Fiscal decentralization and urban public transport

Abstract

Financing public transport through public funds is a common practice that can be justified on different grounds: equity, natural monopoly and, particularly with the increasing motorization rate, externalities produced by private transport (congestion, pollution, road accidents) especially in urban areas. In addition, there is a belief that transport investments support economic growth, in particular transit investments because they help fostering the agglomeration effect. Whether local or national tax sources should be used for subsidizing public transport is a fairly recent question, at least in Europe where, historically, countries used to be very centralized. Several national policy reviews as well as academic papers suggest that the reforms aiming at decentralizing power and responsibility for urban public transport management lead to successful outcomes. Yet, there is no literature on the effects of decentralization of tax raising on public transport provision although an increasing number of subnational governments reports a mismatch between transferred resources and devolved responsibilities and the public finance literature indicates that decentralization of finance authority can improve the results of decentralization reforms .

(cont.) The objective of this thesis, thus, is to test if the theoretical benefits of fiscal decentralization (i.e. decentralization of taxing power in addition to management responsibilities) apply to the urban public transport sector and to what extent. Using a sample of five European cities (Madrid, Barcelona, Paris, Milan and Stockholm) in decentralized countries as case studies, the thesis identifies three major outcomes of fiscal decentralization. First it increases the expenditure in public transport infrastructure. Second it increases the entrepreneurship of the local policy-makers. Third it generally improves the predictability of the revenues and therefore helps planning in the medium to long term. On the other hand, the research also shows that there is no increased willingness to tax at the local level therefore the stability of funding and its adequacy to the needs is not guaranteed by local fiscal autonomy. The thesis moreover suggests that a mixed system of national dedicated taxation and local capacity to incrementally adapt the tax rates is an optimal scheme for financing local public transport. Finally, in light of the case studies, the thesis provides some recommendations to Transport for London (TfL), in order to guide the ongoing debate on the necessity of increased fiscal autonomy for the local authorities in the UK to solutions that are likely to improve TfL's situation.