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A Desire Named Streetcar: How Federal Subsidies Encourage Wasteful Local Transit Systems, Cato Policy Analysis No. 559

A Desire Named Streetcar: How Federal Subsidies Encourage Wasteful Local Transit Systems, Cato Policy Analysis No. 559

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Published by Cato Institute
Executive Summary

The nation's mass transit system is a classic example of how special interests prevail over the needs and interests of voters and taxpayers. Total inflation-adjusted subsidies to transit
Executive Summary

The nation's mass transit system is a classic example of how special interests prevail over the needs and interests of voters and taxpayers. Total inflation-adjusted subsidies to transit

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Published by: Cato Institute on Mar 27, 2009
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inflation-adjusted subsidies to transit—busesand trains—have more than doubled since 1990,yet total ridership has increased by less than 10Prior to 1964, when Congress began subsidiz-ing transit, the industry was mostly private.Since then, the industry has been almost entirely taken over by state and local governments. Today more than three of every four dollars spent ontransit come from taxpayers, not transit riders.The effectiveness of local transit systems isundermined by federal subsidies, which encouragethe construction of highly visible and expensive ser- vices such as light-rail trains to suburban areasdespite the chronically low number of riders onthose routes. Federal subsidies to transit advocacy regulations also encourage a large investment of taxpayer money in wasteful transit systems.The ideal solution would be to devolve transitand other transportation funding entirely to stateand local governments. Short of that, Congressshould reform the federal transportation fundingsystem to minimize the adverse incentives it creates.
 A Desire Named Streetcar
 How Federal Subsidies Encourage Wasteful  Local Transit Systems
by Randal O’Toole
 Randal O’Toole is director of the Thoreau Institute and an adjunct scholar at the Cato Institute.
Executive Summary 
No. 559January 5, 2006
groups and misguided environmental and laborexample of how special interests prevail over theneeds and interests of voters and taxpayers. Totalcreased by 42 percent.The nation’s mass transit system is a classicpercent. By comparison, urban driving has in-
The nation’s transit system is a classicexample of how special interests prevail overthe needs and interests of voters and taxpay-ers. Total inflation-adjusted subsidies totransit—local buses and trains—have morethan doubled since 1990, yet transit ridershiphas increased by less than 10 percent. Theresult is that the average cost to taxpayers forevery transit trip has increased by 95 percent,from $1.68 to $3.28 in 2003 dollars.Prior to 1964, when Congress began sub-sidizing transit, the industry was mostly pri- vate, and, though it was losing riders, it oper-ated at an overall profit. Since then, theindustry has been almost entirely taken overby state and local governments. Today morethan three of every four dollars spent on tran-sit come from taxpayers, not transit riders.The reason localities continue to fundtrain systems that are surprisingly underused,expensive, and wasteful can be traced directly to federal subsidies for transit. Since masstransit agencies depend on taxpayers ratherthan users for most of their revenue, they focus on highly visible and expensive servicessuch as light-rail transit to suburban areas.The transit industry’s core market consists of people who don’t drive and who mostly live ininner cities. To pay for high-cost suburban railtransit routes, transit agencies often raisefares or cut back on services to inner-city areas. The result is that taxpayers often endup paying heavy subsidies for projects thatreduce overall transit ridership and oftenharm transit-dependent families.In addition to the huge subsidies offered by Congress to transit agencies, specific incen-tives in federal law encourage agencies to wastemoney and exacerbate the problem. Instead of helping localities solve real transportationproblems, federal subsidies encourage redi-recting taxpayer money to projects that arelikely to fail.The net result is that the federal govern-ment has succeeded in creating a system thatpromotes wildly extravagant spending ontrain systems. The desires of train supportersend up trumping the demands of everyoneelse.The ideal solution would be to end feder-al transit subsidies and devolve transit andother transportation funding entirely tostate and local governments by letting themkeep their fuel tax dollars. Short of that,Congress should reform the federal trans-portation funding system to minimize theadverse incentives it creates.
A Brief History of Transit
 America’s transit industry traces its rootsto 1827 with the first urban coach line inNew York City.
The development of steamtrains and horse cars in the 1830s reducedcosts and made transit available to more peo-ple. By 1880 American cities had 10,000 milesof horse-car rail lines.
In 1871 private entre-preneurs built the New York elevated train,which carried masses of people on short tripsfor a nickel each. New York also saw the firstcable car in 1868 and the first subway in1870.
Outside major cities, transit boomed only after electric streetcars were fully developedaround 1890. Streetcars had such tremen-dous cost advantages over other forms of urban transportation that, by 1910, almostevery American city with more than 10,000people had one or more streetcar lines, near-ly all of which were built with private funds.Many streetcar lines were built to connectsuburban real estate developments withdowntown job centers, and transit fares paidthe operating costs. The capital costs werecovered by the sale of homes and lots. Thoselines were later merged into regional transitcompanies.In 1907, the earliest year for which num-bers are available, transit companies carriedpassengers on about 9.5 billion trips. By 1926that number had nearly doubled to 17.3 bil-lion trips, a number that would be exceededonly during and after World War II. Per capi-ta transit ridership peaked in 1920 at about287 annual rides per urban resident.
The federalgovernment hassucceeded increating a systemthat promoteswildly extravagantspending on trainsystems.
The rise of the automobile signaled theend of the nation’s streetcar systems. By 1929more than half of all American householdsowned an automobile. State and local gov-ernments began to apply gasoline taxes andother user fees to the paving of streets andhighways throughout urban areas. When thetime came to replace rails, trolley wires, andother capital equipment, transit companiesrealized it made more sense to run buses onpaved streets whose cost was shared withautos than to maintain exclusive rail rights-of-way and infrastructure for streetcars.Buses were also more flexible and faster thanstreetcars. Transit riders annoyed with dilap-idated streetcars welcomed the newer andmore comfortable buses.Some supporters of mass transit have per-petuated the story that General Motors con-spired to destroy the nation’s transit systemsby replacing “efficient” streetcars with “dirty”buses, but that is little more than an urban leg-end that has been debunked by numerousbooks and articles.
General Motors did pur-chase an interest in various transit companies,but its only goal was to sell its brand of busesto companies that were already convertingfrom streetcars to buses. The simplest evidenceof this is that General Motors never controlledmore than a small fraction of the nation’s tran-sit lines, and it controlled none after 1949. Yettransit companies in many cities not con-trolled by General Motors, including Dallas,Denver, Indianapolis, Minneapolis, Portland,and Seattle, all converted from streetcars tobuses, mostly during the 1950s.The shift to buses was mainly prompted by the inefficiencies of streetcars, which were appar-ent to both public officials and private transitoperators. In 1955, for example, Congressordered the company operating streetcars inWashington, D.C., to convert its system to buseswithin eight years.
The last Los Angeles “red car”lines, which were featured as victims of a con-spiracy in the movie
Who Framed Roger Rabbit?
had never been owned by General Motors andwere actually converted to buses by a publicagency, the Los Angeles Metropolitan Transit Authority, in 1961.
In 1966 St. Louis converted its last streetcarline to buses. That left streetcar systems in only six American cities—Boston, Philadelphia, SanFrancisco, Pittsburgh, New Orleans, and Cleve-land—plus other forms of rail transit in New  York and Chicago. Private transit companiesand public transit agencies in most other citiesconsidered rail transit economically inviable.Rail systems simply worked better in high-den-sity urban centers than in less populated cities.Whether by rail or by bus, World War IIboosted transit ridership to a high of nearly 23.5 billion trips in 1946, or about 267 tripsper urban resident. The end of wartime fuelrationing led ridership to decline after thatyear by an average of 7 to 8 percent per yearthrough most of the 1950s and by about 3 per-cent per year in the early 1960s. By 1964 annu-al ridership had fallen to 8.3 million trips, orabout 62 trips per urban resident.
 Althoughtaxpayers supported city-owned transit agen-cies in New York, San Francisco, and severalother large cities, 95 percent of the transitindustry remained privately owned.
Federal Intervention inLocal Transit Systems
In 1964 Congress passed the Urban MassTransportation Act, which promised federalcapital grants to state and local public transitagencies. The law offered capital grants for upto 50 percent of the cost of transit improve-ments. The law did not provide funds for pub-lic purchase of private transit companies, butas transportation historian George Smerkobserves, most transit companies, recognizingthe declining nature of their business, “wereanxious to sell out to the public sector.”
Socities without government-run transit systemsbought the companies to make themselves eli-gible for the federal grants.Congress has justified many other federaltransportation programs using a liberalinterpretation of the Interstate CommerceClause of the Constitution. But most transitsystems do not cross state lines, so federalsupport for transit is based instead on the
Althoughtaxpayerssupported city-owned transitagencies inNew York, SanFrancisco, andseveral otherlarge cities, 95percent of thetransit industry remainedprivately ownedin 1964.

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