Transportation Economics/Revenue/Cost Allocation

Cost Allocation

FHWA Highway Cost Allocation Study

In 1997 the US Federal Highway Administration (FHWA) produced a highway cost allocation study (its first in 15 years) designed to offer guidance on how to structure user charges on different classes of vehicles, particularly in reference to charges imposed by the federal government. The study used a life cycle cost technique to estimate the annual costs of highway infrastructure and to allocate these costs to classes of vehicles based on outputs, such as axle loadings.

Its summary of findings estimated that, in general, passenger vehicles (cars and light trucks) would account for about 93 percent of all miles traveled in the year 2000 and would pay about 64 percent of all federal highway user fees. In contrast, single unit and combination trucks would account for about five percent of travel miles, while paying about 25 percent of federal user fees. The higher share of user fees relative to miles traveled for combination trucks largely reflects the greater fuel consumption of heavier commercial vehicles.

The report weighed user payments against allocated costs to estimate ratios of payments to costs for each class of vehicle in order to estimate the degree of overpayment or underpayment. In general, the findings suggested that pickups, vans and 2-axle trucks were overpaying relative to their share of highway costs, while 3-axle trucks, tractor trailers and buses were underpaying relative to the costs they occasioned. Passenger cars were found to cover their share of highway costs. An important recommendation of the study was that a weight-distance tax, particularly for heavier vehicles, would improve both the efficiency and the equity of the system of highway finance.

The highway cost allocation study also produced rough estimates of the marginal external costs of travel for different classes of vehicles on urban and rural interstates. Several components of external cost were considered, including:

• Pavement damage
• Congestion
• Crashes
• Air pollution
• Noise

The costs varied widely across location and type of vehicle. For example, passenger cars were estimated to account for external costs of 2.91 to 10.41 cents per mile on rural and urban interstate highways, respectively, while 80 kip (kilopascal), 5-axle trucks accounted for 19.85 and 69.64 cents per mile on urban and rural interstates. These per-mile estimates reflect the inclusion of air pollution costs estimated in an addendum to the original study.

Transit Allocation

In 2008 public transit systems in the US as a whole recorded 10.257 billion unlinked trips (boardings). They spent $36.414 billion on operations and an additional $16.089 billion to rehabilitate, replace and expand their capital stock (stations, bus shelters, storage and maintenance facilities, vehicles, etc.). Total fare revenue is estimated at $11.378 billion, or around $1.10 per unlinked trip. We can get a rough estimate of the average cost of an unlinked transit trip by summing the operating and capital costs and dividing by the total number of trips. This turns out to be ($36.414 billion + $16.089 billion) / 10.257 billion = $5.12 per trip. Since transit ridership is measured in terms of unlinked trips the average cost per (linked) trip is actually a bit higher.

The issue of cost allocation in public transit systems is similar to the task of cost allocation among highway users in that the objective is to allocate costs among classes of users according to some measure of output. However, allocation of costs among transit users is a difficult task for several reasons. Consider our estimate of around $5.00 per trip.

First, note that our estimate reflects costs aggregated across different transit modes, each of which may have a different cost structure. The differences may be most pronounced between bus and rail systems. Bus systems tend to have low fixed costs but higher marginal costs. The opposite is true for rail systems, which require large up-front costs for construction, but tend to have low marginal costs thereafter. The data source from which operating and financial data can be obtained typically classify costs as "capital" or "operating", meaning that marginal costs must be estimated. Both categories (capital and operating) have some component of fixed costs, such as administrative overhead.

Second, note that costs may vary not only by mode, but also by time of day.

Third, recall that transit ridership is measured in terms of unlinked trips. Some trips may involve more than one mode (e.g. a bus trip with a transfer to a rail line), making difficult the task of assigning costs among modes.

Fourth, some costs may be joint among different modes and may be difficult to assign among them. This is particularly true for public transit operators that operate more than one mode.