Description

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.

Impact

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 provides benefits both to the employees (more are employed and they receive higher compensation) and to their employers (who have 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. The parking exclusion is more likely to benefit higher income individuals than the mass transit and van pool subsidies. For those individuals receiving benefits, the savings rise with marginal tax rate. The value of the benefit also depends on the location of the employer: the provision is targeted towards the taxpayers working in the urbanized areas or other places where transit is available or parking space is limited.

Rationale

A statutory exclusion for the value of parking was introduced in 1984, along with exclusions for a number of other fringe benefits. In many cases, these practices had been long established and generally had been treated by employers, employees, and the Internal Revenue Service as not giving rise to taxable income. Employees clearly receive a benefit from the availability of free or discounted goods or services, but the benefit may not be as great as the full amount of the discount. In enacting these provisions, Congress also wanted to establish limits on the use of tax-free fringe benefits. Prior to enactment of the provisions, the Treasury Department had been under a congressionally imposed moratorium on issuance of regulations defining the treatment of these fringes. There was a concern that without clear boundaries on 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 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.

Assessment

The exclusion subsidizes employment in those businesses and industries in which transportation fringe benefits are feasible and commonly used. Because the exclusion applies to practices which are common and may be feasible only in some businesses and locations, it creates inequities in tax treatment among different employees and employers. One problem with taxing directly supplied fringe benefits, such as free or reduced price parking, is the administrative difficulty in determining fair market value. Subsidies for mass transit and van pools, and for parking when provided primarily for car pools, encourage use of mass transportation and may reduce congestion and pollution. Reductions in commuting costs due to congestion benefit commuters generally. If these subsidies induce commuters to use modes of transportation which impose fewer external costs on others, such as through traffic congestion, then economic efficiency is enhanced. If these subsidies induce employees to make trips they otherwise would not make, the overall economic benefit depends on how the increase in personal gain compares to the external costs generated by such trips.

Sources: Compendium of Background Materials on Individual Provisions, Congressional Research Service, December 2006, Washington, DC: U.S. Government Printing Office; and "Qualified Transportation Fringe Benefits under ARRA," Internal Revenue Service, 2009.