Money shouldn't be a barrier to providing brilliant public transport and cycling infrastructure. This briefing outlines the many sources of funding used overseas and makes recommendations for the UK.

Lynn Sloman and Lisa Hopkinson, Transport for Quality of Life04 Nov 2019

Summary

Transforming transport to meet climate targets will cost money. It will also save money through improving health by reducing air pollution and increasing active travel. This paper identifies the numerous ways that money can be raised for sustainable transport, including through adopting tax raising approaches used very successfully by other European countries and through scrapping spending on roads that will exacerbate climate change.  A lack of money is not the reason the UK is doing so poorly on trains, trams, buses and bikes – the problem is the lack of political will to prioritise sustainable transport and put in place the funding streams to make it happen.

A PDF version of this article is available here.

Introduction

This is the seventh in a series of eight papers commissioned by Friends of the Earth on the transport policies that are needed to cut carbon emissions in line with the Paris Agreement.

In previous papers, we argued that a strategy focussed purely on electrifying the vehicle fleet (while allowing traffic volumes to grow) does not achieve a sufficiently rapid reduction in carbon emissions to limit global warming to 1.5°C above pre-industrial levels. The carbon arithmetic means that we also need to reduce traffic volumes significantly, and this must happen within the next 10-12 years. This implies a very different approach to the one we have at present. It means that we must instigate a rapid transformation of our transport system to offer excellent low-carbon alternatives to driving and to discourage car use, as well as achieving a faster transition from petrol and diesel to electric cars. This will require major capital investment in sustainable transport infrastructure (e.g. tram networks and cycleways) and low-carbon buses, and increased funding for operation of a Swiss-style comprehensive public transport network.

This paper looks at how the transformation of our transport system described in previous papers can be funded.

Principles for reform of transport funding

Three simple principles underlie our suggested approach:

PRINCIPLE 1: Transport budgets should be re-allocated from climate (and other environmental) ‘bads’ to climate ‘goods’

PRINCIPLE 2: Local authorities should have powers to raise their own funds for sustainable transport

PRINCIPLE 3: Increased funding for sustainable transport should be drawn from all the beneficiaries of better transport services, not just passengers and tax-payers.

Below we describe how each of these three principles should be applied. We also look at how politicians can achieve wide buy-in for a change from our current unsustainable funding arrangements to a new approach that would be fairer, more effective, and would result in a better transport system for all. 

Principle 1: Reallocate transport budgets from climate ‘bads’ to climate ‘goods’

A large proportion of capital expenditure on transport is for projects that make carbon emissions and other environmental impacts worse, not better. The biggest problem is the amount of money which is being spent on road-building. This will generate increases in traffic and in some cases vehicle speeds, in a period when most cars are still petrol- or diesel-powered, and hence will increase carbon emissions and health-damaging air pollution.

In 2013, the Treasury signalled the government’s intention to “commit to the biggest programme of investment in roads since the 1970s” and said that “the government will treble annual investment in major road schemes by 2020-21”1. The Department for Transport subsequently allocated more than £15 billion to Highways England for a massive national road-building programme (Road Investment Strategy 1, RIS1) between 2015 and 20202

In the autumn 2018 budget, the Chancellor went further, announcing that the government would deliver “the largest ever strategic roads investment package worth £28.8 billion from 2020-2025”3 [our italics]. Income from Vehicle Excise Duty in England (about £6 -7 billion per year) has been ring-fenced to form a National Roads Fund to pay for this4.

It is worth taking stock of the likely carbon impact of this huge expansion of road building. Using Highways England’s own figures for increased carbon emissions from road schemes built in the eight years from 2002 to 2010, we estimate that those schemes caused an increase in annual carbon emissions from the trunk road and motorway network of at least 3%5. The significantly greater expenditure on the strategic roads network between 2015 and 2025 (RIS1 in the five years to 2020 and Road Investment Strategy 2, RIS2, from 2020 to 2025) means that schemes to be built in that period will cause an even bigger increase in annual carbon emissions. We estimate that this could be as much as 17% of current carbon emissions from trunk roads and motorways. In other words, the national roads investment strategy is very bad indeed in its carbon impact6.

Other government funding streams are also being used to increase road capacity. The Housing Infrastructure Fund is being used to fund road schemes to open up land for new (car-dependent) housing development, and extrapolating from the HIF funding that has been allocated so far we estimate that this could result in additional funding for road schemes of about £1.8 billion over six years7. The National Productivity Investment Fund (NPIF) includes £1.4 billion from 2017-18 to 2020-21 for roads and local transport, of which the majority is for road schemes8.

It isn’t just national government that has its priorities upside down. Local transport investment is also strongly skewed towards road schemes. For example, about two-thirds of transport capital spending by Local Enterprise Partnerships is allocated to local road schemes, and we estimate that this was about £2.6 billion over the last four years9.  Total capital expenditure on local roads (ranging from structural maintenance to construction of new roads), by all parts of the public sector, is considerably larger than this: government accounts show a total of £20.6 billion capital expenditure on local roads between 2013/14 and 2017/1810.

The amount of capital expenditure on roads dwarfs capital expenditure on buses, trams, cycling and walking11. Government accounts show that in the last five years, capital spending on roads by all parts of the public sector was nearly 30 times bigger than capital spending on these sustainable modes: £34 billion compared to £1.2 billion. Given the government’s current plans, this proportion will almost certainly worsen over the next five years.

There is thus a great deal of potential to increase investment in local sustainable transport, simply by reallocating money that is currently being spent on unsustainable transport. Diversion of capital currently allocated to roads could provide capital (and extra revenue funding)  for buses, trams, cycling and walking of at least an extra £7 billion per year (based on past spending12), and up to an extra £10 billion per year (based on planned future spending13), while still staying within the existing transport capital budget. This would be transformative. It would enable a major programme of construction of tram systems powered by green electricity in urban areas; rapid conversion of the bus fleet to clean electric buses; redesign of roads to provide comprehensive networks of cycleways and safe streets for pedestrians; and increased revenue funding that could be used to improve services.

This increase in funding for local sustainable transport would need to be accompanied by action to build local capacity in order to spend the money wisely. Local authorities have been cut back to the bone and many do not have the staff and expertise to manage a substantially larger sustainable transport budget. As argued in previous papers, changes to local transport governance will be needed, including re-regulation of bus services (which will itself achieve savings that can be reinvested), and adoption of legally enforceable regional and local carbon budgets. There should be long term 15-year funding deals between government and local authorities, conditional upon developing local transport plans that are compliant with carbon budgets, to enable local authorities to plan properly. We will need new bodies to provide training, advice and support to local authorities while they build their expertise (which we called ‘Local Public Transport for England’ and ‘Walking and Cycling for England’ in previous papers).

Principle 2: Local authorities could have powers to raise their own funds for sustainable transport

Transport funding is strongly centralised in the UK, and local authorities are heavily dependent on decisions made in Whitehall. In other countries, local authorities have more freedom to raise income from local sources, and this is used to fund both capital investment in new transport infrastructure and ongoing operating costs.

Below we summarise 16 local funding sources that are used by local authorities around the world to pay for their public transport systems14. Only three of these are widely used in the UK: development charges, parking charges and council tax.

Funding sources widely used in the UK

Development charges - widely used. In Britain, the Community Infrastructure Levy and Section 106 agreements can fund public transport capital upgrades and walking/cycling infrastructure, but offer little for subsequent operating costs. CIL and S106 capture only a small proportion of landowners’ windfall profits from development.

Charges for parking on-street and on public land - a widespread source of income in UK and elsewhere, some of which is used for public transport.

Residential property tax - widely used to support public transport in USA. Being used to expand the Metro in Paris. A small proportion of council tax in UK is used for public transport.

Funding sources used in a few places in the UK

Business property tax - widely used to support public transport in USA. Being used to expand the Metro in Paris. The Crossrail project in London raised £4 billion from a temporary supplement to business rates.

Levy on workplace parking - Nottingham has introduced a workplace parking levy, which it uses to help fund its tram. Melbourne, Perth and Sydney also use workplace parking levies to fund public transport.

Road user charges - London, Singapore, Stockholm and Gothenburg apply congestion charges. London and Milan apply local air pollution charges. San Francisco is using bridge tolls for public transport improvements. Lorries in Germany pay a fee per km, but this is not locally controlled.

Funding sources not used in the UK

Local payroll levy - widespread in France (Versement Transport). In Oregon, the cities of Portland and Eugene levy 0.6% for public transport. New York levies 0.34% for public transport.

Visitor lodging levy - local authorities throughout Switzerland levy charges at various rates for each night of accommodation, with funds partly used to support public transport, on which visitors get free local travel. Paris also has a visitor levy to support public transport improvements. Local authorities in many other countries (including Austria, Belgium, Germany, Italy, the Netherlands and Spain) also use visitor lodging levies to raise income for local services, although not always for local transport.

Land value uplift levy - a land value uplift levy is an additional tax levied on residential and/or commercial sites when they benefit from major public transport upgrades. Miami, Los Angeles, and Denver defined ‘transit benefit districts’ to capture property value uplift. Tax Increment Financing borrows to build public transport on the basis of future increases in property taxes (Atlanta is an example).

Land value capture - public authorities in France, Germany and the Netherlands are able to acquire undeveloped or derelict land for development at close to its ‘existing use value’, then develop it themselves or sell in parcels to developers. Around 90% of the resulting uplift in land value is captured to fund infrastructure and affordable housing.

Local income tax - Cincinnati levies 0.3% local income tax to support public transport.

Local corporation tax - New York partly funds public transport from a local surcharge on corporation tax.

Local sales tax - the most common dedicated source of public transport funding in USA. Los Angeles levies 0.5% for public transport and some road schemes; Seattle levies 1.4% for public transport.

Property sales tax - New York partly funds public transport from a local tax on property transactions.

Levy on commercial car parks - Chicago levies $0.75-$2.00 per day as a surcharge on parking.

Local vehicle tax - 33 states and 27 local governments in USA use a vehicle tax to fund public transport. Toronto collects $60/vehicle/yr.

Local fuel tax - Vancouver levies 15c/litre for public transport.

How much money could be raised in the UK

The three funding sources that are widely used in the UK (development charges, parking charges and council tax) provide very limited amounts of income for public transport. Development charges, in the form of Section 106 agreements, currently generate only about £130 million per year for transport schemes15. Parking charges generated net income of £870 million in England in 2017/1816. Only about 2 pence in every £1 raised from council tax is spent on public transport17.

By contrast, the amount of additional funding that could be generated from some of the sources listed above is substantial. For example:

Road user charges 

We estimate that a road user charge or Eco Levy on driving in urban areas could raise around £8 billion per year in Britain (if applied to cars and vans at a rate of 6 pence per km18), while also reducing car traffic in these areas by more than a quarter.  In addition, an Eco Levy on driving on the Strategic Road Network (motorways and trunk A roads) could raise around £5 billion per year, which we have suggested in an earlier paper could be used to substantially reduce rail fares19. A distance based HGV charge designed to recoup the full costs HGVs impose on society could raise around £7 billion per year, which could be used to increase rail capacity for freight, electrify the rail network, connect freight sites to the rail network and develop new types of rail freight services20.

Land value capture

More effective capture of landowners’ windfall profits from housing development could provide around £11 billion per year in England21. This could be achieved be changing the law so that public authorities leading a land assembly process were only required to pay land-owners an amount close to the ‘existing use value’ of the land (rather than an amount reflecting the much higher value of the land once developed).

Payroll levy

A local payroll levy could raise up to £7 billion per year (if widely applied so that it generated comparable income to the French public transport payroll levy, Versement Transport, VT22).

Visitor lodging levy

A visitor lodging levy could raise around £1 billion per year in Britain (if applied at a flat rate of £2 per overnight stay to all visitors23).

Land value uplift levy 

Research commissioned by Transport for London found that a sample of eight proposed transport schemes in London with a total capital cost of £36 billion (including a proposed new rail line, extension of an Underground line, and upgrade of an Underground station) could potentially increase the value of existing property and land nearby by £63 billion, and could unlock land for development with a value of £24 billion24. These are absolute increases in value (not annual revenue flows), but tax reform to capture some of this windfall could generate significant future income, against which a local authority could borrow money for major sustainable transport infrastructure schemes. TfL concluded that “the scale of the opportunity to use land value capture as a method of funding transport investment is vast”. There is similar evidence from outside London: for example, a survey by Nationwide building society found that proximity to a Metrolink stop in Manchester or a rail station in Glasgow adds 5-6% to the value of a house25. The potential of a land value uplift levy is likely to be greater in larger cities.

For some of these funding sources (land value capture and a visitor lodging levy), only a proportion would be likely to be available for transport schemes, as local authorities would also wish to use the income for other purposes: in particular, land value capture could pay for increases in the amount of genuinely affordable housing that is built, and a visitor lodging levy could be used in part for public realm improvement, street cleaning, and tourism services. Nevertheless, there is significant potential to generate increased local funding for transport.

The most appropriate funding sources are also likely to vary from area to area. For example, rural areas will have less capacity to raise significant funds from a payroll levy, but some (such as National Parks, Areas of Outstanding Natural Beauty and seaside areas) will be well-placed to apply a visitor lodging levy.

Local fund-raising powers would not remove the need for central government funding, particularly for economically disadvantaged areas where the ability to raise local funds might be less. Government could incentivise local authorities to take advantage of new fund-raising powers by offering matched funding, with a higher ‘gearing’ in more deprived areas – for example, Tees Valley might receive 90% match, while London might only receive 5%, reflecting these areas’ different abilities to raise money from sources such as a payroll levy. However, powers to raise local funding to improve local transport could command local support, and this would increase the total amount of investment available. Greater local control over income would give local authorities more freedom to address local priorities and fund what was most needed, rather than having to rely on ring-fenced funds for specific purposes. It would also reduce the large amount of wasted effort that goes into bidding competitively for government funding.

Seattle provides a good example of the way in which local revenue-raising powers can be used to improve local public transport. The Central Puget Sound Regional Transit Authority (which covers Seattle and surrounding areas, a region with a population of about 3.1 million people26) has repeatedly received voter backing for increases in local taxation to enable major expansion of the public transport network. Just over half of the transport authority’s funding comes from a local vehicle tax, property taxes and sales taxes. Most recently, in 2016, voters supported an increase in the local vehicle tax from 0.3% to 1.1% of vehicle value (paid on purchase and then annually); a new annual property tax of $0.25 per $1000 of property value (i.e. $100 per year for a $400,000 house); and an increase in a sales tax hypothecated to transport from 0.9% to 1.4%27. The additional funding will enable the transport authority to build 62 miles of new light rail lines; build a bus rapid transit system on major highways; extend railway platforms to increase rail capacity; and provide funding for operation of the increased services28. The total cost of the expansion programme between 2017 and 2041 is $54 billion, of which slightly over half of the funding will come from the new taxes ($28 billion), with the rest coming from bonds, existing funds, and federal grants29. This scale of expansion of public transport is what we need to be doing in Britain, too, in order to tackle climate change. Enabling local authorities to raise funds (with matched increases in government funding) could unlock a similar ambition here.

Principle 3: Increased funding for sustainable transport should be drawn from all beneficiaries

The UK approach to funding public transport investment and operations is very narrow: politicians argue that funding must come either from fares paid by passengers, or from (national) tax-payers, as though there were no other options. For most of the last four decades, governments have taken the view that tax-payers should pay less, and fare-payers correspondingly more.

This binary choice is a major barrier to sustainable transport improvements. Local authorities that want to expand their public transport network are reliant on securing funding from national government, and if that is not available, they are powerless to act. For example, Leeds, one of the fastest growing cities with chronic road congestion, has twice had bids for funding for a tram system turned down by the government30.

There are a number of beneficiaries of an efficient public transport system, in addition to existing fare-payers, and there is a logic that all the beneficiaries of such a system should make a contribution to the costs. For example:

  • Employers benefit, because a good public transport system (and good cycleways etc.) enable their staff to travel to work, and increase the catchment area from which they can recruit employees;
  • Tourists benefit, because a good public transport system enables them to explore the city or countryside they are visiting;
  • Land and property owners benefit, because public transport improvements increase the value of their asset;
  • Car-users benefit, because an efficient public transport system reduces congestion. A majority of drivers would actually prefer to swap their cars for public transport if services were better31.

A new approach to transport funding, in which local authorities designed ambitious sustainable transport investment packages which drew on contributions from all local beneficiaries, backed up by a contribution from national government, could unlock substantially more funding than the current approach.

Four funding reforms would make this new approach possible.

First, local transport authorities should be given the power to introduce a local public transport payroll levy. Employers would contribute towards the cost of a city’s public transport system in proportion to the size of their workforce. As described in an earlier paper32, the French public transport payroll levy (Versement Transport, or VT) is used by more than 80% of France’s 300+ urban transport authorities, and funds more than half of their public transport infrastructure investment and operational subsidy. It pays for cities to build or extend their tram networks, funds major improvements to bus networks (including new routes and construction of dedicated bus ways); and enables public transport fares to be kept low or even removed altogether (as in Dunkerque and elsewhere).

Second, local authorities should be given the power to introduce a visitor lodging levy, using some of the resulting income for local transport (and, as in Switzerland, giving visitors a ‘guest card’ which entitles them to free use of local public transport). The Scottish Government has committed to introduce legislation to allow local authorities to implement a visitor lodging levy, and the proposal has cross-party support33. Edinburgh may be the first local authority to bring in a levy: the council anticipates that a ‘transient visitor levy’ of £2 per night would raise £15 million per year, and the levy is supported by 85% of Edinburgh residents and a majority of businesses and accommodation providers. Consultation suggested that the priorities for use of the levy are street cleaning, transport, parks and policing of tourist areas34.

Third, the law should be changed to enable local authorities to buy or assemble land for development at close to its ‘existing use value’ (in particular, for housing), and to capture the increase in value that results from planning permission being granted35. This would provide funding for construction of sustainable transport infrastructure to and within new developments, including new tram and rail lines and cycleways. It would enable an excellent sustainable transport network to be built before new residents move in. This approach is the norm in France, Germany and the Netherlands, where about 90% of the increase in land value as a result of a change of use is captured by public authorities (compared to only about 27% here, captured via development charges)36.

Fourth, current property taxes (council tax for residential property, and business rates for commercial property) should be reformed so that they capture increases in the value of existing property that occur because of public investment in infrastructure, such as tram lines or railway stations. This has recently been recommended by the House of Commons Housing, Communities and Local Government Select Committee37.

In addition to these changes, the government should encourage local authorities to take advantage of the powers they already have to introduce an Eco Levy for driving (a road user charge) or a workplace parking levy. We argued in a previous paper19 that the government should make introduction of a distance-based Eco Levy in urban areas obligatory within five years, as a means of achieving carbon budgets, and that it should provide up-front funding immediately to enable sustainable transport alternatives to be improved in preparation for the Eco Levy.

Making it happen

There is no shortage of potential funding sources to create and operate a low-carbon sustainable transport system in our towns and cities. But there are two problems: money is being spent on the wrong things, making carbon emissions worse, not better; and we don’t have the right mechanisms to secure contributions from all those who would benefit from a better transport system.

If government gave local authorities the powers to raise funding from employers, visitors, and land and property owners, and at the same time offered matched funding for sustainable transport schemes (re-purposing money that until now has been spent on road-building), it could unlock a wave of ambition for clean, green, affordable, connected transport systems.

As in Seattle, towns and cities would be able to decide whether it made sense for all the beneficiaries of such a transport system to make a contribution to help make it happen. Because everyone would be contributing, it would feel fair; and because everyone would be better off, it would feel attractive. There is evidence from America that people do vote to pay more tax if they can see it will benefit them directly. Seattle is exceptional in the scale of its ambition, but across the USA, around 70% of referendums about increasing taxes to fund transport projects receive the support of voters. In 2018, 34 out of 39 public transport ballot measures received voter approval, and 13 out of 16 cycle and pedestrian ballot measures38. Most of these were at regional, county or municipal level – that is, people were voting to pay more sales or property tax to enable a transport project in a place that was local to them. It would not be necessary to introduce ballots like this here (public consultation can establish whether there is local support), but the American system of referenda provides evidence that people are willing to pay more tax if it will lead to a better local transport system.

Similarly, evidence from Edinburgh shows that residents, businesses and accommodation providers all support introduction of a transient visitor levy to improve facilities and services related to tourism34. Surveys (in London) and referenda (in Stockholm and Milan) show people support road user charges aimed at cutting congestion and air pollution19. In France, local employers have supported introduction of and increases in the public transport payroll levy to pay for tram systems and, in some cases, fare-free transport39.

More than anything, we need a sense of vision to create public transport systems that are fit for a low-carbon future. But knowing that the funding is there to make the vision happen could unlock our collective civic imagination. In France, the renaissance of tram systems and associated public realm enhancements over the last few decades owes a lot to the introduction of the public transport payroll levy.

As noted in an earlier paper, transport is now the rogue sector in our efforts to tackle the climate emergency. Business-as-usual on transport policy and funding has brought us to an ecological tipping point. In order for us not to tip the world into catastrophic climate impacts, we need a political tipping point. The large-scale changes in funding for transport that are proposed in this paper may sound unlikely. But we live in extraordinary political times, in more ways than one. Our proposals offer a practical means for politicians to start dealing with climate change, while also stimulating investment across the country, creating places that have clean air, healthy streets, and efficient economies, and where everyone – residents, businesses, visitors and land and property owners – is better off.

Conclusions

The following are ‘must do’ actions to provide the funding for a low-carbon transport system:

  • Cancel the £28.8 billion National Roads Fund and reallocate all national and local government funding that is currently earmarked for road schemes to sustainable local transport, generating a fund of £7-10 billion per year.
  • Give local authorities the power to introduce a public transport payroll levy, generating up to £7 billion per year.
  • Give local authorities the power to introduce a visitor lodging levy, providing up to £1 billion per year.
  • Change the law on land compensation so that local authorities can buy or assemble land for development at close to its existing use value, freeing up to £11 billion per year for construction of sustainable transport infrastructure.
  • Reform property taxation to capture increases in the value of existing property and land that occur when tram lines and railway stations are built with public money.
  • Require urban local authorities to bring in an Eco Levy for driving, generating about £8 billion per year.
  • Introduce an Eco Levy on the Strategic Road Network, generating about £5 billion per year, and a distance-based HGV charge, generating about £7 billion per year.

Taken together, these funding sources have the potential to generate locally-controlled income of £27 billion per year, of which a significant proportion – perhaps around £21 billion per year – might be spent by local authorities on sustainable transport. In addition, there could be £7-10 billion per year in government grants to local authorities for sustainable transport, and £12 billion per year that could be used by national government to reduce rail fares and shift freight from road to rail.

Acknowledgements

Thanks to Jenny Bates, Mike Birkin, John Booth, Ric Bravery, Mike Childs, Chris Crean, Richard Dyer, Kate Gordon, Victoria Harvey, Gerald Kells and Anthony Rae for their helpful comments and advice on this paper.