Pre-Tax Transit Benefits
By Chrissy Mancini Nichols
Nov 18, 2011
This post first appeared at metroplanning.org
Did You Know? If Congress does not vote by year’s end to maintain the existing pre-tax transit benefit, workers who commute via rail and bus will be hit with a tax increase beginning in January.
In 2009, Congress increased the maximum amount an individual can set aside pre-tax for mass transit expenses to $230, equal to the benefit received by those who drive to work and park. Originally set to expire at the end of 2010, the increased allowance was extended to Dec. 31, 2011, but unfortunately that extension was temporary. If Congress fails to act, in January 2012 the limit will roll back to the pre-increase amount of $120 plus a $5 per month adjustment for inflation for a total of $125 per month.
Increasing the limit was a smart investment that saved 1.8 million transit riders in the Chicago region alone up to $500 a year, decreased the tax burden on employers, reduced traffic congestion and our reliance on foreign oil, promoted cleaner air, and provided revenue for our cash-strapped mass transit systems.
What’s at stake?
Congress first established transit commuter tax benefits in 1998, to provide parity with drivers: At the time, the Internal Revenue Service treated free employee parking as a tax-free fringe benefit, while those who commuted via transit received no tax break. Since 1998, the amount transit commuters have been allowed to set aside pre-tax has risen, reaching its highest level in 2009 when the American Recovery and Reinvestment Act nearly doubled the limit to $230 per month.
Tax-free commuter benefits only may be provided through employee-funded pre-tax payroll deductions or employer-funded or partially funded benefits. Workers may spend the money for commuter rail, subway and bus transportation, eligible vanpools, and commuter-related parking. Today, an estimated 28 percent of all employers nationwide offer the pre-tax transit benefit, covering 44 percent of U.S. employees.
Participating employees and employers both receive a major tax break. An employee who deducts the full $230 saves more $1,100 each year in taxes.* Reverting to the $125 monthly limit would equate to a $500 tax increase for these workers. Employers who offer the benefit pay fewer taxes too, because they do not pay payroll taxes on pre-tax deductions made by employees. When an employee elects to take the full $230 benefit, his employer’s tax burden decreases by $233 per year. If the benefit is reverted back to the $125 level, it would result in a tax increase of $120 for that employer.
A report by TransitCenter, a nonprofit that works to expand the use of tax-free transit benefits, explains how reverting to $125 will hurt national transit ridership and the economy: In 2010, the first full year following the cap increase, 17 percent more firms offered the pre-tax commuter benefit. That same year, 42 percent of employers reported that participating employees increased their pre-tax deduction (thereby decreasing the employers’ tax burden) as a result of the cap increase.
Nationally, up to one-third of Americans who commute via transit spend more than $125 per month. In metropolitan Chicago, decreasing the transit allowance to $125 will further squeeze transit commuters who already face higher commuting costs in 2012. On more than half of all Metra system zones, a monthly pass costs at least $125, with the most expensive pass at $217; with Metra’s proposed fare increase scheduled to take effect in February 2012, the most costly monthly pass will run $263.50.
The environment also will take a hit: The City of Chicago’s Climate Action Plan recommends expanding – not contracting – transit benefits program and incentives, toward the related goals of reducing the number of cars on the road by 19,000 per day and cutting carbon dioxide emissions by 15.1 million metric tons by 2020. Keeping transit incentives in line with parking benefits encourages more people to choose transit instead of driving solo to work. On the other hand, reducing the transit allowance is a disincentive to take transit, and the wrong message to send to employers who are doing the right thing by providing green incentives for their workforce.
How can employers get involved?
The Metropolitan Planning Council is helping to advance the goals of the Chicago Climate Action Plan through the Commute Options pilot program. In conjunction with the Civic Consulting Alliance, MPC is working with individual employers to create a customized menu of driving alternatives for their employees, including pre-tax transit benefits, employer-assisted housing and home energy-efficiency retrofits, car and ride-share, vanpools, bike to work, telecommuting, and more. Congress ought to reward public-private partnerships like these – and individuals who choose to commute via transit – by providing them with at least equal benefits as those who choose to drive.
Help us counteract this rollback: Visit www.commuterbenefitsworkforus.com to learn more about U.S. Sen. Charles Schumer’s (D-NY) Commuter Benefits Equity Act of 2011, S1034/HR2412, a common sense bill that gives commuters who take transit the same benefits as their co-workers who drive. The bill would permanently increase the transit benefit to $230 per month and adjust it annually by indexing it to inflation.
If you work for or run a business that would like to explore better commute options for your employees, contact MPC’s Commute Options Project Manager Tim Grzesiakowski for more information.
* Based on an employee paying 28% in federal income tax, 5% in state income tax, and 7.65% FICA and sets aside the maximum ($2,760.00 or $230/month) and assumes employer pays 7.65% FICA and 0.8% FUTA tax.
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