Transit Funding Mechanisms – A Primer
Prepared for SGA’s State Transit Campaign
This primer provides a snapshot of various proven and potential transit funding mechanisms. For
more information and references to related publications, refer to the following Smart Growth
America documents which focus in detail on specific funding mechanisms: “Sales Tax,” “Gas Tax,”
“Parking Fees and Taxes” “Payroll/Employer Tax,” and “Vehicle Fees,” and “Carbon Fee Case Study:
British Columbia.”
Sales Tax






A “consumption taxes” levied on the purchase of goods and services, paid by the consumer
to the seller, who then passes the tax on to the government
Any local enactment of a sales tax must first be approved at the state level
This is the most widely used funding mechanism for transit in the US. As of 2007, local
jurisdictions in seventeen states were using some form of a local sales tax to fund transit.
Relatively high revenue yield potential and can be implemented easily and efficiently; but
revenues are very sensitive to economic fluctuations
Often considered regressive, though there are counter arguments
Case study: In 2008, San Diego County voters approved a forty-year extension of the
TransNet Program, with a new one-half-cent sales tax designated to fund a variety of
transportation projects. The extension was originally expected to generate approximately
$14 billion over the forty-year period, which would be split evenly three ways between
transit, highways, and local streets and roads. Between 1987 and 2008, the TransNet
project produced approximately $1.1 billion for new transit and for annual operating costs.
In recent years, however, falling sales will mean a projected revenue drop of 6.5% for
transportation (over $22 million) between the 2009 and 2010 fiscal years. Currently, San
Diego faces a $13 million annual transit budget gap.
Motor Fuel (Gas) Tax







A “consumption tax” levied on the purchase of gasoline and diesel fuel that is currently
applied in all fifty states and serves as the primary funding source for transportation in
most places.
Federal gas tax=18.4 cents/gallon. Average state gas tax=20.9 cents per gallon.
Gas taxes provide a portion of transit funds in 15 states; 22 states constitutionally restrict
gas tax revenues to highway and road improvements only – leaving transit ineligible.
Easy and inexpensive to administer, and has generated stable revenue in the past.
By its nature, provides an incentive for reduced driving and encourages transit ridership.
Value of gas taxes decline over time unless indexed to inflation. Though this has not been
done on the federal level, six states (FL, ME, NE, KY, NC, WV) currently index their statewide gas tax to inflation in some way.
Case study: The Rhode Island Public Transit Authority, or RIPTA (one of only two statewide
transit agencies in the U.S.) had an operating budget for the FY 2009 of $101.2 million.
Approximately 39% of this was funded by a statewide gas tax. In recent years, rising fuel
prices have discouraged driving and have led to decreases in annual revenues from the gas
tax, putting a dent in RIPTA’s funding. Between FY2008 and FY2009, the total revenue from
the gas tax fell by approximately $2 million, and with a growing budget gap of
approximately $10 million for the fiscal year RIPTA was forced to consider major service
Smart Growth America, 1707 L St. NW, #1050, Washington, DC 20036
SGA: Smart Transportation Investments in a Time of Economic Crisis
cutbacks. In response to this, Rhode Island’s General Assembly voted in the summer of
2009 to raise the gas tax to 32 cents per gallon, an increase which is anticipated to bring in
between $8.8 and $11 million in additional funds for RIPTA in the upcoming fiscal year.
Payroll Tax








Paid by employers based on the amount of gross payroll within a specific region, such as a
transit district. Employers pass on to their employees
When used to fund public transportation, these taxes are generally administered by state
revenue agencies on behalf of transit agencies.
Easy to administer, difficult to evade
Responsive to inflation because they are based on the percentage of gross payroll
Potentially could encourage businesses to locate outside of transit jurisdictions.
Revenues fluctuate with unemployment levels, layoffs
Often considered regressive, though setting income thresholds could counter that effect
Case Study: Portland’s Tri-County Metropolitan Transportation District (TriMet) gets 55% of
its operating funds from a district-wide payroll and self-employment tax. In 2008 TriMet
received approximately $215 million from the tax, an increase of close to $8 million from
the previous year. The high unemployment rate in Portland has raised concerns about the
revenues TriMet receives from the payroll tax. In 2008 the rate of growth (2.7%) was
substantially less than the 7.7% growth rate for FY2007. In February of 2009, TriMet
announced that it expects to face a $13.5 million shortfall for the 2009-2010 Fiscal Year.
Carbon Tax




A fee on the distribution, production or use of fossil fuels designed to reduce emission
levels.
A price per ton of carbon emitted is established by the government and then translated into
a tax rate for each fuel type (different fuels produce different carbon emission levels)
Not currently implemented anywhere in the U.S.
Case Study: As of July 1, 2008, residents of British Columbia now pay a tax on the purchase
and use of fossil fuels including gasoline, diesel, heating fuel, propane, natural gas, and coal.
The tax is currently revenue-neutral and is expected to generate between $100 million and
$200 million annually, all of which will be returned to tax payers in the form of tax
reductions and credits. Some of the mayors in British Columbia have argued in favor of
directing approximately $450 million of the tax’s revenues over the next ten years to the
region’s transit system, Translink. Tax rates are scheduled to rise each year through 2012,
with a current rate for gasoline of 3.62 cents per liter and the rate for diesel set at 4.14 cents
per liter.
Parking Fees





Charges paid by drivers to park vehicles along high-demand public streets and in lots and
garages.
Revenues typically go toward some combination of general funds, roads, and parking and
vehicle enforcement. Fee rates and revenue levels vary by location (in Chicago, IL, the city’s
36,000 parking meters generate approximately $19 million annually).
Enactment generally occurs on the local level but is authorized at the state level.
Only currently helps fund transit in a few states (including CA, IL)
Can aid congestion management on high demand commercial streets, especially if fees are
market based; could encourage mode shift to transit, walking or biking
2
SGA: Smart Transportation Investments in a Time of Economic Crisis

Case Study: In 2007, U.S. DOT gave the San Francisco Municipal Transportation Agency
(SFMTA) $18.4 million for the purpose of implementing SFpark, a new parking management
program. Shortly after SFpark was enacted, voters approved Proposition A, which states
that SFMTA will receive 80% of the annual revenues from the parking fees put in place by
SFpark. In the 2008-2009 Fiscal Year, SFMTA received approximately $235 million from
the parking fees (along with traffic violation fees), 30% of SFMTA’s total revenue for that
year. A portion of SFMTA’s funding from the parking fee is dedicated specifically to San
Francisco’s Municipal Railway (Muni), a branch of SFMTA. In 2008, Muni’s total operating
budget was $585 million, $146 million (over 25%) of which came from parking fee
revenues.
Vehicle Ownership Fees






License Fees: imposed in over 34 states—drivers pay for new and replacement licenses. Can
be flat rates or variable based on license class or driver age
Title Fees: drivers pay to register or make changes to a vehicle’s certificate of title
Vehicle Registration Fees: Paid annually, can be flat rates per vehicle or variable based on
vehicle weight, age, and emission level. (Some states with variable rates include CO, FL, and
MN)
Stable revenue streams; easy and inexpensive to administer
Not widely used to fund transit
Case Study: Residents within the Sound Transit authority district (which services the Seattle
area) pay a “car tab tax”, or motor vehicle excise tax (MVET) administered by the
Washington State Department of Licensing. The annual fee is collected at the time of vehicle
licensing at a rate of 0.3% per dollar of vehicle value, or $30 for each $10,000 of vehicle
value. In 2009, the MVET (along with a car rental tax) provided $74.4 million in Sound
Transit revenue, covering approximately 14% of Sound Transit’s total budget for the year.
Vehicle Sale/Rental/Lease Tax






Most states (except NH, AK, OR) impose a sales tax on the purchase and lease of motor
vehicles.
Typically take the form of one-time charges paid at the point of purchase or rental, while
lease taxes are often paid monthly as a percentage of the leasing rate. Revenues subject to
economic fluctuations
Can be either flat rates or variable according to vehicle size, value, and age.
Not widely used to fund transit (one exception is a $2 per day vehicle rental fee in Allegheny
County, PA, which generated $5.8 million for the Port Authority Transit Services in 2009)
If variable rates are used, can be progressive and responsive to inflation, and can account
for the greater social costs imposed by heavier, fuel-inefficient cars
Case Study: Minnesota State currently taxes motor vehicles at the same rate as the state
general sales tax, 6.5%. A portion of the revenues from the tax fund transit operations, but
constitutional language mandates that by 2012 ‘no less than 40%’ of revenues will be put
toward transit operations. Up until FY2007, revenues were growing steadily, but they have
declined substantially in the past two years due largely to the economic downturn. In 2009,
the tax generated approximately $408.9 million, of which $113.5 million (27.75%) went to
transit. The total estimated projection for 2010 is $395.9 million, with $118.7 million (30%)
of that for transit. Metro-area transit agencies will have approximately $18 million less
than originally predicted for 2010 and 2011, bringing the projected shortfall to $62.5
million for the two-year period.
3
SGA: Smart Transportation Investments in a Time of Economic Crisis
Real Estate Value Capture




Based on the idea that public transit increases the value of surrounding real estate, and this
increased value can be calculated and ‘captured’ as a funding source for new transit projects
and even for annual operation costs
Two major types: assessment districts and tax increment financing (TIF)
Assessment districts (most common value-capture mechanism in use)
- Defined geographic areas in which a special tax (often tiered based on proximity to
transit) is applied to property owners.
- Typically, require at least a majority vote from all property owners affected. Have been
used to fund the construction of streetcar lines.
- Work best when there is a relatively small group of property owners within the
assessment district, e.g., where a few developers own a majority of the property in an
area and have an interest in seeing new transit infrastructure. (Can be difficult to
implement over large areas and especially across jurisdictional lines)
- Tend to be implemented in areas with a large potential for new development, where the
possibility of new transit facilities would be attractive and valuable to prospective
developers.
- Case study: The Dulles Rail Transit Improvement District is designed to generate $400
million from commercial, industrial and multifamily investment properties (about 15%
of the Dulles Rail project cost). Initiated by the property owners.
- Case study: In the South Lake Union area of Seattle, an assessment district was used to
fund $25.7 million of a total $52.1 million capital cost for the South Lake Union Streetcar.
A key promoter of the streetcar and the assessment district, Vulcan Inc., is a developer
that assembled approximately 60 acres of property in the neighborhood. Vulcan is
responsible for a third of the payments from the assessment district, and it is likely that
the district could not have been implemented without their large share of property
ownership.
Tax Increment Financing (TIF)
- A financing tool that allows the local government to ‘capture’ the future increases in
property taxes that will result from existing or planned transit near said properties. Has
been used to fund a number of transit projects especially station improvements.
- Can be done over time; as a pay-as-you-go basis; or can be bonded against
- Typically works best in locations with a sizable amount of vacant or underdeveloped land;
Often supports projects which may not otherwise be possible
- Administered by cities (not transit agencies), traditionally for revitalizing neighborhoods.
Has been criticized in come cases for leading to gentrification
- Governed by state law and works somewhat differently from state to state
- Case study: The City of Chicago has used TIF 159 times. Revenues have helped fund new
subway station construction, TOD around stations, and new bus shelter construction, but
not operating costs (per Illinois state law). In 2005, the city raised $42.4 (out of total
project cost of $213 million) to construct a new station and track connections.
Joint Development

Refers to real estate development projects which involve a public/private partnership to
facilitate the development of property near transit, often specifically on transit agency-owned
land. Generally not used for operations costs.
4
SGA: Smart Transportation Investments in a Time of Economic Crisis






Have been used to fund the expansion of infrastructure around stations; encourage TOD; and
even fund the new station construction.
Has offered mixed results as a source of revenue for transit agencies, usually because of
inclusion of increased parking at the stations, which can be very expensive. It also reduces
the space available for private development, which could potentially generate revenues.
Brings in revenues from a very small percentage of the properties actually benefiting from
transit services, unlike assessment districts and TIF
Two types: Revenue-sharing agreements (about one-fourth of joint development projects)
involve distribution of revenues to all partners including the transit agency – resulting from
ground lease payments, air rights payments, etc. from development projects on/around
transit. In cost-sharing (two-thirds of joint development projects) agreements all partners
work together to cover the costs of integrating transit with surrounding development
through infrastructure enhancement. About 40% joint development projects involve some
combination of both.
Case Study: Washington DC’s primary transit agency, WMATA, has undertaken fifty-six joint
development projects around its stations, collectively generating about $10 million every year,
plus additional agency cost reductions.
Cases study: In Portland, OR private developers joined the Cascade Station Development
Company (composed of private groups, the City and the transit agency) and agreed to take
responsibility for repayment of $28 million in bonds for construction of a portion of the light
rail in return for development rights for the surrounding 120 acres. The agreement was
effectively used to construct the new Cascade Station, which is surrounded today by major
retailers such as IKEA, Target and Best Buy, as well as new office and hotel development.
While ultimately successful, the project was very challenging and the profitability to the
development team is unknown.
Development Impact Fees





Usually come in the form of one-time charges paid by the developer to the government either
once the development is approved or once some percentage of capacity in the transit facility
is reached. Only a few instances of this mechanism as revenue source for transit.
Can act as a “user fee,” unlike a general tax mechanism, by requiring the private
businesses/entities who benefit substantially and directly from transit infrastructure to pay
to maintain/expand it.
As one-time charges, they tend to be unreliable as a funding base in the long term.
Case study: In San Francisco, a one-time fee (recalculated annually but set at a maximum of
$8-$10 per square foot) is applied to office buildings to offset new peak period work trips
generated by the development. Payment is due upon 50% building occupancy, and funds
accruing are shifted to Muni’s operating revenue fund annually. As a one-time fee, it does not
generate a consistent flow of funds. Overall, revenues are variable year to year with an
average of about $10 million/year. The fee was set up through an ordinance.
Case study: In 2005, Broward County, FL initiated a Transit Oriented Concurrency (TOC)
system to help pay for transit improvements and operations. Under this system, the County
is split into ten districts and transit needs are identified in each district. The total cost of
transit improvements is charged as a formula-based fee (based on expected trip generation)
on all new development. Projects designed to encourage transit usage and affordable housing
are eligible for fee reductions. The program is expected to raise $10.8 million for the 20062010 period, which would cover 28% of total transit operating and capital costs for that
period.
5