Employer-paid Transportation Benefits
All text from the Congressional Research Service's "Tax Expenditures: Compendium of Background Material on Individual Provisions," 2008.
The value of transit passes or van pool costs provided directly by the employer can be excluded from employees' taxable income, subject to a monthly limit. The value of employer-provided parking facilities can also be excluded from employees' taxable income, also constrained by a separate monthly limit. Employers may choose to provide these benefits in cash, consistent with a compensation reduction arrangement.
Prior to 2009, the transit pass and van pool limit had been set in 2001 at $100 per month and was adjusted each year for inflation (rounding to the nearest $5). The limit for the parking facilities exclusion had been set at $175 per month in 1998 and was also adjusted for inflation each year. The discrepancy between the two limits resulted in significantly larger subsidies for commuters using vehicles compared to commuters using transit systems or van pools.
In 2009, under the American Recovery and Reinvestment Act (ARRA), the two separate monthly exclusion amounts were set equal to each other. The monthly tax exclusion for employer-provided commuter highway vehicle transportation and transit pass benefits increased to $230, effective from March through December 2009. Employees may exclude from income $230 per month in transit benefits and $230 per month in parking benefits — up to a maximum of $460 per month. Employees may receive benefits for commuter transportation and transit passes and benefits for parking during the same month; they are not mutually exclusive.
The law provides the equal benefits through Dec. 31, 2010. The monthly exclusion amount for 2010 will be adjusted for inflation.
Tax Expenditure by fiscal year: Exclusion of reimbursed employee parking expenses ($ millions)
Tax Expenditure by fiscal year: Exclusion for employer-provided transit passes ($ millions)
Exclusion from taxation of transportation fringe benefits provides a subsidy to employment in those businesses and industries in which such fringe benefits are common and feasible. The subsidy benefits both employees, through higher compensation, and their employers, who may face lower wage costs. To the extent that this exemption induces employees to use mass transportation and to the extent that mass transportation reduces traffic congestion, this exemption lowers commuting costs to all workers in urban areas.
Higher income individuals are more likely to benefit from the parking exclusion than the mass transit and van pool subsidies to the extent that the propensity to drive to work is correlated with income. The effective value of the transit benefits rise with marginal tax rate of a recipients. The value of the benefit also depends on the location of the employer: the provision is targeted towards the taxpayers working in the highly urbanized areas or other places where transit is available or parking space is limited.
A statutory exclusion for the value of parking was introduced in 1984, along with exclusions for several other fringe benefits. Some employers had provided one or more of these fringe benefits for many years, and employers, employees, and the Internal Revenue Service had not considered those benefits to be taxable income.
The Comprehensive Energy Policy Act of 1992 placed a dollar ceiling on the exclusion of parking facilities and introduced the exclusions for mass transit facilities and van pools in order to encourage mass commuting, which would in turn reduce traffic congestion and pollution. In 1998, the Transportation Equity Act for the 21st Century raised the benefit limits and modified their phase-in periods and inflation adjustment rules. Employees at that time could also choose to receive cash instead of transit benefits.
Many employers used fringe benefits during World War II to attract workers because wage and price controls limited their ability to compete for labor. A generation later, Congress sought to limit the use of tax-free fringe benefits such as employer-provided transportation benefits. After the Treasury Department proposed and then withdrew regulations regarding the tax treatment of certain fringe benefits, Congress in 1978 imposed a moratorium, which was extended in 1981, on such regulations. In the Deficit Reduction Act of 1984, Congress introduced new rules governing the tax treatment of fringe benefits. At that time, Congress expressed concern that without clear boundaries on the use of these fringe benefits, new approaches could emerge that would further erode the tax base and increase inequities among employees in different businesses and industries.
The exclusion subsidizes employment in those businesses and industries located where transportation fringe benefits are feasible and commonly used. Businesses and industries located where mass transportation alternatives are lacking gain little or no benefit from this provision.
Subsidies for mass transit and van pools encourage use of mass transportation and may reduce congestion and pollution. Motivating commuters in highly urbanized areas to use mass transportation can reduce commuting costs generally. If workers commute in ways that reduce traffic congestion, all commuters in an area may enjoy spillover benefits such as lower transportation costs, shorter waiting times in traffic, and improved air quality.
Determining fair market values for fringe benefits such as free or reduced price parking may be difficult in some places. Most highly urbanized areas, however, have many commercial parking lots, so that calculating comparable value of a parking benefits in those areas may be straightforward.
Fringe benefits are part of the total compensation package that employees receive and that employers provide to compete in labor markets. If some fringe benefits, such as transportation benefits, are not considered taxable income, then both employers and firms may wish to reduce taxable wages and salaries in order to increase untaxed fringe benefits. The tax exclusion of such fringe benefits may motivate employees and employers to design compensation packages that increase the consumption of goods and services provided as tax-favored fringe benefits relative to goods and services bought with taxable ordinary income.
Sources: Tax Expenditures: Compendium of Background Materials on Individual Provisions, Congressional Research Service, December 2008, Washington, DC: U.S. Government Printing Office; and "Qualified Transportation Fringe Benefits under ARRA," Internal Revenue Service, 2009.