Are federal subsidies provided to Amtrak worth their cost to taxpayers? This is a fundamental question that politicians, economists, and the public have debated since 1970, the year the federal government created Amtrak by an act of Congress. This question is of particular interest to people living in cities on the east coast, where Amtrak’s trains are most frequently used. Proponents of Amtrak argue that subsidies are justified because Amtrak provides benefits to the public. Opponents of Amtrak argue that it’s a waste of taxpayer money because a small portion of the public uses Amtrak.

Since its inception, Amtrak has had to rely on federal subsidies in order to operate. In 2014, Amtrak received $1.39 billion dollars in federal money to cover operating costs and fund capital projects. The federal government’s choice to subsidize Amtrak’s passenger rail service reflects its belief that Amtrak provides positive externalities to the public. Like with any other subsidy, the government believes that its investment of taxpayer money in this industry promotes public welfare.

Externalities and subsidies

In economics, an externality is a consequence of an economic activity on a third party and can be either positive or negative. A subsidy is a form of financial aid or investment by a government that usually promotes some sort of economic or social policy. The federal government subsidizes thousands of ventures in hundreds of different industries within our economy with the goal of promoting economic or social benefits (i.e. schools, research grants, etc.).

Amtrak subsidies should be evaluated with externalities in mind. The fundamental question is, do positive externalities exist, and if so, what is their value in the marketplace? This will help determine how much the government should allocate to support these externalities.

Not all Amtrak routes are created equal

An empirical analysis of Amtrak and its finances indicates that Amtrak profits mostly from routes between Washington DC and Boston (referred to as the Northeast Corridor). These profits offset Amtrak’s losses from its less popular routes in other parts of the country. Demand for passenger rail service between DC, Philadelphia, New York, and Boston is relatively constant among business travelers, who often don’t have to personally fund their travel while on business. Outside of the Northeast Corridor, demand for passenger rail is much lower. Amtrak’s long-distance routes are its least popular service, as consumers typically prefer air travel for any journey beyond 200 miles.

Proponents of Amtrak argue that Amtrak’s service provides several positive externalities including energy efficiency, alleviation of traffic congestion, benefits to national defense and infrastructure, a transportation alternative during a national emergency, and contributions to national history and social welfare. Some of these externalities are examined in detail below.

Energy efficiency

Some argue that passenger rail is a more energy-efficient mode of transportation than its competitors (car and airplane travel). Passenger rail travel is more energy-efficient than car or rail travel, however not as efficient as bus travel. Rail is considerably more energy efficient when consumers chose it over air travel. Consumers rarely choose rail travel or air travel, however, especially in instances of travel over 200 miles. The most energy-efficient means of transportation is the bus, which is a good substitute for rail travel between cities, especially in the northeast corridor. If consumers choose rail travel over bus travel, net energy efficiencies decrease.

Alleviation of traffic congestion

Traffic congestion is considerably alleviated when consumers choose passenger rail over car or bus travel, particularly in the northeast corridor. As more consumers choose passenger rail over driving, interstates are less clogged with traffic. This positive externality is easily observable, especially in dense urban areas where traffic congestion is a major concern. This externality is less present in more rural areas of the country, where demand for passenger rail service is low.

National defense and infrastructure

Another argument for Amtrak is its contribution to the national defense network of the United States. In times of war, passenger trains can be used to transport troops throughout the country. In the case of an attack on the homeland, interstates and highways might be damaged or destroyed, thereby limiting troop transport to rail or air travel. Passenger rail provides an alternative to interstate car travel and thereby strengthens the defensive infrastructure in our country.

Peak oil and transportation shortages

Similar to the national defense argument, some argue that Amtrak provides a viable transportation alternative to consumers during times of petroleum shortages or national emergencies. If the price of oil becomes prohibitively expensive, consumers will look for substitutes for car travel. As rail service is the second most energy-efficient means of transportation, a viable supply for passenger rail service would have to exist in order to meet consumer demand in these particular conditions. Given the low price of oil today, this is unlikely to be a concern anytime soon.

Existing externalities

Evidence from research conducted by the Congressional Budget Office suggests that most of the positive externalities mentioned above are concentrated in the Northeast Corridor and the California coast, where demand for Amtrak service is the highest. Amtrak does little to alleviate traffic or preserve energy in the Midwest, South, Southwest, or Northwest regions, where consumers rarely choose Amtrak service over air or car travel. Amtrak’s load factor is just under 50% (load factor measures usage by capacity), which suggests that excess supply exists in the marketplace for passenger rail in the United States. As such, federal subsidies to Amtrak should be adjusted to only fund its most profitable lines (the Northeast Corridor and California coast) and discontinue its least profitable lines. Such an adjustment would shift the supply of passenger rail back to a market-equilibrium price and help eliminate the inefficiencies that currently exist in the marketplace.