Public transit can help people access jobs, reduce environmental pollution, create economic growth, and reduce traffic congestion. But federal investment in public transit has fallen in recent years. A new transit infrastructure tax credit, combined with a “direct pay” provision, could help close the gap while also providing states, localities, and transit agencies with a more predictable source of federal support than under the current competitive grant-based system.

Investment in new transit lines is slowing

Adjusted per capita, the US urban rail network is now the shortest among G7 (Group of 7) nations. Since 2021, the value of urban rail transit construction put in place—defined as the level of investment in this type of infrastructure completed each year—has been steadily declining. It is now at about half the level that persisted during the 2010s.

This situation results in part from price increases eroding the real value of transit investments. But it also reflects that, unlike highway projects, new transit lines depend on a time-consuming competitive grant process and very limited federal funding. 

Federal funding for transit differs substantially from funding for highways

The federal government distributes tens of billions of dollars annually to state departments of transportation to spend on highways, with broad discretion. 

By contrast, the Federal Transit Administration (FTA) distributes just $1 to $5 billion dollars annually to new transit projects, like rail or bus rapid transit lines, primarily through the capital investment grants (CIG) program. Under CIG, the federal share is determined on a project-by-project basis and can range from 30 to 80 percent of costs, with states, localities, and transit agencies covering the remainder. 

Most agencies apply for CIG funds for new lines because it offers large grants unavailable elsewhere. But they face a very different process from the open-ended approach to funding highway expansion: 

• Obtaining CIG funding can be a lengthy and resource-intensive undertaking. Applying agencies must invest significant time and resources before their grants are signed. Projects can take decades to move from proposal to completion. The National Environmental Policy Act, which regulates federal investment, is enforced more rigorously on transit projects than highway expansions.
• The CIG program is extremely competitive. Available funding is insufficient to support all eligible projects, leaving some projects waiting years for federal funding commitment and resulting in some projects costing more money over time. Congress has recently proposed cutting grant funding for transit, which would worsen this problem.
• CIG funding gives federal officials substantial discretion over which projects to fund and when. Project timelines and funding decisions can vary across administrations, creating uncertainty for state and local sponsors. For example, since taking office in early 2025, the Trump Administration has only funded a single new transit line. 

Some agencies are now considering investing in transit without federal support, but in the current context, there are few other sources of funding for large investments like new lines.

How a transit infrastructure tax credit could work

To address these issues, one option could be to convert the CIG program to a formula grant akin to the highway program. But determining the formula wouldn’t be simple, since transit lines require large infusions of funding—but not over steady periods; some regions may need to build lines now, whereas others do not. Nor is it obvious which governments or transit agencies should receive funds; in some cases, transit projects are undertaken by state governments, in others localities or agencies.

An alternative solution could be implementing a new transit infrastructure tax credit program authorized by Congress could be combined with direct pay to expand funding for projects while streamlining the process to get them built. Direct pay, or elective pay, enables tax-exempt organizations, states, localities, and agencies to file tax returns, and then receive tax credits to repay part of the cost of certain eligible projects. The IRS treats these credits as overpayments and provides refunds as lump-sum cash payments.

Public and nonprofit entities gained the ability to receive such tax credits for clean energy projects under the 2022 Inflation Reduction Act. For these projects, the IRS provided post-completion credits worth 30 to 70 percent of costs, depending on project location and meeting workforce requirements. 

Transit projects receiving the new tax credit could be made eligible for direct pay, too. Here’s how it might work:

1. Transit agencies would develop project plans. Like highway project plans, they would be required to follow basic federal requirements (but not the complicated CIG review process).
2. Agencies would assemble commitments of local or state funding to cover at least 50 percent of project costs to demonstrate local political support for the project concept.
3. Agencies would preregister plans and cost estimates with the IRS and begin construction, and take out loans for the remaining 50 percent of costs using municipal bonds.
4. Upon completion, agencies would file for the transit infrastructure tax credit and receive a lump sum in return equivalent to 50 percent of initially planned costs. If costs increase over time, agencies would have to make up the gap through other sources.

Congress would need to authorize this approach and program through legislation. To get a sense of cost or foregone federal tax revenue: The 21 transit projects currently funded by CIG across the country have a total estimated construction cost of about $46 billion. Applying a 50 percent credit rate to those projects would imply about $23 billion in federal support over two to ten years, because of different construction timelines. This may or may not be larger than the CIG program today; the ultimate cost would depend on program design, timing, and participation. Additional projects in the coming years would increase the cost to the federal government over time. In theory, privately sponsored projects could also apply for this tax credits, though they would not need to leverage direct pay to do so.

Relative to the current CIG process, this approach could have several advantages. It could provide more predictable federal support for qualifying projects, shorter timelines for project delivery, and more manageable administrative responsibilities at FTA, which has experienced severe staffing reductions. That said, it would require the IRS to takeover some administrative responsibilities.

This new tax credit would not necessarily replace the CIG program. But it could complement existing transit funding by providing a more predictable source of federal support and reducing reliance on a lengthy, burdensome grant process.