Download Fiscal Fact No. 349: Income Tax Code No Longer Favors Parking over Transit…For Now
On January 3, President Obama signed the American Taxpayer Relief Act into law, averting much of the fiscal cliff of higher taxes and expiring provisions.[1] About 56 pages of the 157-page bill consisted of the “taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. extenders,” a grab bag of provisions that regularly expire and are regularly renewed by Congress.[2]
A higher tax-free monthly transit benefit is one of these provisions. Section 132(f) of the Internal Revenue Code establishes a “qualified transportation fringe,” excluding 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. An employee may take any or all of the amounts, which are then withheld from his or her paycheck. Until 2009, the monthly parking cap was roughly twice the monthly transit pass cap, with both growing as the amounts were annually adjusted for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. (see Table 1).
The 2009 stimulus bill eliminated this disparity, equalizing tax treatment of parking and transit commuting expenses at $230 per month each. (A new $20 per month bicycle commuting expense reimbursement provision was added for 2009 as part of a 2008 bill.) The parity between parking and transit was a temporary provision, however, running only from March 1, 2009 to December 31, 2010.[3] Congress subsequently extended it through the end of 2011, when it finally expired. Throughout 2012, therefore, commuters could exempt $240 in parking benefits per month, but only $125 in transit benefits per month.
The 2013 law restores parity between parking and transit, at $240 per month. However, there are two wrinkles in this law.
First, the provision is once again temporary. The transit reimbursement will again fall to roughly half the parking exclusion at the beginning of 2014 unless the provision is renewed. A permanent provision would reduce federal income tax and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. revenue by approximately $160 million per year.[4]
Second, the law retroactively restores parity to the 2012 calendar year. Transit commuters during 2012 could exclude amounts up to a monthly cap of $125, but may now retroactively exclude amounts up to $240 per month. Precisely how this unprecedented provision is to be operationalized will be determined by the Internal Revenue Service (IRS), as the normal method of withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. amounts from salary is not possible since 2012 has ended. One option is to permit employers to withhold smaller amounts from 2013 salary while providing the same level of benefits. Another option is to permit transit commuters to deduct relevant amounts when filing their 2012 income taxes this spring, as the IRS did once with excess telephone excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. collections.[5]
|
Year |
Parking |
Transit Passes & Commuter Vehicles |
Bicycle Commuting Reimbursement |
|---|---|---|---|
|
1999 |
$155 |
$60 |
– |
|
2000 |
$175 |
$65 |
– |
|
2001 |
$180 |
$65 |
– |
|
2002 |
$185 |
$100 |
– |
|
2003 |
$190 |
$100 |
– |
|
2004 |
$195 |
$100 |
– |
|
2005 |
$200 |
$105 |
– |
|
2006 |
$205 |
$105 |
– |
|
2007 |
$215 |
$110 |
– |
|
2008 |
$220 |
$115 |
– |
|
2009 (through February 28) |
$230 |
$120 |
$20 x qualified months |
|
2009 (from March 1) |
$230 |
$230 |
$20 x qualified months |
|
2010 |
$230 |
$230 |
$20 x qualified months |
|
2011 |
$230 |
$230 |
$20 x qualified months |
|
2012 (during the year) |
$240 |
$125 |
$20 x qualified months |
|
2012 (retroactive) |
$240 |
$240 |
$20 x qualified months |
|
2013 |
$240 |
$240 |
$20 x qualified months |
If Congress were to amend this provision to make the parity permanent, it might consider a unified exclusion of all transportation commuting expenses. This would 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.[6] Transit agencies have thus been forced to separate out amounts paid by commuters for transit passes from amounts paid for parking at transit stations. A unified exclusion for all transportation commuting expenses would also substitute neutrality for the current arbitrary encouragement of driving over carpooling, transit use, and bicycling.
[1] See Joseph Henchman, Details of the Fiscal Cliff Tax Deal, Tax Foundation Tax Policy Blog, Jan. 1, 2013, https://taxfoundation.org/blog/details-fiscal-cliff-tax-deal.
[2] See, e.g., Tim Carney, How the corporate tax credits got in the ‘cliff’ deal, Washington Examiner (Jan. 2, 2013) (explaining that the provisions were pasted from a Senate bill marked up in July 2012), http://washingtonexaminer.com/tim-carney-how-corporate-tax-credits-got-in-the-cliff-deal/article/2517397#.UOWlmW_Ad8E.
[3] See Joseph Henchman, Income Tax Code No Longer Favors Parking Over Transit, Tax Foundation Tax Policy Blog, Mar. 3, 2009, https://taxfoundation.org/blog/income-tax-code-no-longer-favors-parking-over-transit.
[4] See Margot L. Crandall-Hollick, An Overview of Tax Provisions Expiring in 2012, Congressional Research Service (Table 2) (Sep. 24, 2012), http://www.fas.org/sgp/crs/misc/R42485.pdf.
[5] See, e.g., Mark Robyn & Gerald Prante, Small Problems in 2007 Tax Filing Could Be Huge in 2008, Tax Foundation Fiscal Fact No. 107 (Oct. 25, 2007), https://taxfoundation.org/article/small-problems-2007-tax-filing-could-be-huge-2008.
[6] Rev. Rul. 2006-57 (Nov. 20, 2006); Notice 2008-74 (delaying implementation until Jan. 1, 2010); Notice 2010-94 (delaying implementation until Jan. 1, 2012); Notice 2012-38 (reviewing implementation issues).
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