Bus commuter benefit tax exemptions

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Bus commuter tax benefits are a type of transportation tax relief that are used to encourage commuters to use public transportation instead of private cars. Any level of government can implement these benefits, and can choose the structure that best fits their country, state, or city. The federal level of government often selects the maximum amount that can be exempted from tax returns, and allows lower levels of government to choose their policies within that framework. Federal governments may raise the cap over time, especially when they factor in rising costs of transportation and inflation. Usually, the policy allows employers to provide the benefit by letting their employees exempt a certain amount of income each month from their tax returns, for the purpose of using the bus to commute to work. Governments may also choose to implement tax deductions as opposed to tax exemptions, which are often based on a set rate per miles traveled. These policies usually include other forms of transportation in the exemptions as well, such as rail and biking. The bus commuter tax benefit may be given the same exemption or deduction amounts as other forms of transportation, or the amounts may vary based on estimated costs of using each mode of transit. The goals of this policy are to decrease congestion, decrease emissions pollution from private cars, and increase public transit ridership. Bus commuter tax benefits are best suited for cities, which have more public transportation options than suburban or rural areas. Employees will only be able to take advantage of the policy if they have access to buses. Countries including the United States, Belgium, and The Netherlands have adopted commuter tax benefits.


CONCEPT


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Goals
Conceptual Example

Let's say there is an urban city that is struggling with poor air quality, pollution, and traffic congestion. There are already plenty of bus routes in place, and yet ridership is lower than it should be. The city decides that, in order to decrease traffic and pollution, it is going to implement a transportation commuter tax benefit. An employer in this city has many employees commuting from both the city and the surrounding suburbs. The employer has limited parking due to its urban location, and cannot provide all employees with parking spaces. The city has a bus system, a rail system, and walk and biking paths. The employer could offer a commuter tax benefit of up to $255 for public transit and for park and rides. The employer would ideally provide the employees with useful information on this fringe benefit, such as bus and rail routes and timetables, bike and pedestrian paths, and how employees may enroll in the benefit. The employer could offer an online system, where employees may modify their benefits as needed. Employees will need to adjust how much of their income is set aside for this benefit, especially employees who are new to public transit in the city and may not know how much it will cost each month. This should decrease the number of employees who choose to drive to work and increase the share of employees using alternative modes of transportation. The employer could even offer a guided tour of using the city’s transit system, providing employees with the maximum knowledge to encourage them to take advantage of their fringe benefit.

Specific Example

In the United States, the bus commuter tax benefit is an optional transportation fringe benefit. The federal IRS Code allows for employers to provide this benefit to their employees. The employer is considered the provider, not the transportation company or organization that the employee uses. Employers may allow employees to exempt up to $255 from their federal tax returns per month for transit passes and/or commuter highway vehicles, and qualified parking. Qualifying bicycle expenses may be exempted up to $20 per month. However, employees may not receive public transit and bicycle benefits within the same month. The commuter highway vehicle must be able to transport at least six adults, and 80% or more of the miles it travels must be for transporting commuters. A transit pass includes buses, rail, and ferries. Qualified parking is for parking related to mass transit, such as park and rides for buses or rail. Unlike cafeteria plans, employers may not allow employees to choose cash over the transportation tax benefit, unless access to a transit pass or voucher is not readily available. Fringe benefit valuation rules stipulate that transportation fringe benefits should be evaluated on their fair market value. The IRS code also contains an unsafe conditions commuting rule, which allows employers to provide $1.50 per commuting trip to employees when employees cannot reasonably or safely use existing public transit to commute. While this policy focuses mainly on bus commuter tax benefits, they are inextricably linked to other transit benefits, and must be discussed in that context. [1]

Specific Example

On January 1, 2016, New York City passed the Commuter Benefits Law. The law stipulates that all employers with 20 or more full-time non-union employees in NYC must provide employees with the option to use their pre-tax income for transportation fringe benefits. As the IRS code requires, these transportation benefits include bus and rail. This policy is beneficial for employers, as it reduces their payroll taxes. It also encourages employees to come to and stay at the company. It may also give employers a pro-environment image, which is especially important in a traffic-congested city such as New York. The law requires all employers with more than 20 employees to offer the benefit, but any business is allowed to offer it, and New York State encourages all businesses to do so. Although the transportation fringe benefit is useful for most employees, it may be detrimental to lower income employees. For example, employees who qualify for a refundable tax credit, such as the Earned Income Tax Credit, may receive a lower tax refund if they also take part in the transportation fringe benefit. New York’s commuter benefit allows employees to use the tax benefit for multiple modes of transportation. It carries penalties for employers if they do not comply with the law and are not small enough to be exempt from it [2]. New York City is one of the few American cities where employers are required to make transportation benefits available to employees [3].


Tradeoffs

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Tradeoffs of implementing this policy may include:

  1. The commuter tax benefit may disproportionately benefits higher income employees, and could have a regressive tax effect. [4]
  2. If compliance is not mandatory, then few employees may have access to this benefit. However, providing this benefit may impose administrative and compliance costs on employers. [5]
  3. If the fringe transportation is implemented in the same way as in the U.S., then it may discourage employees to use both biking and public transportation.
  4. If employees cannot accept cash in lieu of the benefit, as in the U.S., that could disproportionately affect lower income employees who walk or bike to work.
  5. Depending on how the policy is implemented, lower income employees who are able to take advantage of other tax benefits may receive a lower tax refund if they enroll in the transportation fringe benefit. [6]


Compatibility Assessment

Compatibility Assessment.png

If answered yes, the following questions indicate superior conditions under which the policy is more likely to be appropriate:

  1. Does the jurisdiction actively work to provide lower income residents with more equitable access? Lower income residents often have less access to information, research tools, private vehicles, and even public transportation.
  2. Do residents in the jurisdiction have access to buses? That is, do the buses serve a large proportion of local residents, with frequent and reliable service?
  3. Does the jurisdiction have the financial and administrative capacity to update and improve access and service for its bus system?
  4. If the jurisdiction were to implement the tax benefit, would a substantial number of residents take advantage of the policy? Would a substantial number of employers offer it?
  5. Would local officials accept the lost tax revenue, in exchange for the benefits of decreased car usage, such as lowering pollution and congestion?
  6. Does the jurisdiction have the administrative capacity to implement the tax benefit policy?


Design

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Assuming that a jurisdiction has decided to adopt the policy, the following questions will need to be answered when determining how to implement this policy:

  1. How will the jurisdiction decide which employers must offer the benefit, or if the policy will be completely voluntary?
    1. Both New York City and Washington, D.C. require employers with 20 or more employees to offer the benefit. This could be a good model for larger cities. [7] [8]
    2. Richmond, California, has a much smaller population at just over 100,000 residents. It requires employers with over 10 employees to offer the benefit. This could be a good model for small to medium sized cities. [9]
    3. If the benefit program is mandatory, jurisdictions should take into consideration whether they will exempt any types of businesses, such as non-profits or ones that hire unionized employees.
    4. When considering if they benefit should be mandatory, the jurisdiction will need to weigh the costs of enforcing compliance against the risk that employers will not voluntarily offer the benefit if it is not mandatory.
  2. What options should employers be required to provide to their employees for accessing the transit system? [10]
    1. There are many ways employees can pay for their transportation access, such as smart cards and transportation debit cards.
    2. Government should require employers to assist employees in understanding the transportation options available to them, such as routes, timetables, and costs.
    3. Government should require employers to inform their employees of how to enroll in the tax benefit, such as through an online system.
  3. How will jurisdictions increase the attractiveness of choosing public transportation?
    1. Driving is still the most popular mode of transportation in the United States. Therefore, jurisdictions will need to work to improve the quality of public transportation, especially reliability. If the transit system is unreliable, then commuters who can afford to drive will likely chose to do so, even if they could take advantage of the tax benefit. [11]
    2. Access and equity are an essential part of a reliable transit system. For example, in Washington, D.C., there are concerns that WMATA's potential plan to close certain metro stations in off-peak hours would disproportionately impact low-income and minority residents. [12]
    3. Parking is currently bundled with public transportation benefits under IRS code. The effects of the parking benefit, such as encouraging driving and the resulting emissions, are unlikely to be outweighed under the current framework, even though Congress did try to create a balance by increasing the commuter benefit to $255 to be on par with parking, as it was only $130 before. The ultimate result is $7.3 billion in lost taxpayer revenue each year that goes to subsidizing parking, and by extension driving. [13] [14]
  4. What laws must employers comply with? [15] [16]
    1. Jurisdictions must ensure that employers are in compliance with local, state and federal laws. For example, there may be local or state laws related to overtime, and employers should inform employees how these laws relate to them working while taking public transportation.
    2. Jurisdictions must also monitor employer compliance with discrimination in employment laws, such as disability and access.
    3. Jurisdictions should ensure that employers engage in appropriate record-keeping practices consistent with the laws in their jurisdiction.
  5. How will jurisdictions enforce compliance when employers are legally required to provide the tax benefit? [17]
    1. The standard penalty for noncompliance has been levying a fine against the offending employer. In New York City, this fine is between $100 and $250 for the first offense, and $250 for any further offenses.
    2. Jurisdictions may decide to give a grace period from when the policy is first enacted, in order to give employers time to implement a system that will work for their organization.
    3. Jurisdictions may also decide how long employers have to return to compliance before they are fined. 30 to 90 days has been fairly standard.


ADOPTION


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PolicyGraphics
Adopters
  • Notable entities who have implemented or adopted this policy include:
    • Country of United States of America [18] - Provides income tax exemptions for employees up to $255 per month.
    • Country of Belgium [19] [20] - The tax deduction includes all modes of transit, and is based on kilometers traveled.
    • Country of The Netherlands [21] - Tax deduction benefits are based on kilometers traveled, with the same benefit amount applied to commuters who use private cars, bicycles, and public transportation.
    • Country of Germany [22] - Commuters can choose a lump sum deduction or a deduction based on the actual cost of taking public transportation or operating a private car.
    • Country of Switzerland [23] - The tax deduction allows commuters to deduct the cost of using public transportation to commute to and from work, regardless of whether the commuter is driving or taking transit.
    • City of New York [24] - New York City's law is based off of the United States' IRS transportation benefits, but adds the requirement that all employers with more than 20 employees must offer the benefit.
    • District of Columbia [25] - Similar to New York City's law, D.C. requires employers with more than 20 employees to offer the tax exemption, with the goal of reducing the use of private vehicles and therefore reducing traffic congestion.
    • City of San Francisco [26] - San Francisco requires all employers with more than 50 employees to offer the tax exemption for transportation, in an effort to improve air quality in the region by encouraging the use of public transportation.



STAKEHOLDERS


Supporters

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  • Advocates - Bus Transportation. Assumption: Public bus transportation provides economic benefits to communities and is an increasingly popular mode for millennials. [27]
  • Advocates - Environmental Protection. Assumption: By increasing the share of commuters who use public bus transportation, communities can decrease congestion, increase the number of available green jobs, and reduce carbon dioxide and other pollution from cars. [28]
  • Advocates - Mass Transportation. Assumption: Along with economic and pollution reduction benefits, increasing the share of commuters using public transportation helps fund mass transit systems and works to take cars off of the streets, creating a safer environment for all commuters. [29]
  • Advocates - Smart Growth. Assumption: Encouraging and improving public transportation is an essential part of Smart Growth's goals, including transit oriented development. [30]
  • Advocates - Urbanism. Assumption: New Urbanism promotes designing spaces in a way that increases public transportation ridership, and works to reduce sprawl and congestion. [31]
  • Associations - Bus Manufacturers. Assumption: This policy may increase the number of commuters taking the bus, and cities would therefore need more buses for their fleets. [32]
  • Constituent Groups - Commuters. Assumption: Commuters who are able to use public transportation to travel to and from work are able to set aside funds each month in pre-tax benefits that they have some flexibility in spending. [33]
  • Constituent Groups - Local Businesses. Assumption: Employers may deduct the transportation tax benefits from their profits. Employers offering this benefit may also market themselves as promoting sustainability. The benefit also saves employees money, so that they have more disposable income to spend in the local economy. [34]
  • Government Agencies - Environmental Protection. Assumption: Environmental protection agencies actively promote mass transit, given its environmental benefits of reducing congestion and pollution. [35]
  • Government Agencies - Transit Authorities. Assumption: Increasing ridership for mass transit is beneficial to government transit authorities and communities as it decreases the need for additional infrastructure, encourages economic development, provides jobs, increases access and mobility, and reduces pollution. [36]
  • Government Agencies - Transportation. Assumption: In order to comply with federal laws, which in the U.S. include the Clean Air Act and the National Environmental Protection Act, communities should work to increase the availability and ridership share of public transportation. [37]
  • Labor Unions - Bus Drivers. Assumption: Bus driver labor unions are primarily concerned with sufficient funding for their transit systems. This tax benefit would increase ridership and therefore provide more funding to public transportation systems. [38]


Opponents

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  • Associations - Automobile Manufacturers. Assumption: Now that Congress has made the tax benefit equal for parking and mass transit, it will likely lead to fewer drivers. This could lead to less demand for private vehicles. [39]
  • Associations - Vehicle Parts Suppliers. Assumption: Fewer drivers and drivers using their cars left often will reduce the need for car repairs. [40]
  • Labor Unions - Parking Attendants. Assumption: Increasing demand for mass transit will decrease demand for driving and therefore for parking, limiting the need for parking attendants. [41]
  • Labor Unions - Road Workers. Assumption: The tax benefit will increase the number of public transportation users and decrease the number of drivers, therefore decreasing the need for additional road construction. [42]



REFERENCES


Research

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Resources

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Footnotes
  1. https://www.irs.gov/pub/irs-pdf/p15b.pdf.
  2. http://www1.nyc.gov/site/dca/about/commuter-benefits-FAQs.page
  3. http://www.nytimes.com/2016/01/07/your-money/commuter-transit-benefit-becomes-more-generous.html?_r=0
  4. http://www.bls.gov/ncs/ebs/benefits/2014/ownership/civilian/table40a.pdf
  5. http://www.bls.gov/ncs/ebs/benefits/2014/ownership/civilian/table40a.pdf
  6. http://www1.nyc.gov/site/dca/about/commuter-benefits-FAQs.page
  7. http://www1.nyc.gov/site/dca/about/commuter-benefits-FAQs.page
  8. https://www.wmata.com/business/employer_fare_program/transit_benefit_ordinance.cfm
  9. http://www1.nyc.gov/site/dca/about/commuter-benefits-FAQs.page
  10. http://usf-cutr.custhelp.com/app/answers/detail/a_id/3163/~/setting-up-a-pre-tax-commute-benefits-program
  11. https://hal.archives-ouvertes.fr/file/index/docid/827972/filename/Public_transport_reliability_and_commuter_strategy.pdf
  12. https://www.washingtonpost.com/news/dr-gridlock/wp/2016/10/17/the-20-stations-metro-could-close-during-off-peak-hours-to-save-money-are-mostly-in-communities-of-color/
  13. http://transitcenter.org/2016/02/11/transit-parking-subsidy/
  14. http://usa.streetsblog.org/2014/11/18/the-parking-tax-benefit-a-7-3-billion-subsidy-for-traffic-congestion/
  15. https://www.shrm.org/resourcesandtools/legal-and-compliance/state-and-local-updates/pages/cities-transit-benefits.aspx
  16. https://www1.nyc.gov/site/dca/about/commuter-benefits-FAQs.page#6
  17. https://hrlaws.services.xerox.com/wp-content/uploads/sites/2/2015/12/hrc_fyi_2015-12-07.pdf
  18. https://www.irs.gov/pub/irs-pdf/p15b.pdf
  19. https://www.justlanded.com/english/Belgium/Belgium-Guide/Money/Taxable-Income
  20. http://www.iea.org/policiesandmeasures/pams/belgium/name-23310-en.php
  21. http://oro.open.ac.uk/2910/1/
  22. http://oro.open.ac.uk/2910/1/
  23. http://oro.open.ac.uk/2910/1/
  24. http://www1.nyc.gov/site/dca/about/commuter-benefits-FAQs.page
  25. https://www.wmata.com/business/employer_fare_program/transit_benefit_ordinance.cfm
  26. http://commuterbenefits.com/the-basics/ordinances/ordinances-sf/
  27. http://www.publictransportation.org/benefits/Pages/default.aspx
  28. http://www.apta.com/gap/policyresearch/Documents/facts_environment_09.pdf
  29. https://www.transalt.org/about
  30. https://www.epa.gov/smartgrowth/smart-growth-and-transportation
  31. https://www4.uwm.edu/cuts/2050/urbanism.pdf
  32. http://www.nctr.usf.edu/jpt/pdf/JPT11-2Ecola.pdf
  33. https://www.washingtonpost.com/news/powerpost/wp/2015/12/16/heres-what-made-it-into-congresss-big-tax-and-spending-bills/
  34. http://web1.ctaa.org/webmodules/webarticles/articlefiles/TaxIncentives_6_2014.pdf
  35. http://transerve.dot.gov/docs/EPA_2016_Transit_Benefit_Integrity_Awareness_Training_2016-07-12.pdf
  36. https://www.wmata.com/pdfs/planning/WMATA%20Making%20the%20Case%20for%20Transit%20Final%20Report%20Jan-2012.pdf
  37. http://transerve.dot.gov/docs/annoucements-reports/Federal%20Participation%20in%20Mass%20Transit%20Programs_GAO_RCED-93-163_.pdf
  38. http://www.atu.org/action/mobilization/campaigns/the-people-on-the-bus
  39. http://thehill.com/policy/transportation/263438-spending-bill-increases-transit-tax-break
  40. https://www.metromile.com/blog/car-tips-if-you-drive-less/
  41. https://www.wmata.com/pdfs/planning/WMATA%20Making%20the%20Case%20for%20Transit%20Final%20Report%20Jan-2012.pdf
  42. https://www.wmata.com/pdfs/planning/WMATA%20Making%20the%20Case%20for%20Transit%20Final%20Report%20Jan-2012.pdf
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