Free Public Transit Paid for by Property Tax

When I used to work in the Netherlands, I once had a discussion with some of my colleagues during lunch at the university cafeteria. I was recently reminded of this discussion and thought of sharing it here.

The discussion was about the cost of checking tickets on trams, metros and trains. As the economics of crime and punishment suggests,  it is more efficient not to check every passenger for tickets every time but instead to check infrequently and fine heavily those found travelling without tickets. (Usually in the Netherlands they say that you travel for free until you get caught.) My colleague who is an expert on urban land and property taxation issues then threw a proposition which wasn’t entirely new to me: that public transport should be free and that it should be paid for through property taxes. The argument is: it would remove the need to put resources for ticketing and ticket checking. But also that it would encourage people to use public transport more than private cars (positive for the environment and in some cases reduce travel time).

Some of us immediately started thinking about free-rider problems. They were quickly dismissed as non-arguments by my colleague who had suggested this idea. The renters would indirectly pay for their travel through increased rent that they would pay to the landlord to cover for the higher property taxes. The people who live outside the city and commute to the city for work will pay through their employers who rent work space for which property tax is paid. Out-of-city tourists will pay their part when they shop in the city or visit museums or eat at a local restaurant or stay in a hotel – each of those businesses, if located within the city will be paying property tax and the price of their services will include the added cost of free public transit in the city.

There will invariably be some free riders – for instance, poorer tourists or backpackers/campers who do not spend enough in the city for its propertied class to justify paying for her/his local travel needs. But lets suppose that the numbers of such free-riders are comparable to the current ticketless travellers who do not get caught. Would this then be a cheaper and fairer system to finance a public transit when compared to the user-fee model? Lets consider some problems in this proposal.

First, there will be some who would pay higher property tax even though they don’t have much local travel needs – the retired people, for example might object to this proposal. It would be a bit unfair for them to have to pay for the travel needs of those who travel more frequently and those who travel long distances. There will be no monetary incentive for people to select their residential location close to their workplace. And there will be boundary problems: people will move right at the edge of the city just outside the city limits thus avoiding paying higher property taxes but still availing free public transport. This would only work if this system is formulated at the metropolitan level, therefore avoiding the boundary problem. Also a growth boundary with protected open space around the metropolitan area will be needed to avoid any developments sprouting at the edges of the city.

Nonetheless, the idea was quite appealing to me and made a lot of sense. And I started wondering why it has not happened already. Possible explanations might be that whichever city implements such a policy, the perception is that this city will become less competitive for corporations and potential investors who can always move capital to cities with lower taxes. (Businesses like to put the bulk of the burden of developing urban infrastructure on their workers.) The challenge would then be introduce an element of reward for early-adopting cities that can offset the initial misgivings about making the city less business-friendly that can serve as exemplars for other cities who will then adopt such a policy to provide free public transport paid for from property taxes. Can someone suggest a way to solve this problem?

For an annotated bibliography on this topic, readers might want to have a look at this.

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