Last week, an extensive discussion of parking garages and parking as an employee benefit occurred here at streets.mn. As I read the discussion, one thing really stood out to me: Commuter benefits are wildly inequitable, and companies are given more incentive to provide parking than any other possible benefit.
Beyond issues like the Fed garage, the issue is even more complex when you look at current and prior tax law, as well as proposed revisions.
The question becomes: How do you fix the commuter benefit to make it more equitable?
Current Commuter Benefit Rules
Employers are able to offer employees a tax-advantaged qualified transportation benefit. Originally developed in the 1980s, these benefits were intended to reduce congestion and pollution by creating a transit incentive. In practice, they’ve become a parking subsidy.
The 2019 limits for employer-provided benefits are $265 for transit or vanpool, and $265 for private parking. There is a $0 benefit for walking or cycling under current tax code. Prior to the passage of the Tax Cuts and Jobs Act of 2017, cyclists qualified for a $20/month benefit from 2009 to 2017. (This benefit is scheduled to go back into effect on January 1, 2026, assuming no intermediate legislation changes the rules.) Employers can still provide cyclists this benefit, but it is a taxable benefit to the employee.
Each benefit – including the defunct cyclist benefit – is based on actual cost of the benefit. The $265 and $20 is the maximum reimbursement allowed. Actual reimbursement is based on the cost of the transit pass, the fee for parking, or receipts for the cyclist’s needs. Parking provided by the employer is included in that value cap, even if provided for “free” to an employee, and is given fair market value compared to regular commercial price for parking at the same or nearby location. More than three times as many American workers get free parking as get any other form of commuter benefit. In other words, in practice anyone not opting for free parking is helping subsidize everyone else’s free parking.
Additional complication was created by the aforementioned Tax Cuts and Jobs Act of 2017: It turns out that in a zeal to find expenses to cut to fund the tax cuts sought in that act, the bill accidentally made the parking benefits offered by many employers taxable. Popular theory is that someone thought “commuter benefit” meant “bus passes,” and didn’t realize that the bulk of value in the program was associated to parking subsidy. As a result, private sector employers are no longer able to deduct the tax-free qualified transportation fringe benefit payments to employees as a business expense, and must pay a 21% tax on the benefit as “corporate profits.” They can avoid this by taxing the benefit along with W2 wages.
Now, the IRS is proposing rules changes to “fix” the problem – mostly by subsidizing free parking, and leaving the 21% tax on benefits that include transit passes. For employers that have large on-site parking areas specifically for employees, especially suburban-style parking lots, or ramps similar to that proposed at the Minneapolis Fed, the IRS proposes calculating tax liability using only the operating and maintenance costs of the lot (sweeping, heating, lights, etc.) and not the capital costs (land, construction, all that expensive stuff).
What Should Be Done?
Claiming that real estate and construction costs shouldn’t be included in parking liability while taxing employee transit benefits is silly. The IRS has asked for comments on this proposed rule change, with a comment deadline of February 22.
- The Coalition for Smarter Transportation, and Congressman Earl Blumenauer, has drafted a letter to the IRS, and recommend interested parties read it and ask their Congressional Representatives to co-sign and support it.
- This Twitter thread also has information about the proposed minimum request: https://twitter.com/andersem/status/1096145517581524992
Obviously, this is the minimum approach to oppose the proposal, and not a true fix for the inequity of commuter benefits. It merely keeps the existing benefit inequitable, not ridiculously in favor of free parking.
A study in the Journal of Public Transportation shows that when parking is free, most people will drive. When there are costs associated, multi-modal share increases. The highest share of multi-modal transport occurs when there is no benefit whatsoever, which suggests “just pay people more” would be a great solution. However, expecting corporate America to lose a tax benefit but then also just pay people more to make up for the loss is not realistic.
A better approach would be to make commuter benefits cafeteria plan eligible.
A cafeteria benefit is a custom-selection option that allows employees to choose among a variety of offerings to create a benefits package that best meets their needs. In a cafeteria-style plan, an employee generally receives a certain number of dollars from the employer to purchase particular elements of a benefits plan. They operate under a a special exception to federal income tax rules that apply to an employee’s earnings, and allow this “benefit dollar allocation” to be used for eligible benefits. Current eligible benefits include health insurance, life insurance, disability plans, HSAs and even retirement contributions. The advantage of a cafeteria plan is that it allows employees who may want a more expensive health plan to prioritize that and opt out of another benefit, like life insurance. In a typical cafeteria plan, an employee can even choose options that exceed the number of dollars allowed by the employer. In these cases, the employee pays a part of the premium for his or her chosen benefits, so the cost to employers is lower.
Commuter benefits are not eligible for this kind of benefit allocation – in other words, an employer cannot tell an employee, “Here is $200 per month in tax preferred commuter benefit. Choose your mode.” Were employers permitted to handle a commuter benefit this way, every eligible employee could be given the same allocation, and the same ability to weigh the costs of each way of getting to work. Someone who chose bicycling could buy up their health insurance or put surplus in an HSA. Someone who got a parking spot further away that was cheaper could put the excess in their 401k. Someone who contracted with the fancy underground garage could pay the difference for that choice.
This would be the fairest way to apply a commuter benefit without going cold turkey on parking. Individuals would receive equitable allocations, and employers a tax benefit. Individuals could use their funds as chosen, be it to pay for parking, pay for transit, or pay for a really nice bike lock and the occasional lift home if required. Employer cost to provide not-parking would be exactly the same as the cost of providing parking on a per-employee basis. Real estate cost would be a factor in an employer’s decision to build or provide “owned” parking — for employers building lots, they would have to look at local market value of a parking spot, and evaluate if owning parking at that rate is worthwhile.
Would going cold turkey be better? Maybe. But just like any other addiction, we won’t break America’s addiction to “free” parking overnight. By providing financial incentive to workers to choose other options, we can move to a better balance where people pay more to drive to work, and may only drive to accommodate specific needs, rather than because it is a day ending in Y.