Modernize the Transit Benefit
While the size of the transit benefit has changed over time, the structure of the benefit has not fundamentally changed in two decades. In the meantime, the number of urban transportation options has greatly expanded as cities have built protected biking infrastructure and bikeshare networks and mobile devices have enabled ridehailing and carsharing services. The transit benefit should be reimagined to reflect the more varied transportation options available in 21st century cities.
Expand Access to the Transit Benefit
The main problem with the current transit benefit is that it does not reach enough people to override the negative effects of the parking benefit.
Cities, regions, and states can expand access to the transit benefit through the adoption of commuter benefits ordinances and laws. But changes at the federal level could also help to expand access.
Reforming commuter benefits to expand access to those not in traditional employer/employee relationships can widen eligibility for benefits to the self-employed and independent contractors. This reform is particularly important given the decline in traditional work arrangements and the rise in contract labor and employment in the “gig economy.” Excluding workers in nontraditional work arrangements from commuter benefits programs shuts out millions of Americans who deserve to have access.
To expand access to the benefits and to ensure equity, the federal government could create a commuter income tax deduction that operates in parallel to the existing commuter tax benefit and is available to those who do not receive the benefit through the workplace. This deduction would enable taxpayers to deduct the value of transit passes or other eligible commuter expenses from their federal taxable income, up to the same dollar limits that apply to tax-free commuter benefits.
Creating such a deduction raises the concern that employers might be discouraged from offering the existing transit benefit. Employers who offer transit benefits, however, still save on payroll taxes and also benefit from employee satisfaction with the benefits.
States may also adopt credits or deductions for transit in their tax codes. The state of Massachusetts, for example, allows commuters purchasing Massachusetts Bay Transportation Authority transit passes to deduct the cost of the passes, up to $750 per year, from their taxable income for state income tax purposes.
Make Additional Modes of Travel Eligible for the Benefit
Current policies related to commuter benefits were developed prior to the explosion of technology-enabled shared mobility services in American cities that began in the early 2010s. As a result, commuter benefits policies are being used in ways that were not imagined at the time they were created—and are failing to take advantage of opportunities for reducing single-occupant automobile commutes that did not exist decades ago. For example:
Pooled ridesourcing vehicles and microtransit—Uber and Lyft have partnered with commuter benefits providers in New York City and elsewhere to allow commuters to pay for the UberPOOL and LyftLine shared ridesourcing services with tax-free commuter benefits. Federal rules limit the use of tax-free commuter benefits to “commuter highway vehicles,” which must seat at least six people (not including the driver). The rules also exempt private vanpool services from the “80/50 rule” that is applied to employer- or employee-run vanpool services, which requires that vehicles used in those services travel 80 percent of their miles in travel to and from work and have their seating capacity be more than 50 percent filled.
In the case of UberPOOL and LyftLine, the result is a perverse situation in which the companies are encouraged to put larger-than-necessary vehicles on the road to serve people using the transit benefit, with no guarantee that those rides are actually shared.
In addition to Uber and Lyft, several private “microtransit” services such as Via102 and Chariot103 accept tax-free commuter benefits for travel on their services (though these services typically use larger vehicles to serve their regular customers and are explicitly based on a shared-ride model, and so do not face quite the same perverse incentives as firms like Uber that supply a variety of vehicles in a given market and operate taxi-like service).
Employer shuttle buses—Employer-provided commuter shuttles have grown dramatically in some cities, most notably in the Bay Area, where “Google buses” or “tech shuttles” have become an important (and controversial) part of the transit system. As of 2014, employer shuttles in the Bay Area carried more than 9.6 million riders—a 45 percent increase since 2012. Combined, the shuttles serve more riders than some of the Bay Area’s suburban fixed-route transit systems that are accessible to the general public.
These employer-provided shuttles are treated as vanpools under federal law and can be provided to employees tax-free. However, the valuation rules traditionally applied to vanpools may be poorly suited to luxury employee shuttle buses. Travel in such vehicles is subject to the same $255/month limits as transit service. However, unlike transit passes, which have a clear and defined “fair market value,” employers can choose several methods under tax law to calculate the value of shuttle service, including methods that may establish artificially low values, reducing government revenues and providing a perverse incentive for the creation of new private services instead of the expansion of public transportation.
Shared mobility—Over the last several years, new types of shared mobility services, including modern bikesharing and one-way carsharing services like Car2Go have emerged in American cities. Unlike previous shared mobility modes, such as round-trip carsharing services, these new one-way modes are suitable for use as part of a daily commute, either by providing door-to-door transportation themselves or by serving as first- and last-mile connections to transit systems. Yet, under a 2013 IRS ruling, bikesharing is not eligible for tax-free commuter benefits, as bikesharing systems are not considered by the IRS to be “mass transit facilities.” Indeed, bikesharing is not even eligible for the bicycle commuting benefit, as that benefit only applies to expenses related to the purchase, maintenance, and storage of a bicycle.
A revised system of commuter benefits would refocus the program on the goal of reducing single-occupancy vehicle commutes and eliminate outdated program definitions and perverse incentives that hamper the program’s ability to respond to 21st-century demands.
An improved program might extend tax-free commuter benefits to the following services:
- Public transit passes or fare media.
- Employer- or employee-run vanpools and shuttle buses. The valuation rules for employer-provided shuttle buses should be revisited to ensure that they are not overly generous relative to the valuation methods used for public transportation and other services.
- Verified shared rides and “first mile/last mile” connections to transit via shared mobility services. Current federal rules enable some trips via shared mobility services to be paid for through pre-tax earnings, but those rules push providers to use larger vehicles than necessary and do little to encourage the actual sharing of rides. Revising the eligibility rules for shared mobility providers can support the program’s intent of encouraging efficient travel that removes cars from the road. Verification could occur either on a trip-by-trip basis, or by providing data on the propensity for rides to be shared system-wide.
- Bicycle commuting expenses, which should be eligible for pre-tax treatment even when used in combination with other commuter benefits and be reformed to make the benefit easier for employees to access.
In addition to these benefits, policy makers may wish to consider the following options:
- Allowing employers to pay workers tax-free income corresponding to the number of miles they travel on foot or by bike in their commutes. Belgium and the Netherlands are among the countries that enable people who bike to work to claim these benefits (which are parallel to similar benefits offered to commuters in those countries who travel to work by car or via transit). Evidence from Belgium suggests that this system can increase the number of people biking to work. The Netherlands also allows employers to provide employees with a “company bike,” as well as associated gear and equipment, tax-free.
- Allowing the value of workplace parking to remain tax-free for employees who travel to work in a carpool. Carpooling is not specifically advantaged within the current system of tax benefits, and allowing employers to provide carpool parking tax-free would both encourage the practice and eliminate the administrative burden of distributing the value of parking and corresponding tax costs among various members of a carpool.
The cap on tax-free benefits should remain at approximately the current level of $255 per month.