Transportation equity through fiscal policy

Adopting a commercial approach to pricing limited road space or transit can be a tricky topic. It is often rejected on the grounds that pricing disproportionately disadvantages people with low or fixed incomes, while those who can afford to pay gain the benefits of a less congested network. Finding a way to implement modest changes to the progressive tax system can address these obstacles and create a larger role for pricing in transportation policy.

Transportation economists have long argued that congestion on the road network can be mitigated or removed through the thoughtful use of pricing. Despite this, only a limited number of downtown city areas (e.g. London, Singapore and Stockholm) have adopted road pricing. Additionally, most publicly operated transit systems are not able to cover their direct operating costs through fare recovery, and seek outside investment for capital and renewal costs due to the low (in commercial terms) fares charged.

The limited use of road pricing and high prevalence of low transit fares can be linked to a variety of factors, including the commonly held equity based rationale for low or zero transportation pricing. This has constrained policy makers from using pricing to influence transportation demand, both in absolute terms and in terms of mode choice. Mitigating equity concerns would allow pricing to become an integral component of the transportation policy toolkit and reduce the direct subsidies required for much of the transportation network.

The transportation pricing challenge could be considered a wider societal issue of income distribution, however a more targeted approach until a wider policy narrative can be discussed is recommended. For example, promoting a revenue neutral system, whereby the additional revenue raised by pricing transportation is used to enhance the system and further invest in transportation infrastructure. However, the design of such a system would need to avoid simply recycling the revenue back at the level paid, as this would provide little incentive to change behavior, and may make equity considerations worse, given the impact on cash flow of those on low incomes. Instead, a combined approach is possible, one that combines revenue neutrality alongside a mechanism that returns revenue disproportionately to low income households. Transparent and simple revisions to the tax system may be a way to achieve this.

Possible approaches could include increasing income tax-free allowances or credits where funding is primarily via income taxes (e.g. for national or state/provincial highway systems). For property tax funded systems, introducing or increasing a non-taxable allowance or credit would return money to those in lower value residences and by inference lower incomes. More fundamentally, the long proposed Universal Basic Income (UBI) may be a route that could encompass increased use of transportation pricing, although as intimated earlier, the case for UBI is much broader than just transportation.

Obviously, any changes to the tax system would need to be grounded in the governance structure of the transportation system and associated funding sources. Such changes should simplify governance since the transportation agencies affected would become more financially self sufficient, relying less on interagency governance and funding arrangements.

In summary, the ability to use pricing as part of a transportation policy toolkit is often limited by genuine concerns around equity implications. However, a well-developed proposal that compensates users that pay, with a focus on low income users, would mitigate such concerns. Better integrating transportation and taxation policy will provide a wider range of transportation policy options, and ultimately better transportation systems.