Congestion Pricing in New York City and How it Will Affect Businesses
By Owen Liu and Katy Chen
Attention Drivers! Beginning in 2021 there will be a charge for entering Manhattan south of 61st Street! New York State is making one of the biggest changes in its transportation history with the passage of the Traffic Mobility Act (“TMA”), America’s first congestion pricing program.
The bill is meant to reduce congestion and raise revenue to fund capital projects for the Metropolitan Transportation Authority’s subsidiary/affiliated agencies, including New York City Transit, Long Island Railroad and Metro North Railroad. TMA establishes tolls for vehicles entering the congestion zone, which includes all Manhattan streets and roadways south of and including 60th Street, except for FDR Drive and the West Side Highway. Vehicles that bypass the zone by traveling on these two expressways, without entering the street grid, are exempt from the toll charge. Emergency vehicles and vehicles transporting disabled persons will also be exempt. Passenger vehicles will only be tolled once on any given day and credit will be provided for residents with income lower than $60,000.
TMA did not specify all the details. For example, what will be the mechanism used to charge the vehicles? How much is the charge? Does the amount vary by time of day, or day of the week? Are there additional exemptions, discounts or credits? These details are left to Metropolitan Transportation Authority to work out, and there are currently no answers to these questions.
While the congestion pricing program is new to New York, similar programs exist in many other parts of the world. London, for example, established its own congestion pricing program in 2003, which successfully reduced traffic and raised revenue. Other cities such as Stockholm, Milan and Singapore also have their own versions of congestion pricing.
Like the congestion pricing program abroad, New York aims to generate funding for its public transportation systems, as well as to enhance the business environment. Growing congestion hinders truck transportation, which sellers rely upon to deliver products. When deliveries are not made on time due to congestion, businesses keep extra inventory on hand, which can be costly. The congestion pricing program is designed to help create a better flow of traffic, which will lead to a more efficient transportation ecosystem.
However, freight operators going into the congestion pricing zone will directly feel the increased cost of doing business. They argue that the benefit of smoother traffic will not outweigh the cost of paying congestion prices. The smoother traffic may save some travel time, but that the saved time will be too little to add on more delivery stops. Therefore, the slim benefit from the improved traffic does not increase to match the new cost of operation.
Others argue that a congestion charge will encourage people to visit out of town shopping areas and lead to a decline in business within the congestion zones. It may also be expensive to manage the program, collect the charge and enforce the rules.
Regardless of their views, business owners will have to approach the upcoming congestion pricing strategically. For example, although many details of the rules are not available yet, freight operators should prepare by asking the following questions:
- Will the congestion pricing be a part of my operation cost, or can it be avoided?
- If the congestion pricing is not avoidable, how does my business absorb the cost?
- Could I pass on this additional cost to the customers, in part or in whole?
- How does this cost compare to other major cost, such as the cost of traffic violations, fuel and labor cost?
- How would my competitor respond to the congestion pricing?
- If different congestion prices apply to different sizes of vehicles, is it beneficial to utilize more vehicles with lower price tag?
- Is it worthwhile to avoid paying the congestion prices?
For example, if the congestion price does not apply in the late hours, the owner may consider changing the shipping schedule as long as other factors allow. Typically, larger businesses have the capacity to make deliveries at late hours, while smaller businesses may not. In addition, the schedule of the route may be dictated by customer demand, meaning less flexibility in changing delivery hours or routes.
Logistic service providers should also include the cost of congestion pricing in their annual budget plans and executives should have a long-term strategy of dealing with the added cost. Sales teams should evaluate the possibility of raising the service fee for applicable customers, and Finance teams should analyze the profitability of operations in the applicable area. Prepare a plan to negotiate with owner-operated truckers on who will bear the additional cost.
There is no doubt that the congestion pricing is coming. Business owners should be prepared by having the congestion pricing in their future budget plan. Our advisors at Mazars USA can help you develop your strategy so you will be prepared!