Rough times.

Photographer: Micah Walter/Bloomberg

How to Fix DC's Metro

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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The Washington Metro, the country’s second-busiest rapid transit system, has been having a tough year. A tough half-decade, really.

Last month the whole system shut down for a day for emergency inspection and repair of electrical cables; soon after, a top official warned that entire lines might need to be idled for up to six months for maintenance. Train delays are rampant, and ridership has been declining since 2010, even as the region’s population continues to grow.

The Washington Post’s Robert McCartney and Paul Duggan have written an epic examination of what went wrong. It’s fascinating but also a little frustrating -- because they find so many potential culprits. Still, two issues stand out.

One is the system’s governance, with authority shared equally among board members appointed by the District of Columbia, Maryland, Virginia and the federal government:

Board members past and present complain that nothing important gets done unless the District’s mayor and the governors in Annapolis and Richmond reach a consensus and push an issue forward. But the three often have divergent interests or are too busy with other matters to give Metro the attention it needs.

The other is its funding:

It’s about a $3 billion-a-year agency without dedicated funding (unique among big U.S. transit systems) going hat in hand to the governments of Maryland, Virginia and the District, seeking annual operating subsidies from three jurisdictions with differing priorities and budget constraints.

The two problems are surely related: It’s hard to agree on a dedicated funding source with two states and a state-like entity that’s subject to lots of congressional meddling. And I’ll admit that I don’t have any brilliant ideas for fixing this governance quagmire.

On the funding source, though, one solution springs to mind. The Washington Metro needs subsidies because, like many other transit systems around the world, it does not take in enough in fares to pay for operations. Like other transit systems, Metro delivers economic gains to non-riders by reducing car traffic, lessening the need for parking, stimulating local economic activity and generating other kinds of what economists call positive externalities. Many of those gains are diffuse and hard to reliably quantify, though, and there are those who dispute that they’re really big enough to justify all the taxpayer dollars spent on transit.

There is one positive externality from public transit, though, that is pretty easy to measure. Study after study after study has showed that, in the Washington area and elsewhere, having a rapid transit station in the neighborhood almost always increases property values. A recent report by the Washington D.C. Economic Partnership estimated that 78 percent of new construction in Washington through 2030 will be within half a mile of a Metro station. Shouldn’t Metro be able to tap into some of the real-estate riches it has clearly played a big role in creating?

There’s a term for this -- land value capture -- and the global gold standard for it is Hong Kong’s MTR (for Mass Transit Railway) Corporation. From a 2013 Atlantic article:

The MTR strikes a bargain with shop owners: In exchange for transporting customers, the transit agency receives a cut of the mall’s profit, signs a co-ownership agreement, or accepts a percentage of property development fees. In many cases, the MTR owns the entire mall itself. The Hong Kong metro essentially functions as part of a vertically integrated business that, through a "rail plus property" model, controls both the means of transit and the places passengers visit upon departure.

In recent years, some U.S. transit systems have used elements of the land-value-capture approach to finance expansions. The extension of the 7 subway line to Hudson Yards on the far West Side of Manhattan has been paid for in part by bonds backed by property taxes and fees generated by development around the new station. The Washington Metro’s extension to Dulles Airport is being paid for in part by taxing landowners along the new line. 

What land value capture doesn’t seem to be used for in the U.S., though, is funding ongoing transit operations. It’s a little hard to imagine a U.S. transit agency being transformed into a vertically integrated rail-plus-property business along the lines of Hong Kong’s MTR -- although that might not be a terrible idea -- but you'd think that property taxes would be a more significant source of transit income than they are. A quick examination of the dedicated funding sources for the four biggest U.S. rapid-transit systems besides Washington's -- New York’s, Chicago’s, Boston’s and San Francisco’s -- indicates that sales taxes are the main common denominator and taxes on property play a modest role.

There are historical and political reasons for this. Property taxes are the largest source of local-government tax revenue in the U.S., meaning that they’re used to fund schools, street repairs and other local services and that attempts to divert them for region-wide purposes are likely to meet resistance. They also appear to be the least popular of taxes, so politicians probably aren’t eager to propose increasing them.

But it still seems like a huge missed opportunity when what may be the most easily quantifiable benefit of rapid transit -- increasing property values around train stations -- is so seldom tapped to help pay for it. In the Washington area the real-estate boom around stations has been especially dramatic. How about giving Metro some more of the money it's generating?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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