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The Metropolitan Transportation Authority announced its holiday present to New York early: half-price subway and bus fares on weekends between Thanksgiving and New Years, and all week between Christmas Eve and New Years. The venture might cost $50 million, or 5 percent, of the MTAs nearly $1 billion operating surplus. It will be worth it if it achieves an unstated (and perhaps unintended) goal: getting people to treat a subway ride as a regulated transportation service, not as a heavily subsidized social service.
The MTAs huge operating surplus wont last long; the authority will face a nearly $1 billion annual deficit in less than three years. The main reason the authority enjoys a surplus now is simple, and its the same reason much of the surplus could soon disappear: the MTA is reaping an unsustainable level of real-estate-related taxes.
To help subsidize its below-cost fares, the MTA receives revenues from a once-insignificant mortgage-recording tax. A decade ago, that tax put less than $100 million into the MTAs coffers. Due to the white-hot regional housing market, though, the figure has multiplied by more than six-fold, and likely will register even higher this year.
But why is the MTA dependent on a once-obscure, and now volatile, real-estate tax, in the first place? For the MTA adequately to cover its costs with fares, a subway ride would cost about $4.00and would increase steadily with inflation. This would be a bargain compared to alternatives. A car rideincluding the cost of the car itself, insurance, gasoline, and parkingcosts $15 to $20 one way. A taxi ride through Manhattan costs about $12. And, in fact, when the first subways opened, in 1904, the regulated price of a ridefive centswas adequate to cover its cost and to generate a profit for the systems then-private-sector investors. New Yorkers wanted a modern, efficient way of getting to work, so they paid for the cost of it.
It wasnt until after World War I that local politicians began to view the subway not as a regulated service but as a social and political tooland the inadequate nickel fare became the symbol of their cause. Predictably, as inflation inched up, subway operators couldnt cover their costs, and service deteriorated. (Under the original subway investors contract with the city, the nickel fare was supposed to increase by mutual agreementsomething that the city never allowed to happen.)
The government put the subway operators out of their misery in 1940, purchasing their assets. The story has gone like this since then: Since politicians keep the subway fare artificially low to please constituents, the already inefficient MTA must depend on a complicated menu of dedicated taxes and unreliable government subsidies rather than on a regulated adequate fare to cover its own costs, and fare hikes always lag the increase in actual costs.
Thats why the MTAs move now is a good ideabecause its such a radical departure from politics as usual. Millions of people4.5 million each daydemand to use the subway on normal weekdays, because they have to get to work. Fewer people demand to use the subway on weekends and on holiday weeks. So why not slash subway fares on trains that might be half-empty anyway, and greatly publicize the holiday discount to entice local shoppers and holiday visitors to stay on the subways? If enough people take advantage of the lower fare, the discount program wont cost $50 million.
And if this experiment works, why not apply market principles to ease future fare hikes? The MTA likely will raise fares within two years to cover future deficits. Though the authority hasnt said so, it would make good sense for it to charge a higher fare during rush hours, when most people dont have a choice but to ride the subway, and to keep fares at lower rates for nights and weekends in order to sustain off-peak ridership, which has grown in the past decade but could fall after another large fare hike. The MTA could measure changes in ridership on weekdays and weekends to assess whether this fare increase just on weekdays does decrease demand on those days. The point, obviously, is not to clog up overcrowded roadsbut why subsidize fares to boost rush-hour ridership if you find you dont have to?
There is one argument against this plan: poorer workers who ride the subway would be penalized at the expense of weekend tourists. But no other method of transportation is priced for the poor, as the subway is now. If the MTA were gradually to switch to pricing based on cost and demand, state and city government could approve discount subway vouchers for poorer workers.
A subway subsidy for those who need it makes far more sense than todays subway subsidy for everyone, including for billionaire daily rider Mike Bloomberg. Further, state and city politicians could never revoke it to balance their budgets, as they have done with direct cash contributions to the MTA, without provoking a political firestorm.
A move toward rational pricing based on market forces, and a rational subsidy based on need, could pave the way for true regulated-market pricingwhere, after federal, state, and local contributions for strategic capital investments, riders gradually would grow accustomed to paying more of the true cost of their ride.
For more information on this topic, please see How to Save the SubwaysBefore Its Too Late, City Journal, Spring 2005.