for which they didn’t take the number of trips required to break-even at the sticker price. The MBTA got revenue from passes without having to provide all of the capacity they could have represented.

This was equity enhancing only because the MBTA has a weekly bus/subway pass that is roughly ¼ of the monthly to maintain pass access for low-income riders not in the corporate program. And because the agency could use the corporate pass revenue to fund service for the bus/subway pass users riding more than the breakeven point. So commuters (really the federal government and employers) were subsidizing everyday riders.

The COVID pandemic likely killed this golden goose for the MBTA. First, many people turned off their transit payroll deductions during the pandemic and will have to be convinced to resign up. And second, it is likely that some continued remote work will make the monthly pass less attractive, even with the pre-tax benefits. It is also possible that large employers will reduce their subsidies for transit (please don’t).

This means even as ridership returns fare revenue could lag behind, thus creating a structural problem if there isn’t a new source of sustainable operating funds.  This new source of funds should also be equity enhancing, not higher fares on the remaining riders.

Clearly the MBTA, and other transit agencies previously reliant on pass revenue, have to rethink their fare structures over the next few years, including different products in their corporate programs (will require technology upgrades). It will also be important to make federal and employer transit benefits more available for lower wage workers in industries where remote work isn’t an option.    

I would be curious to hear from folks with knowledge of other agencies’ fare mix if there are similar or different concerns about how fare revenue will return. Do people have suggestions about how to make sure the federal transit pre-tax policy remains a useful tool for transit agencies?