For release: June 29, 2004

Contacts:	Charles Henderson
	Office:	(314) 444-8311
	E-mail:	charles.b.henderson@stls.frb.org
	Mobile:	(314) 609-5972
	Pager:	(314) 538-9526
Online Press Room:		www.stlouisfed.org/news/press_room/contact.html

Light Rail: Boon or Boondoggle?

ST. LOUIS, Mo.— Light-rail transit systems have become commonplace in many American cities in the past several decades, but an economic analysis from the Federal Reserve Bank of St. Louis suggests that the costs of light-rail transit may outweigh its benefits.

The analysis was conducted by Molly D. Castelazo, a research associate, and Thomas A. Garrett, a senior economist at the St. Louis Fed. Their comments appear in the June issue of The Regional Economist, the Reserve Bank's quarterly publication of business and economic issues.

Champions of rail transit systems argue that they enhance communities by creating jobs, boosting economic development and property values, and reducing pollution and traffic congestion. Critics, on the other hand, charge that light rail benefits only a small portion of the population and that the benefits of light rail are outweighed by its high costs.

To stay in business, private companies must offer a product or service whose costs are below what consumers are willing to pay, but Castelazo and Garrett found that light-rail services cost more than consumers are willing to pay. For example, fare revenue covers only 28.2 percent of operating costs in St. Louis, 19.4 percent of costs in Baltimore and 21.4 percent of costs in Buffalo.

"Nationwide," say Castelazo and Garrett, "annual light-rail operating costs total more than $778, which far exceeds fare revenues of about $226 million. Taxpayers, of course, pay the balance. With such large annual losses, no light-rail system could possibly recoup its operating costs, much less its construction costs."

Castelazo and Garrett also address light rail proponents' other arguments:

• Light rail reduces pollution and congestion caused by automobile traffic. "Light rail is only a short-term solution," they say. "Longer-term, policymakers have to address the inefficiency of roadway usage and the artificially low cost of driving an automobile." They explain that "to decrease pollution and congestion, drivers must bear the full costs of their driving, which could be accomplished through the imposition of toll roads or an increase in motor fuel taxes."

• Light rail provides transportation to thousands of low-income individuals. Castelazo and Garrett agree that providing public transit to the poor generates important benefits, but they emphasize that light rail is very cost-inefficient. They suggest several less-inefficient alternatives, including expansion of existing bus service and more express bus routes.

• Light rail creates jobs, fosters economic development and boosts property values. "While there is some academic evidence to back this up," they write, "it's important to realize that these benefits are not free. What keeps light rail running are taxpayer-funded subsidies, which amount to hundreds of million dollars ever year. The costs of these subsidies must be subtracted from the value of the benefits to accurately represent the true value of benefits received from light rail."

So if light rail has more economic disadvantages than advantages, why do voters continue to approve new taxes to subsidize them? Because, say Castelazo and Garrett, the costs, while large in the aggregate, are small when they're spread over the tax-paying population. In St. Louis, for example, the cost to each taxpayer is only about $6 a year.

"If other public projects in which overall costs outweigh benefits, then six bucks a year per project could add up to quite a hefty bill for taxpayers," Castelazo and Garrett conclude. The Regional Economist is also available online at the St. Louis Fed's web site.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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