TRB Special Report 303: Equity of Evolving Transportation Finance Mechanisms (2011)

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3 Equity Through Different Lenses Debates about equity in transportation, including equity in transporta- tion finance, are often bedeviled by the many different, and sometimes contradictory, notions of equity. Consider, for example, civil rights law- suits filed against public transit operators over the allocation of services. While plaintiffs have generally argued in favor of greater income-based or social equity for those who are most dependent on transit services— low-income groups, persons with disabilities, and minority inner-city residents—transit officials have argued that achieving greater geographic equity requires them to invest in commuter-oriented suburb-to-central- business-district transit services (see, for example, Brown 1998; Garrett 2006; and Grengs 2002). There are different equity concepts, various ways of categorizing peo- ple for the purposes of equity analysis, numerous impacts to consider, and various ways of viewing and measuring these impacts. As many observers have noted, a particular decision may seem equitable when evaluated in one way but inequitable when evaluated in another. Moreover, equity is a relative concept, and public policies are typically more or less fair rather than strictly fair or unfair. Researchers have explored different ways of defining and classifying equity in an attempt to overcome such difficul- ties and analyze transportation finance equity in a logical and transparent manner. Rosenbloom (2009) notes more than 25 separate definitions of equity in the literature on infrastructure finance and service delivery. The purpose of this chapter is to consider systematically the many ways that equity is defined and used in transportation debates, thereby alerting decision makers to the diverse equity issues they may encounter during debates about evolving finance mechanisms. The focus is on the practical application of efforts to identify and categorize the equity implications of 39 

40 Equity of Evolving Transportation Finance Mechanisms transportation finance mechanisms. In addition, the different equity per- spectives presented here provide a basis for evaluating mitigations of equity concerns and identifying possible remedies for inequities. The chapter identifies and discusses equity concepts frequently encoun- tered in debates over transportation finance. Useful ways of grouping people for the purposes of equity assessment are then examined, and the assessment process is discussed. The final part of the chapter discusses ways in which the impacts of a transportation finance policy—cost and other burdens, as well as benefits—may be distributed as individuals and institutions modify their behavior in response to the policy. Examples, some hypothetical and some drawn from practical experi- ence, are included throughout this chapter; however, no attempt is made here to capture all the empirical evidence on the equity implications of evolving transportation finance mechanisms. That task is addressed in Chapter 4. EQUITY CONCEPTS People use different criteria for judging equity, each based on an underly- ing idea of fairness. Table 3-1 lists five equity concepts often encountered in debates over transportation finance, together with simple definitions and transportation examples illustrating the principles involved.1 Benefits Received, Ability to Pay, and Return to Source Rosenbloom (2009) notes that benefits received and ability to pay are the most traditional and familiar equity concepts. The benefits-received con- cept argues that equity increases when individuals pay in proportion to the benefits they receive from the service being financed, and this concept underlies the traditional user fee approach to highway financing embod- ied in the gas tax. Ability to pay is based on the principle that those with 1 In a broader context, social problems and inequities are sometimes addressed by providing trans- portation access or resources, and this approach has been termed “compensatory equity.” This approach is not really an equity concept, but rather a remedy for achieving equity. Putting com- pensatory equity into practice often focuses on matching transportation services to the particular needs of users—for example, by financing a variety of special transportation services for people with disabilities or for older people, whether poor or not, as well as providing additional services to certain neighborhoods or otherwise disadvantaged travelers (Bonsall and Kelly 2005). 

Equity Through Different Lenses 41 TABLE 3-1 Equity Concepts Type of Equity Simple Definition Transportation Example I get what I pay for. People who use a facility the most pay the most. Benefits received I pay more because I A project is financed through a progressive tax Ability to pay have more money. that is disproportionately paid by higher income people. We get back what we Transit investment in each county is matched to Return to source put in. that county’s share of metropolitan tax rev- enues used for transit. I pay for the burden I Extra expense required to provide express bus Costs imposed impose on others. service for suburb-to-city commuters is recov- ered through fares on this service. Public outreach regarding proposed new high- I had a voice when the Process occupancy toll lanes provides transparent decision was made. (or participation) information and seeks to involve all affected parties in public hearings and workshops. greater income or wealth should pay more to support public services and is a basis for income and property taxes. The return-to-source concept of equity is also widely considered in the transportation field and is based on the idea that the amount a par- ticular group pays should reflect the expenditures on transportation for that group. Groups are often defined by where they live or pay taxes, and return to source and geographic equity are frequently synonymous in the context of surface transportation policy (Altshuler 2010). As discussed further in Chapter 5, geographic equity is often the overriding equity concern for politicians at the state and local levels when faced with deci- sions about which transportation projects to pursue and how to fund them. In most highway financing debates at the federal level, return to source or geographic equity focuses on whether states get back an equi- table share of the fuel taxes they send to Washington. Other Equity Concepts In addition to the three well-known equity concepts already noted, other less familiar equity concepts—costs imposed and process or participation—have begun to attract attention, often in the context of concerns about what has become known as environmental justice. As noted in Chapter 1, debates about environmental justice now address 

42 Equity of Evolving Transportation Finance Mechanisms not only disproportionately high and adverse human health and environ- mental impacts of pollution and the siting and transport of toxic hazards (costs imposed), but also the exclusion of certain groups from decisions about the transportation system (process or participation equity). Costs Imposed According to the costs-imposed concept of equity, people should pay in proportion to the costs they impose on society (others), including other transportation system users and third parties. This concept comes close to defining efficiency as equitable because it aligns charges with costs imposed by different users.2 Therefore, the costs-imposed concept pro- vides a basis for both the efficiency and the equity justifications for sev- eral policies sometimes described as market based or market like—for example, congestion pricing, carbon and other pollution taxes, and taxes on heavy vehicles proportional to the pavement damage they inflict. Process The concept of process, or participation, equity is an increasingly impor- tant aspect of decision making for the transportation system. Process par- ticipation can take a wide variety of forms, ranging from responses to formal solicitations for public comment, to organizing neighbors to sup- port or oppose a local transportation project, to weighing in at the ballot box on transportation measures. Federal legislation, and that of many states, requires a high level of formal citizen engagement in transporta- tion decisions (FHWA 2000). Moreover, there is some evidence that peo- ple’s perceptions of what is fair often depend on the decision-making process as much as, or even more than, on the outcomes of the decisions.3 Although the opportunity for people to voice their views at meetings, in writing, or on line does not necessarily indicate that those views influ- ence decision making in a meaningful way (Arnstein 1969), there are cases 2 For example, according to the authors of a report on estimating the marginal social costs of freight transportation, information on the extent to which shippers and carriers pay the full social costs of their freight operations would help government to “design policies . . . that promote economic efficiency and . . . establish financing practices that are accepted as equitable” (TRB 1996, p. 1). The reader is referred to the report cited for further discussion of this topic. 3 Lessons learned about the benefits of engaging stakeholders in discussions of road-pricing proposals are discussed in Chapter 5. 

Equity Through Different Lenses 43 where groups concerned about inequities have clearly influenced deci- sions about the provision of transportation facilities and services. For example, decisions about the future of bus service in parts of Baltimore, Maryland, were strongly influenced by public hearings that focused atten- tion on the plight of lower income residents with no alternatives to the bus as a means of transportation (Douglas Duncan, committee member, per- sonal communication, 2009). In Chicago, the transit agency’s decision to close down the Green Line completely to save time and money during the reconstruction process left members of the largely minority communities served by this line without rail transit service for more than 2 years (Jan- uary 1994 to May 1996). As a result, at least in part, of the ensuing public outcry, the Chicago Transit Authority subsequently decided to keep the Brown Line running with reduced service during its reconstruction, even though the project, which ran from February 2006 through December 2009, took longer and cost more than it would have if the reconstruction had been done with a complete shutdown (Joseph Schofer, committee chair, personal communication, 2010). Practical Difficulties in Applying Concepts Although the definitions and examples in Table 3-1 are intended to pro- vide a helpful system for classifying equity, practical applications are rarely straightforward. Two examples illustrate the kinds of difficulties encountered with individual concepts and the overlap between them. In the case of the benefits-received concept, it is difficult in practice to assess and extract appropriate payment for the precise amount of the benefit a given traveler obtains from a transportation facility or service. Different individuals use the transportation system in different ways. In addition, they differ in how they value aspects of travel such as travel time, reliability, and safety. Moreover, such values can vary significantly for the same individual from trip to trip. For example, a business exec- utive may value travel time more highly when traveling to meet with an important client than when taking a leisurely Sunday drive to visit a relative. Overlap between the benefits-received and costs-imposed concepts can also result in some confusion. As already noted, the benefits-received concept is the basis for using the federal motor fuel tax as the primary 

44 Equity of Evolving Transportation Finance Mechanisms method of financing the federal highway system; an individual driver’s fuel consumption is roughly proportional to that driver’s use of the high- way system and presumably also to the benefits received. Fuel consump- tion and use of the highway system are also related to the costs imposed in terms of pavement wear and tear and emissions, however, which leads to uncertainty as to whether the gas tax is benefit based or cost based. Thus, while identifying the equity concept(s) involved in a particular case may be useful in guiding analysis, evaluation, and the search for remedies, the classification itself may well be overlapping or ambiguous. CATEGORIES OF PEOPLE Most of the equity concepts just discussed require identifying impacts on different people. Useful criteria for grouping individuals for the purposes of assessing equity impacts are listed in Box 3-1. These criteria are not independent of one another. For example, there is often a strong correlation between economic status, geographic loca- tion, and use of the transportation system. In addition, one category may sometimes be used as a proxy for another—geographic location as a proxy for economic status, for example. Low-income groups are often concentrated in areas where affordable housing is available, so transporta- tion policy issues associated with such areas may reflect economic status as well as geographic location. BOX 3-1 Criteria for Grouping Individuals • Geographic location, • Economic status, • Generation, • Other demographic characteristics (e.g., sex, age, race or ethnic- ity, physical limitations), and • Use of the transportation system (e.g., drivers, rail commuters, bicyclists). 

Equity Through Different Lenses 45 In addition, the concepts of horizontal and vertical equity, both of which rely on grouping people according to selected characteristics, are commonly encountered in transportation debates. Horizontal equity assesses how members of the same group (e.g., drivers or bus riders) fare relative to one another, whereas vertical equity assesses how members of different groups (e.g., low-income groups versus high-income groups, drivers versus nondrivers, or inner-city versus rural residents) fare relative to one another. Both concepts are part of most people’s ideas of fairness. Geographic Location As noted in the earlier discussion of return-to-source equity, geographic location is very often at the heart of debates about fairness in the allocation of transportation resources; where people work and live can influence how they are affected by transportation investment decisions. Moreover, public officials who make many of the decisions about transportation investments are elected to represent specific geographic jurisdictions. At a national level, debates about the geographic equity of transporta- tion finance often break along state lines, whereas within states, debates are often between urban and rural areas. Within metropolitan areas, debates often highlight differences between a city center and its suburbs or differences among counties, among municipalities, and among neigh- borhoods and council districts. Such debates have been central to many controversial highway and transit funding decisions. For example, urban highway users subsidize rural users (Levinson 2005), and urban transit riders, particularly bus riders, generally cross-subsidize suburban transit users, particularly rail users (Golob et al. 2006; Guenthner and Jea 1985; Taylor et al. 2000). Furthermore, many funding mechanisms are set up to charge nonresidents more than residents (so-called other people’s money), as is the case with highways such as the Chicago Skyway and the Indiana Toll Road that carry a large proportion of traffic from other states (Swan and Belzer 2010). The Chicago Skyway, which is owned by the City of Chicago, mainly tolls commuters from Indiana; trucks using the Indi- ana Toll Road are generally moving freight to and from major U.S. distri- bution hubs, and many are from out of state rather than from Indiana itself. (See the section below on generational equity, including Box 3-2, “Generational Implications of Long-Term Concession Agreements.”) 

46 Equity of Evolving Transportation Finance Mechanisms Concerns about geographic equity extend beyond where revenues are collected to include how and where those funds are spent. Road tolls, for example, can be dedicated to financing and maintaining a specific facil- ity but can also be used to pay for other transportation facilities if allowed by specific policies. Experience has shown that people’s perceptions about fairness in the use of revenues can vary on a case-by-case basis. For example, a sticking point among elected officials voting on plans put for- ward by the Central Texas Regional Mobility Authority was that the pro- posed toll (or user tax) would be used for systemwide financing. In particular, tolls collected on one corridor (US-290 East) would be used to build State Highway (SH) 45 Southwest, despite the fact that commuters who paid the toll on US-290 East were unlikely to be regular users of SH-45 Southwest (Johanna Zmud, committee member, per- sonal communication, 2009). In other situations, however, particularly where benefits are shared by all or most who pay tolls, the tolls are per- ceived as fair. Thus, in the case of the broad system of toll facilities planned for Austin, Texas, tolls from each facility contribute to an over- all system of finance that is seen to benefit everyone, and explicit for- mulas address revenue sharing (Jeffrey Buxbaum, committee member, personal communication, 2010). Economic Status Economic status is another common grouping used in assessing a policy’s equity implications. As already noted, the possibility of poor drivers being unable to use a tolled lane or road because they cannot afford to pay tolls or other fees has motivated concerns about the potential inequities of road pricing. In addition, low-income travelers may not be able to take advantage of discounted payment of fees and charges, such as monthly transit passes or in-vehicle transponders requiring advance payments and the use of credit cards (Schweitzer 2009). The typical measure of economic status is current income, although other measures, such as wealth (accumulated resources), are also used. Adding a layer of complexity, life-cycle average income considers not only current income but also potential income over a lifetime, which can lead to very different results. For example, West (2009) cites students and retired people as groups that may have very low annual income at given 

Equity Through Different Lenses 47 points in time, but high lifetime income; she notes that these different measures can lead to different interpretations of equity effects. Generation Most transportation investments are long-lived, so that both the result- ing services and their financing may affect future generations. It is a long- held tenet of public finance that borrowing for long-lived facilities is fair because it spreads the cost across generations of users, as opposed to cur- rent users paying for future generations (Mikesell 2007). Nonetheless, generational equity concerns have recently come to the fore as some states have relied on debt more heavily to avoid increases in current taxes and others have given up long-term revenue streams in exchange for large up-front payments from the private sector. Extensive use of debt can transfer funding responsibilities to future gen- erations beyond the benefits they will receive. States such as Massachusetts and New Jersey, for example, have commonly used debt financing to sup- port routine operations and maintenance rather than for longer-lived con- struction projects. The long-term impact of such policies is to pass responsibility for today’s expenses to future generations that will not derive a commensurate benefit. Members of the later generations will still have to pay their own current operations and maintenance expenses in addition to retiring the debt incurred for earlier operations and maintenance. Evolving and relatively untested transportation financing strategies, as well as forms of project delivery such as public–private partnerships (PPPs), may raise similar questions about generational equity. For exam- ple, PPPs in the form of long-term leases of existing facilities to private firms have on occasion suddenly and drastically shifted the burden of financing from current taxpayers to future users, because lease agreements have permitted more rapid increases in toll rates than would otherwise be likely (see Box 3-2). Generational equity is also a concern on the investment side. Ignoring major transportation problems today because of the difficulties of fund- ing repairs and upgrades could impose an even bigger bill for repairs and upgrades on future generations. In addition, transportation raises ques- tions about long-term environmental damage, including climate change. As noted in a recent report, addressing climate change now should help 

48 Equity of Evolving Transportation Finance Mechanisms BOX 3-2 Generational Implications of Long-Term Concession Agreements In 2005, the City of Chicago granted a 99-year concession on the Chicago Skyway, a toll connector linking Interstate 94 to the Indi- ana Toll Road. For an up-front payment of $1.8 billion, the con- cessionaire took on responsibility for maintaining the bridge and roadway and collecting tolls, with future toll increases contractu- ally stipulated. A year later, Indiana granted a 75-year concession for the Indiana Toll Road for a $3.8 billion up-front payment, on similar terms (FHWA 2008). In Chicago’s case, some of the up- front payment was used to pay down existing city debt, and in Indiana’s case, some was used to fund the 10-year highway work program. In both cases, the concession was a way to extract mar- ket value from the facilities in exchange for a future, escalating stream of toll revenues. Potential concerns about generational equity arose because some of the up-front payments were used to fund improvements with life spans of considerably less than the concession periods. As a result, future toll payers are likely to be paying to retire debt on past improvements that will have been subsequently retired, rebuilt, or replaced. avoid costly future investments and disruptions to operations; conversely, ignoring climate change now could result in even more deleterious effects and heavy cost burdens on future generations (TRB 2008). Other Demographic Characteristics Characteristics such as sex, age, race or ethnicity, language isolation, and physical limitations may be used alone or in combination with income to define groups for the purposes of equity assessment. Federal and state laws often require a focus on such groups in situations in which special needs can be addressed through transportation policies or in which the 

Equity Through Different Lenses 49 groups incur additional costs as a result of transportation policies. For example, the 1990 Americans with Disabilities Act (ADA) requires that transportation providers make certain efforts to serve travelers with dis- abilities, and the 1964 Civil Rights Act, in conjunction with presidential directives about environmental justice, focuses on groups likely to suffer disparate impacts from transportation (and other) policies (see Chapter 1). Thus, U.S. Department of Transportation regulations issued pursuant to ADA expressly require public entities operating fixed-route transit sys- tems to provide complementary paratransit service for mobility-impaired groups comparable to their fixed-route service. This stipulation has been used by plaintiffs to secure improved paratransit scheduling, routing, and vehicles. Use of the Transportation System Travelers can be grouped according to their use of the transportation sys- tem, such as by mode used (e.g., motorists, train or bus riders), direction of travel, and time of day when travel occurs (e.g., rush hour versus off-peak times). These groupings are based largely on choices made by travelers—for example, whether to drive or take transit or whether to avoid rush hour travel by working a flexible schedule. Whether such choices are constrained by factors beyond travelers’ control needs to be taken into account in any equity assessment. For example, if affordable housing and job locations are not served by public transportation, low- income motorists cannot reasonably switch to transit to avoid tolls (see the section on impacts on travelers later in this chapter). EQUITY ASSESSMENT This report focuses on equity as a criterion for assessing transportation finance mechanisms. In practice, however, equity is rarely the sole cri- terion considered by public officials making decisions on transportation investments. Efficiency, the relationship between inputs (costs) and outputs (benefits), is frequently an important consideration and is the criterion underlying traditional and fundamental benefit–cost and cost- effectiveness evaluations of projects and programs. Decision makers and their constituents often strive for efficiency in seeking to get the 

50 Equity of Evolving Transportation Finance Mechanisms most “bang for the buck” in transportation investments. There may, however, be a trade-off between efficiency and equity—or among effi- ciency, equity, and a range of other criteria. For example, the most effi- cient transportation solution from the perspective of benefits and costs could be to collect taxes and use them to direct new services to the most mobile and economically secure travelers. On the other hand, equity con- siderations could lead to choices that distribute services more broadly across income groups or even focus them where mobility need is great- est. The solution to such dilemmas calls for a broad perspective and is almost never formulaic. In assessing the equity implications of a transportation finance policy, it is important to remember that the financial and other burdens imposed on individuals and groups are a consequence of investments in facilities and services benefiting individual travelers, businesses, and society as a whole. Examination of a policy’s equity implications includes analyzing and evaluating these benefits, which are the reason for raising the funds in the first place. If the funds collected are directed broadly across a trans- portation system—for example, to provide general operating support for a transit system—isolating the benefits associated with a particular financing mechanism may be difficult. The task is easier if the revenues are directed to a specific project, such as a replacement bridge or a tran- sit line extension. In either case, however, explicit consideration of the benefits produced by the new funds is needed to avoid losing sight of the fundamental purposes of transportation facilities and systems. Winners and Losers The fundamental objective in assessing the equity implications of a trans- portation finance mechanism or policy is to determine how the policy affects different groups (e.g., drivers, the elderly, residents of a particular county or geographic area, low-income groups) and to decide whether these impacts, taken together, are judged to be fair or can be rendered so by taking steps to remedy inequities. There may be opportunities to com- pensate the losers—for example, through subsidies or rebates or by pro- viding or improving alternative transportation services (see Chapter 4). The decision about what is fair in a particular case is ultimately made by elected representatives (politicians). 

Equity Through Different Lenses 51 Short- and Long-Term Impacts Identifying the full range of likely impacts of a policy is complicated and subject to uncertainty. People often change their behavior in response to a new policy, and the actual impacts may differ from those anticipated by experts and estimated using analytical tools. In particular, impacts may be shifted to another party, as noted in Chapter 2 and discussed more fully later in this chapter. Some of the behavioral changes are likely to occur in the short term and others in the longer term, so the full impact of the policy may not be known for some time. For example, in discussing consumer responses to an increased gasoline tax, West (2009) reports that a 10 percent increase in the price of gasoline may reduce consumption by as little as 1 percent in the short term, but by an estimated 3 to 9 percent in the long term. This difference between short- and long-term impacts reflects the time it takes for travelers to change some of their behaviors. Whereas people may make increased use of carpools or transit in the near term, retiring older or second cars and possibly replacing them with more fuel-efficient models usually takes longer. In addition, transportation investments affecting land use often have both short- and long-term equity implications. For example, people liv- ing close to the stations on a new light rail line may enjoy increased mobility in the short-term as a result of the policy makers’ decision to invest in the line. The impacts of the new light rail line may be mixed in the longer term, however; for example, although the new line may increase the value of homes for existing owners, it may also increase property taxes, rents, and the price of land for new buyers. Resulting gentrification may cause owners and renters to move, some willingly, others reluctantly (Freeman 2005). While owners who choose to sell in a gentrifying area may reap windfalls, tenants may simply be forced out by rising rents. Economic and Other Burdens Equity depends in part on the burdens imposed by a financing system. A first step in determining those burdens is to determine the direct eco- nomic burden of the payments themselves, and the next section of this 

52 Equity of Evolving Transportation Finance Mechanisms chapter discusses ways this can be done. There are, however, further eco- nomic and other burdens to be considered. For example, West (2009) observes that low-income households consume more gasoline as a frac- tion of income than higher income households, but that this apparent regressivity 4 is reduced because low-income households are also more sensitive to gasoline prices. As gas taxes rise, lower income families may reduce their gas consumption up to twice as much (in proportion to initial consumption) as higher income households. Technically a tax cannot be regressive if low-income people do not pay it, but using regres- sivity alone to assess the impact of increased gas taxes is misleading. Being forced to depend on alternatives to the car may place substantial time and other burdens on households; many studies in the United States and abroad suggest that using public transit to access many destinations may impose great costs in time and inconvenience (Blumenberg and Manville, 2006; Giuliano and Schweitzer 2010; Sanchez 2008). More- over, other research suggests that it simply may not be possible to reach the majority of jobs or other important destinations in most metropoli- tan areas at all without a car (Baum 2009; Cervero et al. 2002; Dargay and Hanly 2007; Giuliano 2005; Ong 1996, 2002; Rogalsky 2009; Rosenbloom and Plessis-Fraissard 2010). The lack of both a car and public transit access has been linked to social isolation and a lack of social capital for whole areas and classes of low-income, elderly, and disadvantaged travelers (Delbosc and Currie 2011; Priya and Uheng 2009; Sanchez et al. 2007; Stanley et al. 2010). Thus, if rising fuel taxes prevent low-income families from traveling by car, these families may suffer substantial economic burdens and perhaps social and psychological problems (Lucas et al. 2009). These broader economic, social, or other burdens are more difficult to measure than monetary payments, but they may be equally important or more impor- tant to the people affected. Therefore, a complete equity analysis needs to take such burdens into account. 4 A regressive tax is one that takes a greater share of the income of the poor than of the rich; in contrast, a progressive tax takes a greater share of the income of the rich than of the poor (Rosenbloom 2009). A proportional tax is one that imposes the same relative burden on all income groups. 

Equity Through Different Lenses 53 Comparison of Alternatives Some observers have suggested that high-occupancy toll (HOT) lanes should be rejected because they are regressive. As Weinstein and Sciara (2004) note, however, HOT lanes (and other evolving transportation finance mechanisms) do not exist in a vacuum, and their equity impli- cations need to be assessed in comparison with alternatives such as sales taxes and gas taxes, both of which are also regressive. In practice, ana- lyzing the impacts of wholesale shifts in financing strategies is challeng- ing and depends on how broadly policy alternatives are defined. As a result, the equity implications of different transportation finance poli- cies are most frequently evaluated on the basis of differential or mar- ginal impacts, that is, relative to some other policy, such as the current financing arrangement. Schweitzer (2009) notes that researchers have generally focused on examining different variants of the same type of finance policy, such as cordon tolls of different sizes, at different toll levels, or with different revenue allocation strategies. Detailed compar- isons of the incidence of very different transportation finance policies, such as a sales tax and a traditional user charge, have only rarely been undertaken. DISTRIBUTIONS OF BURDENS AND BENEFITS The equity implications of a transportation finance policy depend on how its effects, both positive and negative, are distributed among differ- ent groups. Identifying these effects and describing their distribution involves analyzing the policy’s incidence—that is, determining who bears the burden and who receives the benefits. Careful examination of all the costs and benefits, both monetary and nonmonetary, is then needed to assess the policy’s equity implications. As discussed briefly in Chapter 2, the distribution of a policy’s finan- cial burden is not always immediately apparent. If groups are able to modify their behaviors in response to a policy, they may shift some or all of the burden of a tax, fee, or price change onto others. Therefore, the eventual burden of the policy—and its equity implications—may differ dramatically from that originally envisaged by policy makers. Two exam- ples, the gas tax and a weight–distance tax on trucks, illustrate how shifts 

54 Equity of Evolving Transportation Finance Mechanisms of transportation cost burdens may occur in practice and provide a num- ber of lessons for equity analysis. The Gas Tax Figure 3-1 portrays schematically some of the primary ways a tax on motor fuel (gasoline and diesel) may be shifted and how it may affect transportation usage. In the first instance, the tax is levied on fuel distributors, who then include some or all of it in the price they charge fuel retailers. Fuel retail- ers in turn will try to incorporate the tax into the price they charge pri- vate drivers and businesses who purchase fuel; if they succeed, then the tax has been shifted from distributor to retailer and from retailer to con- sumer. It is not certain, however, that fuel retailers can in fact raise their prices by the full amount of the tax, because they are competing with each other for customers, and the nature of that competition dictates the ultimate price that prevails. In general, the more competitive the industry, the more fully its members can shift the tax forward while Motor Fuel Tax Income Tax Reduced Deduction Tax Revenues Fuel Distributors Business Travel More Efficient Vehicles Private Fuel Drivers Retailers Personal Reduced Auto Travel Travel (fewer trips, more transit) Reduced Auto Travel Businesses More Efficient Vehicles (Shippers, Carriers) Reduced Cost-absorbing, shifting entities Shipments Increased Potential cost shifts Prices Effect of tax on travel FIGURE 3-1 Motor fuel tax: an example of shifting the transportation cost burden. 

Equity Through Different Lenses 55 at the same time suffering some loss of business and probably some business failures. Both theory and empirical evidence suggest that the effect of the gaso- line tax on prices may differ in urban and rural markets. The theoretical reasoning is as follows. In urban markets, gasoline retailers are highly competitive, with each individual retailer unable to influence the prevail- ing price. As a result, retailers enter or exit the market relatively smoothly in response to any changes in drivers’ purchases of gasoline. This causes a near-total pass-through of a tax increase into the retail price; virtually all the tax burden is shifted to consumers, which results in a modest reduction in gasoline sales. In rural markets, by contrast, retailers have some market power but also have fewer alternative options for using their land and facilities.5 This situation affects their ability to pass the tax through in ways that depend on the exact nature of competition among them. Empirical evidence suggests that there is indeed some difference between rural and urban markets, although this difference is not large (West 2009). Mostly the evidence shows that rural retailers absorb some portion of the tax (Alm et al. 2009), presumably because their reduced flexibility in exiting the market more than compensates for any increased flexibility resulting from market power. The example of the gas tax highlights two of the most far-reaching implications of incidence analysis. First, the ultimate burden of a tax or other financial charge depends in part on the nature of the competition in affected markets. Second, the financial burden is usually shifted away from parties that are highly responsive to price and toward parties that are relatively unresponsive. Those consumers that are businesses may accept lower profit mar- gins or may further shift the burden to their customers by raising their prices, as shown in the bottom portion of Figure 3-1. At the same time, both businesses and private drivers may reduce the impact on them- selves by modifying their behavior—for example, by reducing their automobile travel and freight operations through routing efficiencies and consolidation or by shifting to more fuel-efficient vehicles. Parties 5 The longer the time between changes in a tax rate, the more responsive is supply likely to be as developers and investors find ways to add or subtract from the inventory of retail outlets. 

56 Equity of Evolving Transportation Finance Mechanisms that can reduce the impact on themselves most successfully—for exam- ple, a business with good access to a rail freight terminal or a commuter with an attractive public transit option—can reduce the ultimate bur- den relative to parties that have poorer options or a stronger preference for their original behavior. Weight–Distance Tax on Trucks As noted in Chapter 2, several states charge trucks a form of vehicle miles traveled (VMT) tax at a rate that depends on truck weight (usually reg- istered gross loaded weight) and distance traveled. As with the gas tax, the response to a weight–distance tax (or, indeed, to any usage-based toll imposed on trucks) depends on both the level of the tax and the struc- ture of competition within the directly affected industry—in this case, mainly the motor carrier industry, but to some extent the competing railroad industry as well. Owner–operators tend to exist within a very competitive environ- ment: each is too small to appreciably affect the price charged to ship- pers, and there is easy entry into and exit from the industry. For this reason, the new equilibrium price following implementation of, or an increase in, a weight–distance tax is likely to go up by close to the same amount as the tax; that is, the carriers shift most of the economic burden to their customers (shippers). This does not mean the owner–operators are unaffected; on the contrary, to the extent that shippers cut back on truck shipments, some owner–operators will be forced to reduce their operations or even to go out of business. That there is free entry into and exit from the industry means, however, that most such operators have other options that pay almost as well as trucking (see, for example, Global Insight, Inc. 2005); or, to put it differently, they were barely mak- ing enough to keep them in business to begin with. Therefore, their exit involves a relatively small overall economic burden, even though the burden on individuals, groups, or communities may be significant as a result of the disruption and inevitable transition difficulties such eco- nomic changes are likely to entail. Larger companies may operate in somewhat less competitive envi- ronments, meaning that each company must account for its possible loss of market share if it raises prices. To put it differently, larger companies 

Equity Through Different Lenses 57 have some market power enabling them to withstand some loss of profit without exiting the industry. As a result, they probably cannot fully shift the tax to their customers; they have too much invested in the business to abandon it easily, and therefore retain more of the direct economic burden. Many entities besides motor carriers may be affected by a weight– distance tax. Examples include roadside services, markets for new and used trucks, the labor market for truck drivers, and even capital markets in which trucking firms raise money for investment or working capital. In general, it is impossible to account fully for all the simultaneous price changes that are triggered by a change in a tax affecting truck movements, especially since they all affect each other as well as being affected by outside forces such as international trade, unionization, safety regulations, and technological innovations. Because of the complexity of analyzing multiple interconnected markets, every quantitative incidence analysis—and therefore every quantitative equity analysis—requires models that approximate the economic changes triggered by the policy being considered. To date, such models have rarely been used to inform political debates over transportation finance equity. When such models are used, different answers may be obtained using different simplifying assumptions; accounting for tax or benefit shifting can completely change the results of an equity analysis. Again, the case of a weight–distance tax on trucking is illustrative. At first blush, the tax burden is borne by the trucking industry, and so an equity analysis would need to consider how tax payments are distributed among the various entities that are part of this industry. If the taxes are fully or partially shifted to shippers, however, the analysis also needs to consider the distributional aspects of increased costs to shippers. Indeed, if such shifting were complete, the distribution of payments among truck- ers would be of no relevance. Having to consider shippers unquestionably complicates the analysis, because shippers are a diverse group and most are involved in markets in which they may further shift the impacts. If the extent of shifting from truckers to shippers is believed to be minor, it might be ignored for practical reasons, but any such decision would need to be justified. 

58 Equity of Evolving Transportation Finance Mechanisms Lessons for Equity Analysis Shifting of Burdens and Benefits The preceding discussion and examples provide lessons for equity analy- sis. First and foremost, any transportation finance equity analysis that con- siders only the nominal payers of taxes or fees is incomplete and may well be misleading. The starting point of such an analysis must be who bears the burden (and receives the benefit) of a given policy. The policy’s ultimate effects, including its equity implications, may be different either from the intended impact of legislation or regulation or from the effects perceived by elected officials and members of the public debating the policy. The effects of any public policy take place within an economic system in which individuals and institutions are continuously responding to their environments. As a result, an important—but challenging—step in equity analysis is to explore and estimate how the burdens (or benefits) of poli- cies are shifted through market forces. The examples of a gas tax increase and a weight–distance tax on trucks illustrate ways in which a tax may be imposed on one party but really paid by another—that is, shifted. Shift- ing of benefits may also occur. For example, if a new highway or transit link improves the accessibility of an apartment complex, rents may rise as a result, thereby shifting the benefits from tenants to landlords. Price Responsiveness One of the most far-reaching findings of economic incidence analysis is that the degree of shifting depends on how responsive parties are to prices. Specifically, the burden of a tax or other financial charge tends to be shifted away from parties that are highly responsive to price and toward parties that are relatively unresponsive. In the truck weight–distance tax example, owner–operators are highly responsive to prices but large truck- ing companies are less so (Dornan 2008), which causes the former to shift more of the burden to customers. The principle by which price-sensitive groups shift burdens (or bene- fits) to groups that are not price-sensitive works on both the supply and demand sides of markets. Suppliers who are relatively unresponsive to price have few options to continuing in business, while consumers who are unresponsive to price have few options to continuing their purchases. In each case, the parties with fewer options are less able or willing to enter 

Equity Through Different Lenses 59 or exit the market in response to a tax or fee, which makes them vulnerable to the greater flexibility of the other side of the market. In the case of relatively unresponsive consumers, the result can be seen as charging what the market can bear; that is, a fee tends to get passed through insofar as the higher price fails to reduce sales, as both the gas tax and weight–distance tax examples illustrate. Price responsiveness is typically measured as an elasticity,6 which is the (percentage) change in quantity supplied or demanded as a result of a change in price, divided by that (percentage) change in price. Much inci- dence analysis involves measuring the price elasticities of both suppliers and consumers (see, for example, West 2009). Economists typically view those who alter their behavior to avoid a tax as being “successful” at avoiding the tax burden. Nonetheless, when low-income consumers stop making some desired trips because of the tax-induced burdens of higher fuel prices, for example, they may bear significant nonmonetary burdens, as noted earlier. Impacts on Landowners Land is thought to be one of the most inelastically supplied commodities, because there is only a finite amount of it (O’Sullivan 2008). Changes in transportation costs can have important effects on land markets by differ- entially affecting particular locations, with resulting implications for equity. For example, a system of toll financing for roads will affect people who live, work, or shop nearby, and their responses to tolls will in turn affect the demand for use of land at those locations. Landowners often have few options for alternative land uses, so it is likely that some or all of the burden of toll financing will be shifted to them. They may nonetheless benefit if toll roads increase the value of their land. Landowners are also likely to have very different characteristics than toll-paying travelers, and accounting for shifts in the burden of toll financing could change an equity analysis quite drastically. Therefore, the strong role taken by central city and suburban landowners in transportation projects—whether in 6 In economics, elasticity refers to the degree to which individuals (consumers or producers) change their demand (consumers) or amount supplied (producers) in response to price or income changes. For example, elasticity is used to assess the change in consumer demand as the result of a change in the price of a good or service. 

60 Equity of Evolving Transportation Finance Mechanisms promoting government-subsidized transit that boosts the value of their land or in opposing financing proposals that are likely to decrease the value of that land—may reflect the importance of the shifting of benefits and burdens to landowners. Such shifting substantially changes the distribu- tional impacts of policies, and therefore their equity implications. Impacts on Travelers Even if consumers or other economic actors who are taxed are unable to shift the burden to others, they may moderate their burden by purchas- ing less of the taxed good. This behavioral change does not eliminate the burden, because consumers must forego the benefits of consuming the taxed product; but it does reduce the direct economic burden compared with the case in which they had no option other than to pay the tax. Therefore, the more price-sensitive a group is, the less burden that group receives from a tax or other price increase, even if it cannot shift the bur- den to some other group. In the case of consumers, the burden is mea- sured by the change in consumer surplus (net benefit), a measure of how much the product is worth to them over and above what they pay for it (West 2009). Consumers who reduce their use of a transportation service because the price goes up lose some of that consumer surplus. As noted earlier, focusing on the success of price-sensitive travelers in adjusting their travel behavior to avoid paying transportation taxes or fees paints an incomplete equity picture. A key question for transportation finance equity centers on the ability of price-sensitive travelers and ship- pers to avoid paying some or all of the tax or fee while still enjoying desired access benefits. For example, in the event of an increase in the gas tax, a price-sensitive traveler wishing to avoid higher travel costs resulting from the tax increase may have several options available: • Choosing to purchase a more fuel-efficient vehicle to reduce fuel (and fuel tax) costs without making any changes in travel behavior; • Choosing to substitute walking, biking, public transit, or carpooling for some trips; • Traveling to closer destinations or chaining various activities together so as to travel fewer vehicle miles to complete the same number of activities; or • Avoiding undertaking some desired activities altogether. 

Equity Through Different Lenses 61 Travelers who choose one or more of the first three options incur bur- dens in reducing their fuel consumption in the face of an increased gas tax but are still able to complete desired activities. In the fourth case, however, a price-sensitive driver with few alternative access options who simply forgoes desired activities to avoid paying an increased gas tax can be said to have paid a less visible but very real price in terms of reduced access (and consumer surplus). Economic and Noneconomic Impacts As the foregoing discussion illustrates, incidence shifting changes the nature of both economic and noneconomic equity considerations. Shift- ing of the truck weight–distance tax further illustrates this point. If the tax is mainly shifted to particular local industries, such as mining, it may have disproportionate effects on local communities dependent on that indus- try. Similarly, if highway truck stops play a particular social role in a region, a change that makes them less economically viable may affect that role. The impacts of a policy or financing mechanism are often measured in terms of monetary costs and benefits, with nonmonetary effects, such as time lost or gained, converted into monetary units through studies measuring consumers’ willingness to pay to acquire or avoid these effects (see, for example, Brownstone and Small 2005). The practice of convert- ing nonmonetary effects into monetary units facilitates comparisons of like with like by reducing disparate types of impacts to a single metric, although the degree to which nonmonetary effects can be reliably mon- etized remains a subject for debate. It is also important for informed equity assessments to ensure that potentially significant nonmonetary impacts are not overshadowed by more readily quantifiable monetary or monetized outcomes. CHAPTER HIGHLIGHTS • Equity (fairness) in transportation finance policy can be viewed from a variety of overlapping, and often contradictory, perspectives. In surface transportation policy debates, geographic equity has traditionally dom- inated considerations of fairness. Other perspectives are increasingly relevant, however, and changes to the current system of transportation financing could result in a wider range of equity concerns gaining 

62 Equity of Evolving Transportation Finance Mechanisms traction in policy debates. For example, generational equity concerns have recently come to the fore as some states have relied on debt more heavily to avoid increases in current taxes and others have traded long- term revenue streams from tolled facilities for large up-front payments from the private sector. • Recognizing the diverse perspectives on equity and the different groups potentially affected by a policy can help decision makers – Anticipate which groups may raise equity concerns when road pric- ing and other evolving transportation finance mechanisms are considered, – Anticipate what those concerns may be, – Clarify conflicting and overlapping equity issues, and – Seek ways to modify the finance plan or to find remedies to offset inequities, or both. • The burden (or incidence) of a policy designed to raise revenues for transportation may fall dramatically differently from that stated in legislation or regulation, as illustrated by the examples of the gas tax and a weight–distance tax on trucks. In general, a complex array of market forces and changes in travel behavior determines the ultimate distribution of policy burden. The actual burdens people and busi- nesses experience as a result of finance mechanisms are not always obvious, because there are numerous opportunities to shift costs to others. People and firms that are most cost sensitive are usually most willing, and often most able, to shift the burden away from them- selves. Therefore, it is important in equity analyses to consider care- fully the ways in which financial and other policy burdens may be shifted and where they may ultimately fall. • An informed assessment of the equity implications of a transportation tax or fee involves examining both economic and noneconomic bur- dens. In response to a new or increased tax or fee, people may forgo trips or otherwise change their travel behavior in ways that avoid or reduce the economic burden but impose a significant social burden because of reduced access to job opportunities, services, social networks, and so on. Thus, focusing exclusively on economic burden by classifying a tax or fee as regressive, proportional, or progressive provides an incomplete picture of its equity impacts. 

Equity Through Different Lenses 63 • Decision makers will need to pay particular attention to the possibility that people in certain locations may be adversely affected by evolving finance policies, given the importance of geographic equity to elected officials. Decision makers will also need to consider whether wealthy people benefit more than lower income groups from proposed finance policies, or whether the wealthy benefit and low-income groups lose out. As always with questions of equity, the benefits and burdens may not be obvious. • Important questions for decision makers to ask concerning a trans- portation finance policy’s burdens and benefits include the following: – Who makes direct payments? – Who receives direct benefits, including time and reliability savings? – Who is most likely to change his or her behavior to avoid a new or increased tax or toll? Are there social implications beyond the individ- ual burden of changing travel behavior, such as loss of an industry or isolation of the elderly? – Are there viable alternatives that satisfy the travel needs of those who reduce their automotive travel in response to new or increased taxes or tolls? – What businesses are likely to be affected and how? – How will the revenues be spent, and who is likely to benefit from these expenditures? – How will the costs and benefits be distributed over time (genera- tions)? – Are land prices likely to shift in response to changes in transporta- tion costs? If so, will the burdens of the policy shift to different groups? How will location patterns (e.g., gentrification, areas of job growth, retail development) respond to shifts in land prices? REFERENCES Abbreviations FHWA Federal Highway Administration TRB Transportation Research Board Alm, J., E. Sennoga, and M. Skidmore. 2009. Perfect Competition, Urbanization, and Tax Incidence in the Retail Gasoline Market. Economic Inquiry, Vol. 47, No. 1, pp. 118–134. 

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