Sunday, November 18, 2012

We need a better system for delivery of commuter tax benefits

Most people are familiar with the concept of purchasing their health insurance through their employer with pre-tax income, but fewer are aware that the same option is available for the costs of commuting (transit or parking). Part of the reason for this is that it's up to employers whether they want to offer the benefit, and not all of them do, and it's a newer program than the one for health care premiums. But given that pre-tax benefits of this type lower taxes for both employee and employer, why don't all employers offer it? If there are legitimate reasons to be hesitant to participate, we in Seattle and we as a nation should be doing everything in our power to address those concerns and encourage maximum use of the commuter benefit for transit users.

First some background: the commuter tax benefit, found in section 132(f) of the Internal Revenue Code, began in 1993 and offered deductions of up to $60 a month for transit use and $155 a month for parking costs. In recent times the value of the transit/vanpool benefit has been approximately half the value of the parking benefit (a policy failure worthy of its own post), but during 2010 and 2011 they came to parity when they were both set at $230. Unfortunately, in 2012 the value of the transit benefit was allowed to fall back to $125 whereas the parking benefit was increased to $240. Even so, someone making $35k a year using their full $125 transit benefit every month ends up saving almost $30 a month in taxes, and more than $300 a year. Those earning more than $35k a year save even more. And on the employer side there's a little over $110 per year tax savings.



Commuter tax benefits since 2007. From Wikipedia.

Just for reference, I calculated the employee number by summing the 15% for federal income tax (at that income level), 6.2% for Social Security tax, and 1.45% for Medicare, then multiplying that percentage by the $125/month. For employers, the savings are just the payroll taxes, since they don't pay federal income tax.

Employees--both those who already use transit and those who would like to--can't participate in this program if their employer doesn't offer it. But what employer wouldn't want to save up to $110 a year per employee? I think the "per employee" part is the answer: like any other program, government-operated or otherwise, there will be paperwork and accounting to accompany it, and it's possible that for small employers the costs would outweigh the potential savings. This is an unfortunate loss for the employees, but it's understandable why the employer wouldn't want to lose their own money for the greater good of his or her employees.


This is also why participation in this program is much more common among large employers, like mine at the University of Washington, for example. (This pdf is an impact survey that has tons of information on the program in various cities, including that fact.) If you have to administer the same program whether you've got ten employees or ten thousand, economies of scale make it much more efficient--you could have an employee whose sole job was to administer this program, and even if only 1,000 workers took advantage of the program you'd be saving over $100,000 a year, far more than you'd need to pay your new administrator, and all of those participating employees would be saving even more for themselves.


Small businesses can't take advantage of these economies of scale, so I think we should build that economy for them by outsourcing the administration and accounting to government or a non-profit organization. State and local governments would benefit tremendously from the savings, leaving their citizens with more spending money to contribute to the local economy, so the costs of creating such a system would be far outweighed by the benefits. And the benefits aren't just financial: by increasing participation in the commuter benefit program we'd be adding ridership to our transit system at no cost, decreasing pollution and congestion, and ultimately encouraging more people to live in denser, more efficient transit-oriented developments.


I've never owned a business, so I don't know the details of how employee payrolls are managed and how the various pre-tax deductions available are tracked and accounted for by employers. That said, we needn't look any further than health care for a similar example of what I'm suggesting, and how it might work. As a result of Obamacare we'll soon have health care exchanges, run by state governments (or the federal government for states that choose not to participate), which will allow people to purchase health care independent of their employers. There are various merits to this system, but since this isn't a health care blog I'll only mention the one that I think is relevant to this discussion; namely, the shift away from employers being responsible for their employees' health care plans. In the long term there's no rational reason to have an employer-based system because it takes choice away from the employee, and as we see with the commuter benefit it can also lead to some arbitrarily missing out on savings--a worker shouldn't be punished for working at a small business whose owner doesn't feel up to the task of setting up and overseeing a commuter benefit plan, and frankly there's no particular reason that the employer should bear this responsibility in the first place.


Perhaps states could set up a similar exchange in which all of a state's transit agencies are represented, and residents can purchase their passes through it according to their location. The state can track the purchases and award the tax savings in real time, then go to the federal government to get reimbursed. Or, at the very least, those who aren't offered the benefit at work can claim a separate deduction (on top of their standard or itemized deductions) on their tax returns every year. This isn't ideal because it forces individuals to save the records of all their transit spending and once-a-year tax refund windfalls don't lend themselves well to responsible financial planning, but it'd be an improvement over the status quo.


This post was originally inspired by a post at Mobilizing the Region about a law that was recently passed in California requiring businesses with at least 50 employees to take part in this program (or offer their own transit benefits), and this is certainly an option too, but not an ideal one. For one, it's not easily replicable. But besides that, many, many people work at businesses with less than 50 people. Ignoring them just because it might take a little more effort isn't fair to them, and it fails to take full advantage of the opportunity to get more people out of their cars. 


What we have right now is a system that favors large employers and their employees over small businesses and their workers, and just as with health care, an exchange or similar institution might be a solution to the problem. Certainly, what we're doing now just isn't working.

3 comments:

  1. Back in the 1990s when I discovered this commuting benefit at my small company, I just took it upon myself to do the paperwork. It was quick and easy to set-up.

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  2. When you say "my small company," do you mean a company you owned, or worked at? Given the ease of setting it up, why do you think so many companies still don't participate?

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