Commuter tax benefits: Who wins and loses?

By Bill Holloway

A new report from TransitCenter shines a light on the federal Commuter Tax Benefits program and the impact the program has on mode choice. The federal program allows employees to avoid paying taxes on certain bicycle, car, and transit commuting benefits provided by their employers. While the concept of excluding from taxation income spent on transportation to work may sound reasonable, in practice the program is heavily skewed in favor of drivers, provides a disproportionate benefit to the wealthy, costs taxpayers billions of dollars per year in uncollected revenue, and adds over 800,000 car commuters, driving over 4.6 billion additional miles per year to the nation’s road system.

The program’s many negative impacts stem from key equity and transportation issues. The parking tax benefit, which accounts for a total of about $7.3 billion in reduced tax revenue, dwarfs the size of the transit and bicycle benefits, which together make up about $1.3 billion in lost revenue. This is due to several factors. The tax exclusion limit for parking is $250 per month versus only $130 per month for transit and $20 for biking. People taking advantage of the parking benefit tend to work in more central-city locations with more costly parking. They also tend to be in higher tax brackets, and so would have paid more taxes on their excluded benefits.  From a transportation perspective, excluding employer-provided parking benefits from taxation encourages more people to drive to work in the most congested cities. Because of the way the IRS calculates the value of employer-provided parking, only about a third of workers that commute by car—those who work in places where parking is most expensive—receive any benefit at all from the program.

The report recommends several options for improving or replacing the current commuter tax benefit program to avoid incentivizing behavior that undercuts national transportation policy objectives: eliminating the parking tax benefit entirely, raising the limit on allowable tax exclusions for transit to achieve parity with the parking benefit caps, or replacing the existing commuter tax benefit program with refundable tax credits for household transit expenditures that would not require employer participation.

Bill Holloway is a Transportation Policy Analyst at SSTI.