Chapter Seven—
The Federal Role in Urban Transportation

Jose A. Gomez-Ibañez

The federal role in urban transportation increased in size and scope after World War II. In the late 1950s and early 1960s, federal involvement was largely limited to grants for urban segments of the Interstate Highway System, but by the late 1960s and early 1970s it included aid for other types of urban highways and for mass transit as well. At first, federal assistance was confined to aid to capital expenditures, but it gradually broadened to include some operating and maintenance expenses. By 1980, federal aid accounted for as much as 40 percent of all government capital spending on urban highways, 80 percent of capital assistance for urban mass transit, and 30 percent of mass-transit operating subsidies.

The Reagan administration proposed to reduce federal aid for urban transportation significantly, by restricting highway aid largely to the Interstate Highway System, by phasing out operating aid for mass transit, by reducing transit capital aid, and by allocating transit capital grants by formula rather than project by project. Congress rejected most of these proposals in 1982, when it restored or substantially increased funding for many of the existing programs.

While some of the proposals made by the Reagan administration may be undesirable, the idea of forcing local governments to assume more responsibility for decisions about the level and mix of urban transportation spending has merit. The rationale for extensive federal involvement in urban transportation is weak, and several of the federal programs, particularly grants for Interstate Highway construction and mass transit capital projects, probably distort local transportation decisions. Reduced

federal aid for highways and mass transit might impose temporary financial hardships, but in the long run most urban areas would probably be better off.

Development of Federal Programs

Urban Highway Aid

Early Federal Aid

Federal highway aid began in 1913 but was largely confined to rural roads until after World War II.^[1] The first highway program apportioned federal funds among the states to cover up to one-half the construction costs of rural post roads, roads over which the mail was carried. In 1921 the federal program was restructured and federal aid was restricted to two types of highways: primary or interstate highways, and secondary or intercounty highways. Each state, in consultation with the federal government, could designate a small portion of their highway mileage as part of these federal aid systems. Highway aid was apportioned among states on the basis of a formula that considered population, land use, and rural-post-route mileage.

Until the Depression, urban highways were specifically excluded from federal aid mileage. Public works relief legislation in 1932 and 1933 provided some temporary funding for urban highway construction since many of the unemployed were city dwellers, and in 1934 the prohibition on including urban mileage in primary or secondary systems was eliminated. Not until the Federal Highway Aid Act of 1944 was specific authorization made for urban highways. This act established three distinct categories of federal-aid highways: primary and secondary rural highways (which were to receive 45 and 30 percent of all aid, respectively) and urban extensions of the primary and secondary routes (which were to receive only 25 percent of the aid).

The Postwar Construction Boom

Pressures to increase highway spending mounted after World War II as postwar prosperity fostered automobile ownership and use. During the 1940s and 1950s urban highway traffic grew at almost double the rate of the urban population, as higher incomes encouraged travelers both to increase the number of trips they made and to make more of them by automobile rather than mass transit (Table 7.1).

Federal aid for urban highways became available on a large scale in 1956, when the federal government responded to the rapid traffic growth by funding the Interstate and Defense Highway System. Under the Interstate program, federal grants paid 90 percent of the construction costs of a congressionally designated system of 42,500 miles of limited access highways. The system was initially conceived as serving intercity travel and bypassing major cities but, under pressures from urban interests, about 20 percent of the final system was located in urban areas. Urban mileage accounted for an even larger share of Interstate program expenditures, since the urban segments were often wider and more costly than their rural counterparts. Unlike the primary and secondary road programs, Interstate grants were to be distributed to the states on a project-by-project basis rather than by formula. In 1970 Congress also established a new federal-aid urban system, instructing the states to designate for the new system mileage that supplements (but does not overlap) the older urban extensions; aid for the urban system is allocated to states on the basis of urban population. Thanks largely to the Interstate program, the federal share of highway capital spending by all levels of government grew from only 10 percent in 1950 to around 40 percent in the 1960s. While in 1950 federal grants were almost exclusively for rural roads, by the 1960s and 1970s many federal highway dollars were spent in urban areas.

Disenchantment with Highways

During the 1960s many social and environmental costs of highway construction and automobile use became apparent. The first focus of concern was the social and aesthetic costs of expressway construction, particularly in urban areas. In response, Congress in 1962 required that metropolitan areas receiving federal highway aid prepare a comprehensive land use and transportation plan, which included consideration of mass transit alternatives. These regulations were substantially strengthened in 1969 by passage of the National Environmental Policy Act, which required the preparation, with public comments and hearings, of an environmental impact statement for any federally funded project. In 1973 Congress also allowed local governments to trade in the federal funds designated for locally contested segments of the Interstate System for use on mass transit improvements, as long as the United States Secretary of Transportation certified that the contested segment was not essential to the national Interstate System. By 1980, over 8000 miles of urban

Interstates had been opened to traffic, although in almost every metropolitan area controversial segments remained unfinished.

The 1960s and 1970s also saw the development of federal programs to regulate the safety, air pollution emissions, and fuel economy of new motor vehicles. In 1965 Congress established the National Highway Traffic Safety Administration, with authority to set safety standards for new cars and to order manufacturers to recall and correct defective vehicles. Air pollution was the next focus of concern, as the problems caused by automotive emissions of hydrocarbons, carbon monoxide, and nitrogen oxides became more noticeable in major urban areas. The Clean Air Act of 1970 required 90 percent rollback in the emission rates of these pollutants from new automobiles by the 1975 model year. High costs and technological uncertainties forced several extensions of the deadlines and a relaxation of the nitrogen oxide target to a 75 percent rollback, but by the 1982 model year the goals set by the Clean Air Act were achieved. Finally, the oil crisis of 1973–1974 stimulated Congress to pass a law requiring that average new-car fuel economy be improved in stages from 18 mpg in model year 1978 to 27.5 mpg in 1985. United States automakers were in compliance with the schedule as of model year 1984, although weakening gasoline prices were making it more difficult to induce customers to buy fuel-efficient models.^[2]

The level of highway construction and investment peaked during the late 1960s. Although nominal highway spending continued to increase during the 1960s and 1970s, capital outlays failed to keep pace with the rapid inflation in building costs (see Table 7.2). The decline in real spending was due in part to the heavy reliance on federal and state fuel taxes to finance highway improvements. Since fuel taxes are assessed in cents per gallon, real receipts fell with rapid inflation and the automobile fueleconomy improvements of the 1970s.

The scope of federal highway aid expanded in the 1970s, despite the spending decline. Highway maintenance became a major concern toward the end of the 1970s, as many of the highway pavements and structures built in the decades immediately following World War II began to reach the end of their useful lives. Until the 1970s, federal highway aid could only be used for new construction or for major reconstruction projects in which the road was widened or substantially rebuilt. In 1976 Congress responded to the maintenance crisis by expanding the definition of highway construction to include "resurfacing, restoration, and rehabilitation" (3R) and establishing a separate program of grants for Interstate 3R projects. In 1970 Congress also established a special aid program for

bridge repair and reconstruction on the federal aid highway systems, activities that had been exclusively state-financed.

Urban highway traffic has continued to grow despite the slowdown in highway construction, higher fuel prices, and increased regulation of new car pollution and fuel economy. Traffic growth was slightly lower in the 1970s than in earlier decades, probably largely because the growth in urban population also slowed during that decade. As in the previous decade, urban traffic increased about four times faster than the urban population during the 1970s (see Table 7.1).

Urban Mass Transit Aid

Almost as rapid as the growth in urban automobile use was the decline of urban mass transit ridership in the 1940s and 1950s, falling from a wartime high of 18 billion trips per year to 7 billion trips in 1960. In an attempt to stem the ridership loss, in the 1940s and 1950s many large metropolitan areas began to provide government aid to their mass transit systems, and several metropolitan areas planned new rail systems. The rapidly deteriorating financial condition of mass transit strained local resources, however, and by the early 1960s had led to strong pressure for federal assistance.

Federal aid began in 1964 with a small program of capital grants that would finance up to two-thirds of the cost of a capital project.^[3] Funds were allocated for specific projects at the discretion of the Secretary of Transportation. Funding for the capital grant program expanded rapidly during the 1970s, reaching levels of almost $3 billion per year, and in 1973 the maximum federal share was raised to 80 percent of costs. Federal grants were used to finance local government buyouts of ailing private bus companies, replacement or refurbishing of much of the existing transit rolling stock and equipment, construction of several new rail systems, and extensions to many of the existing rail systems.

In 1974 Congress established a new federal transit grant program to fund operating expenses, partly in response to pressure from metropolitan areas that felt they did not benefit greatly from the capital grant program, either because their rail systems predated federal aid or because they were too small to consider rail seriously. Funds from the new grant program could be used for capital as well as operating expenses, although in practice almost all was used for operating aid. The federal grants had to be matched by an equal amount of state or local aid if operating expenses were being subsidized, but the federal share could be as high as

80 percent for capital projects. In a significant departure from the original capital-grant program, the operating grants were allocated among urbanized areas according to a formula based on population and population density instead of at the discretion of the Secretary. Federal operating aid grew steadily from around $200 million in 1970 to nearly $1 billion in 1980.

Transit aid from all levels of government increased so rapidly during the 1970s that sometime in the middle of that decade government aid became a more important source of revenue to the industry than passenger fares (Table 7.3). Passenger fares had been enough to cover operating costs and make a small contribution to capital expenses through the 1950s, despite the fact that the industry was contracting. In 1964 passenger receipts fell below operating expenses for the industry as a whole and by the 1980s covered only about 40 percent of operating costs and made no contribution to capital expenses. Government aid grew from $518 million in 1970 to $7.8 billion in 1982, and the federal share of all aid grew from 26 to 53 percent, as shown in Table 7.4.

The influx of government aid was not enough to restore mass transit ridership to its former levels. The steady postwar decline in nationwide mass transit ridership was reversed between 1974 and 1980, when patronage grew by 15 percent, but in 1981 it began to fall once again. The most important urban travel market is commuting, since work trips dominate rush hour travel and are key contributors to traffic congestion and other urban transportation problems. Public transportation's share of commuting trips in all metropolitan areas fell steadily from 19 percent in 1960 to 12 percent in 1970 and 8 percent in 1980 (Table 7.1). As of 1980, mass transit captured more than 10 percent of the commuter market only in a dozen of the largest, densest, and oldest metropolitan areas, where high levels of traffic congestion and parking fees discourage auto ownership and use. Only in one metropolitan area (New York) does transit's share of the commuting market exceed 20 percent.^[4]

The performance of the first new rail systems—opened in San Francisco in 1972 and Washington in 1976—was particularly disappointing; construction costs soared far beyond original projections and the ridership gains were smaller than originally forecast. These results failed to discourage local interest in new rail systems, however, in part because federal aid was available to fund up to 80 percent of construction costs. To force local governments to consider smaller and more cost-effective alternatives, in 1976 the federal government required that cities applying for rail grants submit an analysis of non-rail alternatives, including low-

cost express bus systems. Federal regulations also restricted new rail starts in each metropolitan area to one major corridor at a time, rather than to an entire system of many lines. In 1978 these regulations were strengthened to limit federal liability in the case of construction cost overruns and to specify in more detail the types of low-cost, non-rail alternatives that had to be considered.

Policy under the Reagan Administration

By the time President Reagan took office in 1981, federal grants had increased to cover roughly 20 percent of all government highway aid and 50 percent of all transit aid (Table 7.4). The Reagan administration initially proposed dramatic changes in urban transportation policy as part of its "new federalism" initiative. The theme of the new federalism was to return responsibility for largely local programs, such as urban transportation, to state and local governments. The Reagan administra-

tion proposed both to reduce the level of federal highway aid and to restrict it to highways, such as the Interstate System, in which the federal interest was clearest. Federal gasoline taxes would be lowered (to the levels necessary to fund the smaller program) and state governments would be encouraged to increase their own fuel taxes as needed. For mass transit, the Reagan administration proposed to eliminate federal aid for operating expenses, reduce federal aid for capital projects, and allocate

capital grants on the basis of a formula rather than at the discretion of the Secretary of Transportation.^[5]

The administration achieved some of these goals in its first year in office. The FY1982 budget reduced federal transit aid below FY1981 levels and left highway aid unchanged despite inflationary pressures. The administration also imposed a moratorium on federal aid for starts of new rail mass transit systems or extensions, although funding would continue for projects already under construction.

These victories did not last long. Frustrated by the Reagan administration's moratorium on new rail starts, the House and Senate appropriating committees began to order the Urban Mass Transportation Administration (UMTA) to fund the planning, engineering, or construction of new rail systems in specific cities. The FY1982 appropriations conference report earmarked federal planning grants for six projects and construction grants for five others (two in Miami), while the FY1983 report earmarked funds for alternatives analysis of seventeen projects and engineering or construction of eleven. If all these new rail projects are built with federal aid, the cost to the federal treasury will be between $12 and $19 billion.^[6]

During 1982 pressure also grew within the administration and Congress to increase highway spending as a means to alleviate the deterioration of the nation's highways and bridges and to combat unemployment from the 1981–1982 recession. To gain support from urban areas for increased highway spending, Congress proposed to increase mass transit aid as well.

The Surface Transportation Assistance Act, passed in December 1982, greatly increased federal funding for highways and restored the cuts to mass transit. The law raised the federal gas tax from 4 to 9 cents per gallon, the first increase since 1959. Four cents of the increase is dedicated to the Federal Highway Trust Fund to finance a near-doubling of 1982 levels of highway aid (Table 7.5). The remaining cent of the new gas taxes is earmarked for a new Federal Mass Transportation Trust Fund, which will be used to finance the discretionary capital grant program. Additional transit funding is authorized out of general revenues for new operating and capital formula grant programs and total transit aid is restored to the 1981 funding levels (Table 7.6). The Reagan administration's only victories were in the composition of the spending authorized by the act. Only highway aid for Interstate and rural primary systems is increased, for example, while funding for rural secondary and urban extensions

was held constant. Transit operating assistance is also to be gradually lowered.

Evaluating Highway Aid

Benefits and Costs of Postwar Highway Expansion

Although some benefit-cost analyses have been made for isolated highway projects, there have been no recent and reliable attempts to measure the benefits and costs of the federal urban highway program as a whole.^[7] A comparison of highway user tax receipts with highway expenses suggests, however, that the benefits of the postwar boom in urban highway construction, partly financed by federal aid, have on the whole exceeded the costs.^[8]

User Payments as Benefit Measures

Motorists pay a variety of special taxes to use the highways, including gasoline taxes, tolls, and vehicle registration fees. Since motorists are willing to pay at least this much (and maybe more) for highway use, these user charges provide a minimum estimate of the benefits motorists receive from highway investments. In theory, a particular segment of the highway system might be deemed worthwhile if users pay enough in highway taxes to cover the costs that segment imposes on society.^[9]

Estimating the user component in highway taxes involves differentiating between special charges made for highway use and general taxes levied on consumption or personal property. The commonly used rule for making such separations is to regard a tax as a highway-user charge if collected from highway users or on motor vehicles but not on most other comparable goods or services. By this rule, highway-user charges clearly include federal gasoline, vehicle, spare parts, and excise taxes; state motor vehicle and driver registration fees; and special highway-user taxes on trucks. State gasoline and motor vehicle sales and property taxes are not necessarily included, since many states or localities levy sales or personal property taxes on a variety of other goods, although typically at lower rates. Estimates of United States highway-user-charge receipts derived by following this separation principle are shown in Table 7.7 in current dollars for the years 1956 through 1975.

Government Highway Expenditures

The costs of the urban highway system include both direct government highway expenditures, such as highway construction and maintenance outlays, and the externalities or social damages that highway users impose on others in the form, for example, of automobile air pollution and noise. Table 7.7 also shows estimates for 1956 to 1975 of direct highway expenditures paid by all levels of government, but excluding any external social costs of highway use. The estimates assume that all government highway capital expenses are amortized over the life of the facilities using a 5 percent real discount rate—thus, for example, the 1975 costs include charges for the depreciation of capital investments made in previous years. Capital outlays include all expenditures for the purchase of right-of-way (including relocation assistance), grading and drainage costs, construction of bridges and tunnels, and paving costs. Operating expenses include routine maintenance, snow removal, mowing, painting, and similar activities as well as highway administration, research, safety, and law enforcement. Outlays for all police assigned to traffic and highway safety duties, as well as correctional expenses attributable to enforcing traffic laws and curtailing automobile theft, are included as highway law enforcement costs.

Most highway expenses and user revenues can be attributed to particular parts of the highway system, such as urban or rural roads or Interstate and non-Interstate highways. Some costs and revenues, such as the administrative expenses of highway agencies or annual vehicle registration fees, are, however, not clearly assignable. These costs and revenues amount to about one-quarter of the total and are allocated, somewhat arbitrarily, to the different highway types according to the vehicle mileage occurring on those highways.

For the national highway system as a whole, highway user charges exceeded direct government costs by 50 to 80 percent in the 1950s and 1960s, but fell to rough parity with costs by 1975. If a more conservative 10 percent discount rate is used instead of 5 percent, revenues exceeded expenses by about 25 percent in the 1950s and 1960s but fell short of costs by about an equal amount in the 1970s.^[10] The ratio of revenues to expenses fell largely because total amortized highway outlays increased in real terms (although current capital investment has declined), while user revenues did not keep pace with inflation.

Most of the shortfalls between highway user revenues and direct gov-

ernment highway expenditures occur in rural rather than urban areas and on roads other than the Interstate and other federal aid systems. For the urban Interstates and urban extensions of the federal primary and secondary systems, user revenues were double or triple direct government expenses in the 1950s and 1960s and still exceeded expenses by 30 to 50 percent in 1975.

Even though collectively urban highway users may pay their capital and operating costs, the users of highways in the centers of large dense metropolitan areas probably do not. Costs of constructing and maintaining a lane-mile of highway are much higher in the downtowns of large metropolitan areas than they are in the suburbs or in small metropolitan areas.^[11] The number of lanes in an urban highway is dictated by peak period rather than off-peak travel needs, moreover, so there is substantial reason to assign most of the costs of constructing and maintaining that capacity to peak users only. While highway construction maintenance and administration costs in 1975 averaged only about 1.3 cents per vehicle mile on all urban Interstates, for example, studies suggest that the cost of serving peak-hour users on expressways in the central business districts of Boston and San Francisco were as high as 10 to 30 cents per vehicle mile in the mid 1970s.^[12]

While the capital and operating expenses attributable to peak-period and downtown motorists are much higher than average, the highway-user taxes paid by these motorists are only moderately higher. In 1975, tax receipts from all urban highway users—mainly in the form of the gasoline tax—averaged about 1.7 cents per vehicle-mile. Because of congestion, peak-period and downtown users probably consumed a bit more fuel and therefore paid perhaps 10 to 20 percent more taxes per mile than average. The differential between peak and off-peak highway-user tax payments is therefore far smaller than the differential between peak and off-peak highway capital and operating costs on major downtown highways.

In short, while urban highway users as a whole, and urban Interstate users in particular, supply more highway tax revenue than the government pays directly in highway expenditures, many peak-hour motorists in the centers of very large urban areas probably pay less than their share of highway costs. Since user taxes actually paid may be viewed as a lower-bound estimate of benefits (many highway users might well be willing to pay more rather than do without), it seems likely that the benefit/cost ratio for many urban highways exceeds unity (still ignoring social exter-

nalities for the moment). Even high-cost downtown urban expressways might be able to generate receipts in excess of costs if special tolls were charged, but this is speculative.

External Social Costs

These results probably are not substantially changed by including the external social costs of highway use, such as air and noise pollution, the aesthetic blight of urban highways, and the social costs of relocation and land takings. Although most of these external costs are extremely difficult to measure, estimates of the costs of motor-vehicle air and noise pollution have been made. A study of urban transportation in the San Francisco Bay Area estimated the property, health, vegetation, and materials damage of air pollution from the average car in the 1968 fleet at 1.29 cents per vehicle-mile (in 1973 dollars). Because of federally mandated reductions in new-car emissions rates, the same study estimated that a 1972 model automobile in San Francisco had air pollution costs of only 0.48 cents per vehicle mile. A 1982 model automobile that achieved the nearly 90 percent reduction in emissions over 1970 levels would generate air pollution costs of only 0.1 to 0.2 cents per vehicle mile.^[13] Similar estimates of the effects of traffic noise on neighboring businesses and residences suggest that noise costs probably averaged less than one-tenth of a cent per automobile mile in the mid 1970s.^[14]

Estimates are unavailable for several other social costs of highways, the most notable being uncompensated costs to households and businesses relocated by highway construction, and the visual or aesthetic blight of highways. These costs are probably substantial for some poorly designed and badly sited urban highways constructed in the 1950s and 1960s. Federal regulations mandating relocation assistance, environmental impact statements, and increased citizen involvement in highway planning have probably reduced these uncompensated damages substantially on highways built after the 1960s.^[15]

The external social costs of urban automobile use in the mid 1970s probably averaged about 0.5 cents per vehicle mile based on air and noise pollution alone, and perhaps as much as 1 cent per vehicle mile if an allowance for other unestimated social costs is included. Combined with the 1.3 cent-per-vehicle-mile average cost of constructing and maintaining highways, these figures imply that urban highway users probably on average only slightly underpaid their costs during the mid 1970s. The

rough parity of highway user receipts and costs suggests that many of the urban highways constructed with federal aid during the postwar period were worthwhile, especially when it is remembered that user fees are a minimum estimate of user benefits. The principal exceptions are likely to be extremely high-cost highways designed to accommodate rush hour traffic in the centers of major metropolitan areas.

Future Highway Needs

Several forecasts of future urban highway spending needs have been prepared, the most sophisticated of which are the Federal Highway Administration (FHWA) biennial reports to Congress on highway needs. The FHWA estimates that highway capital spending on all roads (urban and rural) should be increased by about 50 percent over the levels of the late 1970s and early 1980s in order to restore the roads to what it terms minimum tolerable conditions; a 40 percent increase is needed merely to prevent further deterioration.^[16] Such increases would restore real highway capital spending to the peak levels of the mid and late 1960s (see Table 7.2). The composition of capital spending would shift to emphasize the repair and reconstruction of existing pavement and structures instead of major widening or alignment improvement projects.

The FHWA's highway needs forecasts are limited, however, in that they are based on common highway engineering practices or rules of thumb rather than detailed benefit-cost analysis. The FHWA presumes, for example, that additional lanes are needed on an urban Interstate highway segment when the peak-hour traffic volumes exceed 85 percent of the roadway's maximum hourly capacity. Similarly, the FHWA assumes that repaving is needed on an urban Interstate when the Pavement Serviceability Index (PSI), a physical index of pavement roughness, falls below 3.2. There is some evidence that the volume-to-capacity standard used by the FHWA may, on average, recommend more highway widening than benefit-cost analysis would call for, while the FHWA's pavement standard—again, on average—may recommend too little repaving. For urban highway segments with widening and paving costs much higher or lower than average, moreover, the simple uniform standards used in the FHWA forecasts are almost certainly misleading.^[17]

Despite the shortcomings of its forecasts, the FHWA was almost certainly correct in recommending a substantial increase in highway investment over late 1970s levels. Given the slowdown in real highway capital

spending in the 1970s, the net value of highway investments has undoubtedly been declining, despite continuing growth in urban (and rural) traffic volumes. If the postwar highway investments were, on the whole, worthwhile, then comparable—or perhaps greater—levels of investment are probably justified for today's higher traffic volumes.

The Merits of Federal Involvement

The Rationale for Federal Aid

Whatever the appropriate level of urban highway investment, one key issue is why the federal government should be so heavily involved. Since 70 percent of the United States population lives in urban areas, the majority of the country clearly has a strong interest in urban highways. At least in theory, however, our federal system reserves powers and responsibilities to state and local governments unless some compelling and distinct national interest is involved. This devolution of resonsibilities is based both on democratic ideals and the pragmatic argument that those who are closest to a problem often know best how to solve it.

The principal rationale for federal highway aid programs has been the national interest in an intercity transportation system that serves long-distance or interstate as well as local traffic. When federal highway aid began in 1916, the road system was largely unpaved and road construction and maintenance were the responsibility of county governments. The counties were notorious for their failure to cooperate in improving roads that served more than one county, perhaps because their dependence on property tax revenues made it difficult to finance improvements that served more than local needs. An interconnected road system would benefit all, it was argued, by promoting interstate commerce and reducing the social and political isolation of rural communities. The federal government gave highway aid directly to state governments, on the theory that states would have more interest than counties in promoting an intercity highway system.^[18]

While federal intervention may have been needed to promote an interconnected highway system seventy years ago, it may be unnecessary today. Thanks in part to early federal aid, each state now finances and administers its own system of trunk highways, leaving county and city governments responsible mainly for local or secondary roads. Federal aid may not be necessary even to induce states to build a coordinated interstate highway system. In the decade before the Interstate System was funded,

for example, many Eastern and Central states cooperated in the construction of an interconnected system of limited-access toll expressways that allowed motorists to travel between New York and Chicago or Boston and Albany without ever having to stop for an intersection or traffic light. Toll financing had eliminated the problem of using local taxes to support interstate travel and by 1956, when Interstate funding ended the boom, around 12,000 miles of toll expressways had been built, started, authorized, or projected.^[19]

To the extent that there is a distinct national interest in the highway system, it applies more clearly to roads that primarily serve long-distance and interstate rather than local travelers. Although Interstate System planners rationalized the inclusion of urban segments on the grounds that interstate traffic often originates or terminates in urban areas, urban expressways probably have a limited claim to federal aid, since their design is largely dictated by peak-hour local commuting traffic.

Perhaps the strongest argument for a federal role is in the areas of highway research and demonstration projects. Research on pavement durability, highway planning techniques, and highway safety measures is of potential benefit to all states. Since no single state captures all the benefits, there is little incentive for a state to fund research alone. The federal government, however, can consider the benefits to all states in designing its research program.

Incentives under Federal Aid

If state and local interests predominate in urban highways, federal highway aid may distort state and local highway decisions in undersirable ways. It is extremely difficult to predict what the urban highway system might have looked like without federal aid, much less whether the system would have been better or worse. The design of the federal aid programs offers some simple clues about the degree to which state and local choices might be altered. The broader the category of highway projects eligible for aid and the lower the funding levels, the more likely federal aid will merely serve to reduce state or local taxes and leave highway spending decisions largely unchanged. Conversely, the more restrictive the eligibility and the greater the funding, the more likely it is that federal aid, if accepted, will alter local choices.

According to this test, federal aid for the primary, secondary, and urban systems probably had little effect on postwar state and local highway decisions. Although states can designate only a fraction of their highway

mileage as eligible and federal funds must be matched by an equal amount of state or local aid, the level of federal aid probably falls far short of current expenditures on these systems. In 1980, for example, federal primary, secondary, and urban systems aid accounted for only $2 billion of the $9 billion spent for capital outlays on state-administered highways (excluding the Interstates).^[20] The ratio of spending to federal aid was probably even lower in urban areas, since the federally aided mileage is still disproportionately rural.

The Interstate program offers potentially strong incentives to distort state and local choices, however, and efforts to reduce or offset these incentives have been only partially successful. Only segments of the 42,500-mile congressionally designated Interstate System are eligible for aid, and each segment must meet strict federal design standards governing access control, lane width, curvature, ramp length, and other features. In return, the federal government will pay up to 90 percent of the cost of constructing the segment, no matter how expensive the project. (Only allowable, highway-related costs can be reimbursed, of course, and competitive bidding must be used.)

These strong financial incentives led early critics to fear that state and local highway agencies would overlook the environmental costs and social disruption of highway construction and build many unnecessary Interstate segments. Although blighting and disruptive highways were probably built, as noted earlier, the majority of urban Interstate mileage appears to have been worthwhile. The rapid rates of expressway construction and planning in the years immediately preceding the start of the Interstate program also suggest that some, though certainly not all, of the limited-access highways might have been constructed anyway. Finally, federal regulations requiring comprehensive transportation planning, environmental impact statements, and public hearings have helped to reduce the problem of blighting and disruptive highways by increasing the opportunities for citizens to block or delay highway projects.

Recently a new problem has emerged, due to the combination of the strong financial incentives of the Interstate program and the federal regulations mandating increased citizen involvement. To overcome local opposition to the construction of environmentally or socially sensitive urban Interstate segments, state highway officials are now encouraged to incorporate costly design features that are largely paid for by the federal government. Two extreme examples of this new problem are the West Side Highway in New York City and the Central Artery in Boston. Both of these downtown elevated expressways are now part of the designated Interstate system but were built before Interstate aid was available and

consequently do not meet Interstate design standards. Part of the West Side Highway collapsed in 1973, and the Central Artery deck is nearing the end of its expected structural life. Local groups oppose reconstructing the highways in their current form, since they are ugly and blighting; in any case, a reconstruction project would be ineligible for Interstate funding unless federal officials granted a design variance. New York's solution (which was approved by federal transportation officials but has been delayed by an environmental lawsuit) is to build four miles of new Interstate offshore in the Hudson River, with 230 acres of landfill for housing and parks to serve as a buffer between the highway and existing neighborhoods. Boston's proposal (which is pending federal approval) is to depress one mile of the highway along the original alignment, with decks to support overhead development. These offshore and depressed highways would cost around $1–2 billion each, four times more than reconstruction. The added costs appear to be far larger than the estimated environmental or aesthetic benefits to be gained.^[21]

If these two highways can be rehabilitated only at such high costs, they may not be worth maintaining at all. But the availability of 90 percent federal funding—coupled with complaints from local politicians and congressional delegations if federal officials attempt to review local designs more closely—have made local officials unwilling to consider less grandiose schemes.^[22] The Interstate program, in short, may have shifted from building some urban highways that were excessively disruptive and blighting to building some that have been overly beautified.

Financial Effects on Urban Governments

Federal highway aid may not only distort local choices, it also may fail to alleviate long-term financial pressures on local governments to any significant degree. The availability of federal highway aid reduces the need to raise state and local taxes, to be sure, but the aid is financed by federal highway user taxes paid in part by urban residents. Since the federal highway aid program is heavily oriented toward rural roads, federal highway-user tax payments probably significantly exceed federal highway grants in most urban areas. Although detailed urban/rural data are not available, data on federal highway receipts and expenditures by states for the period from 1956 through 1982 show that the ratio of federal highway grants to federal user tax payments was below the national average in virtually every highly urbanized state and that almost all the states with above-average grant-to-tax payment ratios were rural.^[23]

These simple calculations also ignore the fact that federal highway aid

may encourage state and local governments to build projects whose costs exceed their benefits. If the benefits from the West Side Highway project are less than the costs, for example, then the federal aid for that project is worth less to New York than its nominal value. In short, many heavily urbanized states would probably be financially better off if they could substitute their own state or local fuel and vehicle taxes for federal highway taxes and highway aid.

Evaluation Transit Aid

The Experience with Transit Subsidies

Three arguments are usually offered in support of government assistance to mass transit. First, mass transit aid is said to reduce the level of automobile use and thereby to alleviate traffic congestion, the demand for costly urban highways, and automotive air and noise pollution and energy consumption. Second, subsidies to mass transit are thought to promote more concentrated, downtown-oriented forms of metropolitan development, with possible attendant infrastructure or energy savings. Finally, transit assistance is expected to benefit low-income house-holds, the elderly, and children—those too poor, too old, or too young to drive or own an automobile.

Reducing Auto Use

The failure of transit aid programs in the 1970s to increase transit ridership significantly was discouraging, especially given the rapid increase in government aid during the decade. Where transit ridership did increase, moreover, only a fraction of the new riders were former auto users; thus, the cost per auto trip avoided was often extremely high.

The new rail systems provided the most dramatic examples of the difficulties of reducing auto use at reasonable cost. Both the San Francisco Bay Area Rapid Transit (BART), opened in 1972, and the Washington D.C. Metrorail, opened in 1976, had anticipated that fares would cover at least operating costs and, in the case of BART, make some small contribution to construction costs as well. Construction and operating costs on both systems proved to be higher than anticipated, however, even adjusting for inflation, while ridership was overprojected by nearly a factor of two.^[24] In 1976, the average fare on BART was 72 cents, while the operating cost per rider was about $1.95 and the total public subsidies—operating and capital—amounted to $3.76 per rider. Since only 35

percent of all BART riders were former auto users (the remainder being former bus patrons or persons making new trips), the subsidy per auto trip avoided amounted to at least $10.74.^[25]

Metrorail has fared slightly better, perhaps in part because it is still under construction and only some of the most productive segments have been opened to date. When the commitment to build Metrorail was made in 1969, the cost of the planned 98-mile system was set at $2.5 billion. The 31-mile Phase III system, which was in operation by late 1979, alone cost over $3 billion to build (in 1980 dollars), and the cost to complete the entire system (since expanded to 101 miles) is now climbing toward $12 billion.^[26] With the Phase III system, total costs amounted to $2.73 per rail trip in 1980, two-thirds of which was for capital.^[27] Metrorail Phase III did reduce rush-hour auto trips to the downtown core by 4 percent.^[28] Since only 36 percent of all Metrorail riders were former auto or taxi users, however, the Metrorail capital cost per auto trip removed from the road amounted to $5.21, while the total cost (operating plus capital) might have been as high as $7.58.^[29] As the outer extensions of the system are opened, the cost per rider and per auto trip diverted are likely to increase.^[30]

Operating aid also brought disappointing ridership gains, despite the fact that the average operating subsidy per rider increased from 5 cents in 1970 to 76 cents in 1982. The small ridership increase was caused in part by the absorption of much of the aid in reduced productivity and higher unit costs rather than in fare reductions or service improvements. Between 1970 and 1982 the average wage for transit drivers grew 40 percent more than inflation, for example, while labor productivity, as measured in annual vehicle hours of service per full-time employee, fell by 20 percent.^[31] The rapid cost increases meant that the average real fare declined by only 19 percent from 1970 to 1982, while the number of vehicle miles of service offered by the transit industry increased by only 13 percent.^[32]

Even where operating aid led to significant fare reductions or service improvements, the ridership increases were often relatively small. In the Boston metropolitan area, for example, government operating subsidies for mass transportation increased from approximately $80 million in 1971 to $233 million in 1980, while passenger revenues remained relatively constant at $50–60 million per year. The operating aid was used to maintain existing service and keep the fare at 25 cents, despite rapid inflation in operating costs. Inasmuch as the consumer price index more than doubled bwteen 1971 and 1980, retaining the 25-cent fare amounted to reducing the fare by half (in real dollars) over the course of

the decade. Despite this substantial decline in price, ridership remained stable or declined slightly throughout the 1970s. In late 1980 and 1981, when financial realities finally forced Boston officials to raise fares, the response in ridership and auto usage was also relatively small.^[33] When bus fares increased by 100 percent and rail fares increased 50 percent in August 1981, for example, ridership fell by only 10 percent and car usage in the metropolitan area increased by at most 0.5 percent.^[34] Boston temporarily retained some mass transit riders by avoiding a fare increase during the 1970s, but the cost of doing so amounted to around $2 to $3 in added subsidy per passenger trip saved.^[35]

About a dozen metropolitan areas significantly increased their transit ridership during the 1970s, sometimes at a relatively modest subsidy cost of 50 cents or so per added rider. In most cases, however, fare reductions and service improvements were not the only factors contributing to the ridership gains. A few cities allowed their transit service to deteriorate greatly before public subsidies began; thus the increase was significant only compared to the very small base. In several other cities, policies to discourage auto use—such as parking taxes or controls, priority for buses in traffic, or exclusive bus lanes—appear to have contributed greatly to increasing patronage.^[36]

In short, the experience of the 1970s showed that it is difficult to expand transit patronage—and reduce auto use—much beyond transit's traditional markets. Transis has always been best in serving commuters to the downtowns of large and congested metropolitan areas, such as New York, Chicago, San Francisco, and Boston. The combination of high downtown parking fees and slow traffic speeds makes transit competitive with the automobile for these trips, particularly if transit can be protected from the congestion with either an exclusive rail or bus right-of-way or bus priority in traffic. The irony is that where transit contributes most to the alleviation of auto problems, it is probably least in need of government assistance. Where traffic congestion is severe and parking charges high, transit can offer relatively competitive service without significant government aid.

Concentrating Urban Development

The supporters of the new rail transit systems hoped they would lead to more concentrated forms of urban development as well as reduced auto use. A review of the experience of new rail systems in San Francisco, Washington, Montreal, and Toronto and major rail extensions in other cities suggests, however, that rail service is not sufficient to insure intensi-

fied development around suburban or outlying stations. A variety of other complementary factors are needed, including rapid economic and population growth in the metropolitan area and support from the community and local land use policies. In Toronto, for example, clusters of high-rise apartment buildings and retailing appeared around outlying stations, in part because rapid metropolitan growth encouraged new construction and local officials offered powerful zoning incentives for development around stations. With BART and Montreal's Metro, by contrast, there was little development around suburban stations, due in part to slower growth, community opposition, and difficulties of land assembly.^[37]

The principal land-use effect of these new rail systems appears to be in facilitating downtown high-rise office development. San Francisco, Toronto, and Montreal have experienced rapid downtown development since their new systems were completed; Washington, D.C., and Atlanta, where partial systems are now in operation, show signs of similar trends. Other non-rail factors probably contributed, however, since the downtown office booms often pre-dated the subway openings and other cities without new rail systems experienced similar developments.

If new rail systems promote downtown offices but leave suburban development dispersed, their land-use effects are similar to those of the radial expressways that transit advocates often oppose. By increasing the accessibility of the downtown to the suburbs, the rail system promotes more concentrated employment in the downtown and the displacement and dispersal of residences into the suburbs. The overall effect is probably to increase rather than reduce the average length of the commuting trip and to turn the downtown and its immediate neighborhoods into areas that are active during the day and have few residents and associated nighttime activities.^[38]

Helping the Poor

The experience of the 1970s also suggests that transit aid is not always an efficient or effective way to help poor people.^[39] Transit accounts for only a modest fraction of the trips poor people make. Although poor households are more dependent on mass transit than rich households, in 1977–1978 mass transit accounted for only 6.9 percent of the trips made by metropolitan residents with household incomes below $6000, a figure not much different from transit's 3.4 percent share of trips by metropolitan residents of all incomes.^[40] While 85 percent of all metropolitan households owned at least one car in 1977–1978, a surprising 54 percent of

households with incomes below $5000 and 83 percent of households with incomes between $5000 and $10,000 owned autos.^[41]

Poor people make up a small fraction of all transit riders, moreover. Travelers with 1977–1978 household incomes below $6000 accounted for only 25 percent of all transit trips in metropolitan areas, for example.^[42] The share of subsidy that goes to poor transit riders is probably even smaller, since low-income ridership tends to be concentrated on services where the subsidy per rider is relatively low. Subsidies per rider are typically three to four times higher on commuter railroad services than they are on buses or subways, for example, yet only 9 percent of all commuter rail trips were made by persons with 1977–1978 household incomes below $6000, while 38 percent were made by travelers with incomes above $25,000.^[43] Within rail and bus systems, transit subsidies tend to be higher for long-distance and peak-hour travelers, because the costs are higher while fares typically are not. Poor people ride much shorter distances than average because they live closer to the city center; the poor also travel disproportionately in the off-peak hours since many are unemployed.^[44]

Transit subsidies could better help the poor, of course, if they were targetted directly at poor travelers or the services they use. Virtually every transit system offers discount fares for handicapped and elderly persons, but these discounts help only slightly: 75 percent of the metropolitan poor are neither handicapped nor elderly.^[45] A more promising possibility is to subsidize poor users directly; poor persons might be issued discount fare identification cards or, to avoid the possible stigma of an identification card, could be sold monthly transit passes or a supply of transit tokens at a discount price. Targetting the subsidies to services such as bus, off-peak, and short-distance that poor people tend to use is less efficient but would be an improvement over the existing system. The federal government has sponsored several successful demonstrations of the possibilities of direct subsidies to poor people, but so far the practice has been adopted only in a handful of cities.^[46]

The Problems of Federal Aid

The Federal Rationale

The rationale for federal involvement in urban mass transit shares many of the weaknesses of the rationale for federal aid to urban highways. The argument most often cited in the early 1960s debates over the

initial federal capital grant program was the need to counterbalance federal highway aid. The federal and state highway trust funds, all financed with dedicated gasoline taxes, were thought to have induced state and local governments to channel too much capital spending into highways and too little into mass transit. Transit had declined because of undercapitalization, the argument continued, and federal transit aid was needed to correct the imbalance.^[47]

The failure of the transit investments of the 1970s to increase ridership significantly suggests that undercapitalization was probably not a major cause of the decline of mass transit patronage. Rising real household incomes, suburbanization of jobs and residences, and other demographic trends probably played more important roles in the postwar patronage losses. Even if local governments had seriously overinvested in highways and underinvested in transit, a massive new transit aid program may not have been the correct answer. By subsidizing both the highway and transit modes the federal government might reduce the balance between transit and highways only at the risk of overcapitalizing transportation in general. Reducing or eliminating the federal highway aid program might have encouraged more balanced spending on all forms of transportation.

Discretionary Capital Grants and the Rail Starts Problem

Whether mass transit was ever undercapitalized, the federal discretionary transit capital grant program now appears to encourage overcapitalization. The transit capital grant program has many of the same features as the Interstate Highway program. The federal government will pay up to 80 percent of the cost of a transit capital project (after 1982, 75 percent). Since grants are allocated for specific projects at the discretion of the Secretary of Transportation, moreover, there is no clear limit to the assistance a city may receive; the use of aid for one project does not preclude aid for others.

State and local governments have an obvious incentive to use the discretionary capital grant program to substitute federally paid capital costs for locally paid operating expenses.^[48] For example, one early study examined the possibility that transit authorities might save on bus maintenance costs by using federal capital grants to retire buses earlier than they would otherwise. That study never investigated whether transit authorities actually engaged in this practice but estimated that if they did, the waste would amount to more than 20 percent of the value of the federal capital grants.^[49]

Since most federal capital grants have been spent on rail transit, a most troublesome possibility is that local authorities may substitute federal capital grants for local operating expenses by building rail instead of bus systems. Among the advantages often cited for new rail systems is the potential for reducing labor costs by replacing several bus drivers with a single train operator. There are some offsets, of course, such as the added costs of maintaining track, signals, power distribution systems, stations, and other facilities not normally found on a bus system. In some situations, however, rail may offer savings in operating costs even though total costs, including capital, are higher.

The availability of federal aid has been a strong factor in the recent revival of rail transit. Rail systems are often classified as either heavy or light: on heavy rail systems, such as a conventional subway or metro, passengers board from platforms and power is distributed by a third rail; on light rail systems, such as streetcars or trolleys, passengers may board from street level and power is distributed by overhead catenary. From the 1930s through the late 1950s, rail transit mileage declined steadily in the United States as many cities replaced their streetcar lines with buses.^[50] When the federal capital grant program began in 1964, five United States metropolitan areas had rail systems that pre-dated World War II, Cleveland had opened a new heavy rail system in 1958, and San Francisco had already begun the construction of BART. Between 1964 and 1984, almost every older rail system extended its lines, four cities opened new heavy rail systems, one opened a new light rail system, and another five cities began building new light rail systems. As of 1984 at least 13 more cities were in various stages of designing or planning new rail systems, while virtually every existing rail system was planning extensions to existing lines (Table 7.8). While most of the rail construction in the 1960s and 1970s involved heavy rail systems, almost all the cities building or planning new systems in the 1980s are considering light rail.

Several studies have compared the operating and capital costs of using buses and heavy rail to serve metropolitan commuting trips. To insure that the cost comparisons are meaningful, these studies attempt to make the quality of service on the two modes comparable. While it is difficult to make the services exactly equivalent, the cost studies usually insure that the ratio of seated to standing passengers is the same on rail and bus and that bus travel times are comparable to heavy rail by, for example, operating the buses on an exclusive busway or an expressway whose access ramps are controlled to prevent congestion. The cost studies generally show that the bus is less expensive than heavy rail in radial corridors with

weekday peak-hour travel volumes below 15,000 transit passengers. When the peak travel volumes exceed 30,000 transit passengers, heavy rail is less expensive, and between 15,000 and 30,000 passengers the choice is usually determined by local conditions, such as the availability of a relatively free-flowing expressway that buses can use.^[51] Radial corridor volumes above 15,000 persons per peak hour probably are found only in metropolitan area with populations of at least several million, with high population densities and a strong downtown.^[52] Of the metropolitan areas that opened or began construction of heavy rail systems in the 1970s, probably only San Francisco and Washington, D.C., have corridor volumes that exceed the minimum heavy rail threshold. Even in those metropolitan areas, moreover, a careful bus-rail cost comparison would probably suggest much smaller heavy rail systems than the ones opened or planned.

The high cost of the heavy rail systems built in the 1970s stimulated interest in light rail systems in the 1980s. Unfortunately, there has been very little analysis of the comparative costs of light rail and bus.^[53] Light-rail proponents argue that it can be much cheapter than heavy rail because it can operate safely on city streets where building an exclusive right-of-way or subway would be expensive. Because the right-of-way need not be grade-separated, the argument continues, a light rail system does not need nearly as high corridor volumes to bring its per-passenger costs down to reasonable levels. If the light rail system is not grade-separated, however, the comparison bus service probably can also avoid expenditures for exclusive busways or similar facilities. Whether the savings in rail costs outweight the savings in bus costs may depend greatly on local conditions. Many of the metropolitan areas now building or planning light rail systems have such modest populations and densities as to make construction of even light rail systems very risky.

The high construction costs of some of the new rail systems built to date lend credence to the view that the total costs of many of these systems are greater than those of comparable bus systems. Even more striking is the possibility that at least some of the new rail systems may have increased rather than reduced locally paid operating costs. San Diego's new light rail system, for example, is widely touted as a success because farebox receipts cover 80 percent of its operating expenses, compared to only 40 percent on the San Diego bus system. The rail system consists of a single sixteen-mile line connecting the downtown with the southern suburbs and the United States–Mexican border, and it offers faster terminal-to-terminal travel times than the two bus routes it replaced.^[54] The

original bus routes were among the most heavily patronized in the San Diego system, however, and their farebox receipts exceeded operating expenses. Had the bus routes enjoyed the partially grade-separated right-of-way of the rail system, their travel times probably would have been comparable to rail and their operating profits even greater.^[55] Comparisons of bus costs for other larger rail systems are more difficult, since it is harder to identify the specific bus services they replaced. The steady increases in operating deficits in many of the metropolitan areas that recently opened rail systems suggests that the operating savings over buses may have been small.

Federal regulations requiring analysis of low-cost alternatives and restricting new rail starts to one line at a time have not been effective in limiting new rail construction.^[56] The 1976 requirement for alternatives analysis is credited with eliminating Denver's heavy rail proposal and reducing the size of the Buffalo light rail plan (when bus systems were found to offer comparable service at a fraction of the cost). Although the analysis requirement probably has discouraged or reduced the scale of other proposals, since the Denver and Buffalo decisions federal officials have not turned down any rail proposals after alternatives analysis, and the number of cities engaged in rail planning has increased.

As in the case of highways, the complexity of urban transportation planning helps to limit the effectiveness of federal rail transit regulations. Forecasting rail and bus patronage is a difficult art, for example, since ridership projections are sensitive to the detailed spatial distribution of future jobs and residences, which is itself uncertain. The non-rail alternatives can also appear relatively costly and unattractive if they are poorly or unimaginatively designed. Although experience has shown that many of the rail analyses overestimated patronage and understated costs, it is often difficult to demonstrate conclusively before the fact that a forecast is unreliable. Given the subtle judgment involved in accurately forecasting ridership and costs or designing alternatives, it is difficult for UMTA's small staff to detect or correct the potential errors in the alternatives analysis.

These problems are often further compounded by strong political support for rail from local officials and their congressional delegations. Local officials displeased with UMTA decisions are often quick to bring congressional pressure to bear on the agency, particularly when the UMTA position seems petty or unreasonable. The FY1982 and 1983 congressional earmarking of rail funds for specific cities is perhaps only the most extreme example of this problem.

In May 1984 the UMTA administrator announced that future rail-start decisions would be based on the added cost per new transit rider attracted, using a low-cost bus alternative as the baseline for measuring added rail costs and ridership. The hope is that the figures will embarrass Congress and discourage future earmarking for particularly cost-ineffective rail projects. The cost-per-rider estimates will be based on data from the alternatives analyses, however, which will increase the need for UMTA to monitor the quality of these studies.^[57]

Incentives of Operating Aid

The principal debate over federal operating assistance focuses on the extent to which it either substitutes for state or local aid or distorts state and local decisions in undesirable ways. Federal assistance was originally restricted to capital expenses in 1964, for example, partly out of fear that operating grants would reduce incentives for transit managers to control labor costs and improve productivity. Capital grants do not eliminate these incentives altogether, of course, since they free local resources that otherwise might have been absorbed by capital needs for operating expenses. With operating aid, however, the incentives might be more direct and obvious.

The relationship between operating aid and efficiency has received increasing attention because of the rapid inflation in transit operating costs during the 1970s. A careful study of the real (net of general inflation) increase in United States bus transit operating deficits between 1970 and 1980 found, for example, that increasing real labor compensation rates or declining labor productivity accounted for 48 percent of the deficit growth, while real fuel-cost increases accounted for only 11 percent of the deficit growth, service expansions only 19 percent, and fare reductions only 22 percent.^[58] Several cross-section and time series studies of transit agencies have also found that higher levels of government operating subsidies are strongly associated with higher wage levels and lower labor productivity. Correlation does not prove causation, however, and none of these studies has been able to demonstrate conclusively that higher subsidies caused operating cost increases rather than vice versa.^[59]

A more recent concern is the possibility that federal operating grants may encourage expansion of transit service into markets where transit has little chance of capturing significant ridership. Many smaller metropolitan areas greatly expanded their transit service during the 1970s even though low levels of auto congestion and low population densities make

it difficult to attract ridership. Some larger metropolitan areas greatly increased suburban and crosstown services, where the possibilities for attracting additional patronage at reasonable subsidy costs is probably also limited.

The cost inflation and the expansion of underutilized services encouraged by federal operating aid may well be centered on small, low-density metropolitan areas. State and local government aid accounts for 70 percent of all operating assistance for the United States transit industry as a whole, far less than the 50 percent minimum match required for federal grants. The formulas for distributing federal operating aid also provide less assistance per rider to many of the largest and most transit-oriented metropolitan areas; in the big Eastern and North Central cities such as New York, Chicago, Boston, and Philadelphia, federal aid accounts for less than 20 percent of all operating assistance. In many smaller and low-density metropolitan areas, federal aid is at the 50 percent limit and its potential effect on service and efficiency decisions is much greater.^[60]

Federal officials have rejected suggestions that they monitor the services or efficiency of operating grant recipients, in part for lack of simple and reasonable standards. The best remedy would probably be to increase the local matching requirement or to change the formula to favor the larger, transit-oriented cities more. The operating aid formulas were changed in 1978 and 1982 to increase the large cities' share of funding, but the need for broadly based congressional support has insured that many small, low-density metropolitan areas still receive a disproportionate share of aid.^[61]

Financial Effects on Urban Governments

Federal transit aid is targeted far more heavily at urban areas than federal highway aid, and urban taxpayers almost certainly receive more in federal transit grants than they pay in federal taxes to support the program. In 1980, for example, 34 states—all predominantly rural—received less than $10 per capita in federal transit aid, while only 8 states—all with cities that were building or expanding rail systems—received over $20 per capita.^[62] Since all federal transit aid was financed out of general revenues in that year, the federal tax burden for the program is probably far more equally distributed and urban areas are the net gainers.

As in the case of highways, however, the benefits to urban residents from a federal transit grant may be smaller than the dollar value of the

grant. To the extent that federal grants encourage too many rail transit extensions, expansion of underutilized services, or reduced productivity, the value of the grant to the recipient may be significantly lower than its dollar value. Capital grants may cause additional financial strains for urban governments if the capital projects increase rather than reduce local operating costs. The experience of the San Diego light rail system suggests, for example, that the construction of some rail systems may burden local governments with increased transit operating deficits.

The financial effects of federal transit aid also probably should not be viewed separately from those of federal highway aid. If urban representatives in Congress trade their support for highway aid in return for rural support for transit aid, then it would be impossible to eliminate or reduce the federal highway program without making comparable reductions in the federal transit programs. One recent study of the state-by-state allocations of federal transportation grants and taxes suggests that the urban bias of transit aid is not enough to offset the rural bias of highway aid. Of ten highly urbanized states, only two received more in highway and transit grants than they paid in federal highway and other taxes to support the programs. Almost all the states that received more in federal highway and transit grants than they paid in federal taxes were rural.^[63]

The Federal Role Reconsidered

The Reagan administration's proposals to reduce the federal role in urban transportation represented a significant redirection in federal policy. Despite the unsympathetic reaction from Congress, a reduced federal role might have proven beneficial not only for the federal taxpayer but for urban residents.

The rationale for federal involvement in urban transportation is much less compelling now than when that involvement began. Federal highway aid began early in 1916 because of a national interest in establishing an interstate and interconnected highway system. This concern always applied more clearly to rural than urban highways and has been far less compelling since the development of strong state highway agencies than it was under the old country road system. Federal transit aid was rationalized in part as a needed counterbalance to federal highway aid, but in retrospect reduced federal highway aid might have been a more sensible remedy.

Several of the federal urban transportation programs begun in the postwar period appear to distort local transportation decisions in unde-

sirable ways. Interstate highway aid and discretionary mass-transit capital grants create the greatest problems, since both have low state and local matching requirements and are distributed for specific federally approved projects rather than by formula or for a broad range of potential uses. The Interstate highway grants probably encouraged the construction of some highways that were excessively blighting during the 1950s and 1960s and now may be encouraging the construction of highways that are excessively beautified. The transit capital-grant program appears to encourage excessive spending on transit, particularly in the form of new rail systems.

Some of the federal aid programs are relatively less distorting, particularly the federal urban-systems-highway grants and, to a lesser extent, the transit operating and capital formula grants. In both cases, the funds can be used for a relatively broad range of transportation activities, and state and local spending usually exceeds the minimum federal matching requirements. These less distorting programs account for an increasing share of federal transit funding but a declining share of federal highway aid.

A reduction in federal highway and transit aid might leave urban residents financially better off, as long as it was accompanied by a reduction in federal tax rates. On average, urban dwellers probably pay more in federal highway taxes than they receive in federal highway aid. Although the federal transit program reduces this imbalance somewhat, even when the transit program is included urban residents pay more in federal tax than they receive in transportation aid. This calculation exaggerates the benefits urban dwellers receive from federal aid, moreover, since it ignores the possibility that federal aid encourages at least some projects whose costs far exceed their benefits. If estimates of the benefits from federally supported urban transportation projects were available and could be compared with the federal taxes urban residents pay to support these programs, the case for a reduced federal role might be even stronger.