Income Tax Code No Longer Favors Parking over Transit…For Now

January 07, 2013

New Legislation Rides on Shaky Wheels

Washington, D.C., January 7, 2013—Last week, President Obama signed into law the American Taxpayer Relief Act, averting many of the Fiscal Cliff’s potential woes that were caused by temporary provisions in the tax code. Instead of learning from its mistakes in creating temporary tax provisions, Congress’s new bill contains 56 pages of temporary “tax extenders’ which regularly expire and are regularly renewed by Congress. Included among these is a higher tax-free monthly transit benefit which exempts from tax any income (up to a cap) paid by the employer for the employee’s parking, transit passes, commuter vehicles, or bicycle commuting expenses. However, according to a new analysis by the Tax Foundation, the updated provision contains flaws that violate two principles of sound tax policy: the need for stability and no retroactivity.

Although the 2013 law does eliminate the disparity present in previous editions of the legislation, equalizing tax treatment of parking and transit commuting expenses at $230 per month each, it nevertheless suffers from the instability inherent in temporary tax provisions.

“The transit reimbursement will again fall to roughly half the parking exclusion at the beginning of 2014 unless the provision is renewed,” says Tax Foundation Vice President of State & Legal Affairs Joseph Henchman. “A permanent provision would reduce federal income tax and payroll tax revenue by approximately $160 million per year”

Further, the new law retroactively restores parity to the 2012 calendar year. It is uncertain how the IRS will manage the retroactive exclusions, as the normal method of withholding amounts from salary is not possible since 2012 has ended.  The IRS could permit employers to withhold smaller amounts from 2013 salary while providing the same level of benefits, or it could permit transit commuters to deduct relevant amounts when filing their 2012 income taxes this spring.

In order to resolve these flaws, Henchman offers the suggestion that Congress should consider permanently excluding all transportation communing expenses.  “Not only would a unified exclusion resolve the confusing, costly, and long-delayed implementation this year of a 2006 IRS directive that the transit benefit cannot be used for parking at transit stations, but it would also substitute neutrality for the current, arbitrary encouragement of driving over carpooling, transit use, and bicycling.”

Tax Foundation Fiscal Fact No. 349, “Income Tax Code No Longer Favors Parking over Transit…For Now” by Joseph Henchman is available here.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Borean, the Tax Foundation’s communications associate, at 202-464-5120 or borean@taxfoundation.org.

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