The Parking Tax Benefit: A $7.3 Billion Subsidy for Traffic Congestion

Graph: TransitCenter/Frontier Group
Not only does the parking tax benefit pay people to drive during the most congested times of day, the whole system of commuter benefits functions as a gigantic transfer from poor workers to affluent workers, who have greater access to subsidized travel to work. Graph: TransitCenter/Frontier Group

The federal government spends billions of dollars a year on tax subsidies that make traffic congestion worse, according to a first-of-its-kind analysis by TransitCenter and the Frontier Group. The culprit is the parking commuter tax benefit, which costs taxpayers $7.3 billion in foregone revenue each year, all while adding more than 800,000 cars to rush-hour traffic on the nation’s roads each workday, the authors estimate.

The parking tax benefit allows people to claim up to $250 in parking expenses as tax-free income per month. It originated in the late 1970s, when, in the name of fairness, Congress prevented the IRS from taxing the free parking perks that employers gave their workers, without any thought to the effect on transportation. The new report shows that not only does the parking tax benefit have a disastrous effect on traffic, it’s not even fair to car commuters — amounting to a gigantic transfer to the most affluent drivers.

Most advocacy efforts centered on commuter tax subsidies attempt to raise the transit benefit — currently capped at $130 per month. Last week, for instance, two members of Congress pledged to fight for an equal commuter benefit for transit and parking. TransitCenter and the Frontier Group argue that this is the bare minimum to strive for. The real impact lies in simply getting rid of the parking benefit.

The transit benefit, they write, is a “relatively inefficient tool for motivating changes in transportation behavior” and “only weakly counteracts the negative impact of the parking tax benefit” — and should be thrown out, as it were, with the bathwater. If commuter benefits are retained, however, they recommend some key reforms: equalizing the transit benefit, and mandating that employers who offer parking benefits also provide the option of receiving a cash equivalent instead.

TransitCenter and Frontier Group estimate that while most people don’t change their commuting behavior based on the incentives created by these tax benefits, about 2 percent do — and that 2 percent drives 4.6 billion additional miles per year.

To make matters worse, they do that extra driving at peak hours, in crowded downtown areas, worsening congestion that the country’s transportation policy is supposedly oriented toward fixing.

The parking benefit alone costs the country $7.3 billion a year. Image: TransitCenter and Frontier Group
The parking benefit alone costs the country $7.3 billion a year. Image: TransitCenter and Frontier Group

The subsidy disproportionately affects high-congestion areas because that’s where the parking benefit has value. Parking is abundant and free in most of America, and if you work in a suburban office park, the fair market value of the free parking your employer provides approaches zero. While parking is expensive to build and maintain,  the benefit is based on the value of the good being given to the employee for free, not the amount the employer is paying to provide it.

“We estimate that about 37 percent of workplace parking has value,” said Tony Dutzik of the Frontier Group. “Most Americans, therefore, don’t benefit at all from the tax subsidy, and only a small percentage — largely those in downtown areas — get a significant benefit.”

Wealthier workers are the prime beneficiaries of this benefit, as well, partly because downtown workers tend to earn more, and partly because of the nature of the income tax system: If you fall into a low tax bracket, the savings from tax-free earnings will be lower. The report calculates that a high-income earner in Philadelphia would save $990 a year through the benefit — $250 a month of tax-free earnings at a 33 percent tax rate, times 12 months — while a low-income worker at a 10 percent tax bracket would save $300. The transit subsidy mirrors this inequity.

“The commuter parking benefit clearly works contrary to important national transportation policy priorities, such as curbing congestion and reducing pollution,” the report says. Congress created the system without any substantive thought to what transportation purpose it serves (the lawmakers who established the parking tax exemption in the late 1970s saw themselves as defending working people from IRS overreach), and since the subsidies don’t come up in annual appropriations, lawmakers rarely revisit them.

The result: The country spends $200 billion a year on transportation — much of it on road expansion justified as a congestion reduction tool — while simultaneously encouraging people to make congestion worse by driving downtown during rush hour and parking for free.

A far better use for the billions in lost tax revenue would be to help plug the growing hole in the Highway Trust Fund, TransitCenter and the Frontier Group say.

As far back as 1998, a few lone voices were calling attention to the misguidedness of the policy. Senator Daniel Patrick Moynihan of New York decried the “hidden pro-parking bias” of the benefits that resulted in “far too many employees choosing to drive to work over riding transit and other modes.” History has proven him right.

  • walks bikes drives

    I feel like the statistics being used here for the income disparity are misleading at best. While rich people, myself definitely not included, are getting a higher dollar amount, what is the percentage diffrrence of taxes paid to benefit received? While a rich person is saving a higher actual dollar amount, it seems that a poor person will be saving a higher percentage of their tax bill.

    Now, the argument that more rich people are taking advantage of the savings – now that is a different story. Transit subsidies should be worked out to promote greater savings, for rich and poor, than any personal vehicle savings. But I think I should also be privy to a tax subsidy for commuting by bicycle. I should be able to claim the cost of my bike annually, as well as all the wear and tear, and upgrades, etc, as well as double the price per mile of an automobile.

  • Komanoff

    I’m impressed that the report authors’/sponsors’ preferred policy solution is to zero out *all* of the commuter tax-benefits, rather than the customary ask of equalizing the parking benefit via transit benefits, cycling benefits, etc.

    It’s axiomatic that subsidizing all of the conceivable alternatives to a “bad” (in this case, parking downtown) is never as effective and efficient than directly taxing that bad (or, in this case, dumping the subsidy to downtown parkers). But it’s oh so rare to see someone actually recommend that path.

    Of course, that’s the path taken by carbon taxing. Ditto, congestion pricing. (Stuff I work on.)

    Because carbon taxes occasionally come up on this blog, I’ll mention that back in January I did some cool analysis that demonstrated that even an optimal clean-energy subsidy program wouldn’t deliver half the carbon reductions that would come from an equivalent carbon tax. More info on that here: http://www.carbontax.org/blogarchives/2014/01/31/ctc-tells-senate-finance-committee-carbon-tax-beats-clean-energy-subsidies-hands-down/.

  • I rely on that tax benefit to charge my EV (no, not a Tesla) at work gratis and tax-free. But cutting it down to around $50 or so would be plenty.

  • Eric

    A lot of workers downtown drive because there’s not a better alternative, fast, cheap form of transportation. Some people may have to drive because they have to pick up their kids after work and taking the bus isn’t convenient because they’ll have to walk back home and then drive out to pick up their kids. A way to alleviate all the traffic is to build a fast and efficient subway system.

  • archie

    What did that have to do with the parking subsidy?

  • archie

    Maybe I’m missing what you’re saying, but the higher earners are still saving a higher percentage of their earnings since the tax savings is on income in a higher tax bracket (e.g. 27% tax rate). Higher earners are getting a better deal no matter how you look at it.

  • walks bikes drives

    This is where a vast majority of American knowledge of statistics falls short – not saying other countries are better, just basing it off of recent research I read on what Americans SHOULD know – which is knowing which statistics are relevant and proper to use. My favorite quote from my statistics professor in college was “statistics can be used to show whatever you want to show, no matter what the data actually shows.”

    So, in this case, comparing higher level earners to lower level earners on a dollar for dollar basis, the higher earners will reap a higher dollar amount by sure, because of their higher tax bracket. But, using the numbers in the article above, if a lower level earner in the 10% bracket makes $9,000 a year and had a tax bill of $900, and ONLY reaped a $300 tax deduction from this benefit, their tax bill would now be 33% less than before. Now, if a higher level earner making $297,000 had a tax bill of $99,000 dollars at the 33% rate, and they reaped a WHOPPING $990 deduction, then their tax bill is only reduced 1%. This is why the statistics as used are misleading. Yes, a higher earner will get a higher dollar amount, but that is because they are being taxed at a higher rate. When I look at my transit subsidy, I would save more if I were in a higher tax bracket, but I don’t want to move to a higher tax bracket because, although my transit benefit will have a higher dollar amount, I will be paying a higher amount in taxes overall. Although, I’m not saying I wouldn’t mind the pay increase that would get me a higher bracket…

  • Annie F. Adams

    Thanks for this post! This has been bugging me for years. In cities like Chicago (where I live) the most expensive way to get people to work is by private car. So why do they get a $250 monthly tax benefit? Whereas as a commuter cyclist I tried getting the $25 monthly cyclist tax benefit. My company (rightly) said it was too complex and was not a payroll tax advantage for them. In addition I would have to provided $25 in monthly expense receipts. BUT if I took the $250 for private car parking, it is deducted directly from the paycheck—no questions asked! No receipts needed! Whereas the $130 for transit is accounted for via a payment to a transit card. I would prefer companies had payroll incentives for providing cyclist indoor parking, lockers & showers—and/or $1 per day per commuter cyclist.

  • Donald Shoup

    It will be politically difficult to remove the tax subsidy for employer-paid parking, but California has adopted a law that requires employers who subsidize parking to offer an equivalent subsidy to commuters who do not drive to work. In a case study of the results, the cash-out requirement reduced solo driving to work by 17 percent. Here is a link to the study:
    https://dl.dropboxusercontent.com/u/35546513/ShoupParkingCashOut.pdf

  • Juan Matute

    Thank you for posting here, Don. It’s a great way to get the word out on your research.