Should Transit Be Free? What Would it Take? An Analysis of Central Ohio

Transit agencies, particularly in medium-small US cities, have very low farebox recovery ratios. As another transit jargon term, the farebox recovery ratio is the percentage of total operating expenses transit agencies recover through fares paid "at the farebox". This does not by any means suggest that transit is a waste of money. EVERY, and I mean every form of transportation in the US runs on some sort of subsidy.

Healthline BRT in Cleveland, OH

Take roads as an example. In principle, roads are supposed to be funded through user fees, similar to how buses sell fares in exchange for the service provided to passengers. This is also known as a gas tax. Whenever you fill up at the pump, you pay some amount of money in tax that is directed into the Highway Trust Fund, which the Federal Government uses to fund transportation projects across the US. The issue, however, is that the Highway Trust Fund struggles with solvency issues. That is, it does not bring in enough revenue to cover the expenses, meaning money has to be transferred from other government accounts, leaving fewer resources to pay for things like education, welfare, etc (Giuliano and Hanson, 2017). 

In fact, the recent Bipartisan Infrastructure Bill allocated $100 billion to bail out the trust fund (Byington, 2021). In Ohio, only around 50% of highway expenditures are covered by user fees, such as gas taxes and tolls (Cammenga, 2019). The rest has to come from bonds, general state revenues, etc. 

The point is, we subsidize the crap out of roads, so an argument that transit should be abolished or something because it is not "solvent" are invalid, since every form of transportation is not solvent on its own (with VERY few exceptions). The neighborhood roads you live on are probably 100% subsidized and generate no money in user fees. 

In many cities, I think it makes a lot of sense to provide transit for free. But before I get into that argument, let's discuss a bit on how transit is funded in Central Ohio.

How is COTA funded?

In Central Ohio as well as the US, public transit is primarily funded through sales taxes. COTA is funded through a 0.5% sales tax in its service area.  Additionally, transit is funded through state grants, federal grants, fares, investment income, and advertising. Let's take a closer look at COTA's revenue figures. 

Source: Central Ohio Transit Authority (2019)
Note: I am using 2019 as my year here. That is the last "normal" year before the COVID 19 pandemic. After the onset of the pandemic, the funding scheme in transit changed a bit, as the Federal Government became much more heavily involved in funding transit operations (through the CARES Act), where their role before was mostly limited to funding large capital projects. 

From the table, you can see that the VAST majority of COTA's revenue comes from sales taxes. Indeed, sales taxes cover 73% of COTA's total revenue. The other revenue streams make up a much smaller percentage. 

Farebox recovery ratio

The farebox recovery ratio is the percentage of total operating expenses that are covered by fares collected at the farebox. For mid size agencies such as COTA, this number is often quite small. 

Given that COTA's total operating expenses in 2019 were $170,226,304, we can calculate COTA's farebox recovery ratio: 18,209/170,226 = 10.7%. Thus, 10.7% of COTA's expenses are covered by fares. 

A Proposal for Free Transit

Suppose COTA decided to abolish fares, providing all of their services free of charge. To make up for the lost revenue from fares, suppose COTA proposed a small sales tax increase to balance their books. What would this look like? How much would the sales tax have to increase?

Since COTA's sales tax of 0.5% already provides them with $135.7 million, it can be found that this translates to around $27.1 billion in total sales tax eligible purchases in COTA's service area (COTA, 2019). To raise the $18.2 million given up due to the free fares, this means we would have to raise the sales tax by 0.07%. That is an incredibly low number.

To put this into perspective, increasing the sales tax by 0.07% means you will be charged an extra dollar in tax for every $1,429 dollars you spend. This is a negligible impact and would not even be noticeable to consumers, especially since food and housing are generally not subject to sales tax.

The calculation above assumes all else equal. However, this would not be the case in reality. If COTA abolished fares, people would ride the service more. This is a law of basic economics that dictates that consumers will want more of something if the price is lowered. 

It is impossible for me to predict by how much ridership would increase as a result of this ridership increase. However, we can look at some hypothetical scenarios to see how this might play out.

First, note that COTA had 19,146,510 passengers in 2019. That means COTA spent about $170 million/19 million = $8.94 per passenger. Let's assume this is a good metric for comparing different ridership scenarios: that is, assume that a 10% increase in passengers corresponds to a 10% increase in total expenditures. 

Under this scenario and assumptions, a 10% increase in ridership would raise expenditures by $17 million over the status quo.  In this case, we would need a sales tax increase of 0.08% (above the current 0.5%), or $1 for every $1,260 of sales tax eligible expenditures. 

Let's assume a 20% increase in ridership. This would raise expenditures by $34 million over the status quo. In order to absorb those expenditures, a 0.1% sales tax increase would be necessary (above the current 0.5%), which would amount to $1 for every $987 in sales tax eligible expenditures. 

Various hypothetical ridership increase scenarios

At this point, it is important to note that the assumption of a 1-to-1 relationship between ridership and expenditures is likely very unrealistic. This assumption is much stronger than what happens in reality. This assumption would only be accurate if every bus in the system was at full capacity, and they could not fit any more passengers on-board. Anecdotally, if you've ever ridden the bus in a smaller market city like Columbus, you know that there are often empty seats at any given time, and there is even more room where passengers can stand and hand on to the poles. Thus, the increase in expenditure in response to an increase in ridership is likely MUCH less than one to one. This is called an elasticity estimate, and economists would say that expenditures are inelastic with respect to ridership, meaning expenditures do not rise shapely with more passengers. I don't have a great sense for how many more people COTA could, on average, fit on their buses. 

However, consider this. In 2019, COTA obtained 74,351,658 passenger miles. Passenger miles is simply the sum of the distance traveled by all passengers. Therefore, as an example, if there were 10 passengers, and each rode one mile, we get 10 passenger miles. Similarly, COTA had 13,837,591 revenue miles in 2019. Revenue miles are simply the number of miles service is provided in a revenue generating capacity (that is, it excludes time going to the garage, etc)(COTA, 2019). Therefore, COTA had roughly 5.37 passenger miles for each revenue mile. This suggests COTA could likely absorb a fairly large increase in capacity, even on busier routes, without substantially increasing operating costs. Without more data, however, it is hard to say for certain.

Passenger response to free fares: case studies

As we come out of the COVID pandemic, many transit agencies are investigating becoming fare free in an effort to increase ridership back up to pre-pandemic levels. This provides some beneficial case studies, and we can get a sense for how ridership has responded to such fare elimination, whether temporary or permanent.

In the summer of 2021, the Greater Cleveland RTA implemented the first major overhaul of their bus system in over 50 years. In order to help customers adjust to the new routes and schedules, RTA suspended fares for one week. In response, ridership increased by about 13% (Durbin, 2022). However, it is very likely this was people who already use transit making more trips, not any newly "captured" riders. Many people may not have known there were free fares, and it is unlikely one week is enough to capture the long run impacts free fares have on individuals mobility choices. If people cannot feasibly use transit, they aren't going to use it, regardless of what the price is. 

Olympia, Washington abolished fares in 2020 and one month after they did so, ridership increased by 20% compared to the previous year (Hess, 2020). It is hard to say, however, if this ridership increase is sustained over time. 

A study from Universidad Católica de Chile found that a randomly selected group of passengers who were given free fares rode transit 28% more than those who had to pay (Bull, 2021). Interestingly, they found that much of the increase occurred during off-peak hours, suggesting the increase imposed little strain on Santiago's system and likely had very little impact on operating expenditures.

In short, it is difficult to say for certain how much ridership would increase in response to fare abolition. The case studies above suggest a modest increase, one that could likely be absorbed by existing transit operations, particularly in smaller markets. The best we can really do here is assume that Columbus would be similar to Olympia and Cleveland and would see a ridership increase of around 20%. 

If Columbus did see a 20% increase in ridership, in order to cover lost revenue from fares and absorb the new ridership, the absolute maximum amount of sales tax increase would be 0.1%, or $1 for every $987. However, in reality, the necessary increase would be much lower than that because some, perhaps all, of this ridership increase could be absorbed by the service already on the road- no additional buses, drivers, fuel, etc. would be necessary. Therefore, in order to have transit be free in Columbus, we would have to raise sales taxes by somewhere between 0.07% and 0.1% ($1 per $1,429 and $1 per $987, respectively). Either way, these are extremely small increases and would not be noticeable to consumers.  If you spend $50,000 per year, which seems highly unlikely, especially since food and housing are not subject to sales taxes and take up a large portion of consumers budgets, your taxes paid will increase by somewhere between $35 and $50. If you spend $15,000 per year, it's between $10.50 and $15. These are extremely modest sums when you consider the typical American spends about 15.9% of their budgets on transportation costs. 

There is no law saying we have to rely on sales taxes either. We could raise the funds through a combination of sales taxes, motor vehicle registration fee increases, gas taxes, parking fees, etc. All in all, Columbus should seriously consider making transit fare free. Fewer people on the road and more on buses will lead us to a safer and more sustainable future.

Sources

Owen Bull, Juan Carlos Muñoz, Hugo E. Silva, The impact of fare-free public transport on travel behavior: Evidence from a randomized controlled trial, Regional Science and Urban Economics,Volume 86, 2021, https://doi.org/10.1016/j.regsciurbeco.2020.103616.

Byington, L. (2021, August 10). Senators punt on finding long-term fix for highway trust funding. Bloomberg Government. Retrieved May 5, 2022, from https://about.bgov.com/news/senators-punt-on-finding-long-term-fix-for-highway-trust-funding/ 

Cammenga, J. (2022, March 1). How are your State's roads funded? Tax Foundation. Retrieved May 5, 2022, from https://taxfoundation.org/states-road-funding-2019/ 

Central Ohio Transit Authority. (2019). 2019 Comprehensive Annual Financial Report. https://www.cota.com/static/aaaa169981203c91127d190f344f3e83/COTA-annual-report-2019.pdf

Durbin, K. (2022, March 20). Cuyahoga County has been dreaming of free transit, but RTA officials say it's not a likely reality. cleveland.com. Retrieved May 5, 2022, from https://www.cleveland.com/news/2022/03/cuyahoga-county-has-been-dreaming-of-free-transit-but-rta-officials-say-its-not-a-likely-reality.html 

Giuliano, G & Hanson, S. (2017). Looking to the Future. In G. Giuliano & S. Hanson (Eds.), The Geography of Urban Transportation (4th ed, pp. 359-386). The Guilford Press.

Hess, A. J. (2020, March 2). Americans spend over 15% of their budgets on transportation costs-these US cities are trying to make it free. CNBC. Retrieved May 5, 2022, from https://www.cnbc.com/2020/03/02/free-public-transportation-is-a-reality-in-100-citiesheres-why.html