Contemporary Approaches to Parking Pricing: A Primer

4.0 Employer and Developer Focused Parking Pricing Strategies

Previous sections of this primer discussed pricing policies and tools that can be used to manage city-owned parking spaces and facilities. In most communities city-owned or controlled parking represents only a small proportion of the total parking available, and privately owned parking is often made available at no cost to drivers. Shoup estimates that 95 percent of commuters receive free parking at work (1997), and this free parking is not limited to suburban and rural locations; over 50 percent of automobile commuters in the central business districts of cities like Los Angeles, New York, and London receive free parking paid for by their employer (Wilson and Shoup 1990b, Schaller Consulting 2007, Department of Transport 1992).

While cities cannot directly control whether an employee receives free parking, a number of strategies exist to encourage employers and developers to charge for parking or, minimally, make employees more aware of the true cost of parking. Applying a cost to parking can reduce the number of people who drive alone, maximize the utilization of transportation facilities, and encourage more efficient land use.

Cities have the opportunity to influence three primary areas of commuter parking. First, cities can work with employers and developers on employee trip reduction programs that include parking pricing strategies. These can be voluntary or mandatory, depending on the severity of the problem. The transportation demand management field has found that parking cash out and transportation allowances can be used to raise commuter awareness of parking costs and encourage employees to walk, bike, carpool, or take transit to work. Parking cash out provides a payment that can be used to purchase transit fares or kept as cash to employees who elect to give up their employer-owned parking space. Transportation allowances are stipends provided directly to employees who can then choose to purchase parking, buy transit passes, carpool, or pocket the money for another use. There are many supporting strategies in the transportation demand management field that are not discussed in this primer, but can also influence an employee's commute behavior.

Cities have a second opportunity to influence commuter parking through zoning and development regulations. Cities are able to encourage developers to charge for parking separately from office space, a strategy often referred to as "unbundling" that allows employers to see financial benefits when they stop paying for employee parking. Unbundling in residential developments can also influence commute behavior and vehicle ownership levels. In addition, zoning codes can be written to encourage the allocation of parking for car-share vehicles,² free or discounted parking rates for carpools and vanpools, and the establishment of secure bicycle parking.

Cities can also design and charge parking taxes to encourage employers and developers to charge for parking, discourage the construction of excessive quantities of parking, and encourage more efficient land use. These strategies are detailed further below.

4.1 Parking Cash Out and Transportation Allowances

Parking cash out and transportation allowances are similar economic incentive tools. Parking cash out is effective when employers provide free parking to employees, often in employer owned or leased lots. Employees who choose to give up their parking space are offered a payment that can be used to purchase transit fares or kept as cash. Employees typically participate in cash out on a monthly basis, but daily cash out programs do exist. With daily cash out employees receive a set amount of money for each day that they choose to not drive to work. Parking cash out is a better strategy than direct parking charges at employment sites where a move to paid parking is likely to cause significant employee morale issues or where management, for whatever reason, is unwilling to ask employees to pay for parking.

Transportation allowances are provided directly to employees, who can then choose to purchase parking, buy transit passes, carpool, or keep the money. Transportation allowances are best used when employers do not own or lease parking spaces and failure to cover employees' parking costs may put the company at a real or perceived hiring disadvantage. In both cases, payments are tax exempt up to Federal limits when spent on parking, transit, vanpooling, or bicycle commuting.

Parking cash out and transportation allowances are successful because they apply a value to a commodity that is often perceived as free and allow employees to make travel decisions that maximize their individual welfare. The programs are palatable because employees are not asked to bear the actual cost of parking if they do choose to park. Employers can implement these policies on their own to help them compete for the best workers, or cities or states can mandate or incentivize their implementation to encourage reductions in driving.

Both cash out and transportation allowances have shown significant benefits in terms of reducing employee vehicle trips and parking demand. Shoup evaluated eight employer cash-out programs in California and found that, on average, the programs reduced drive-alone trips from 76 percent to 63 percent of total commute trips, increased carpooling from 14 percent to 23 percent, increased transit trips from 6 percent to 9 percent, and increased walking from 2 percent to 3 percent (1997). De Borger and Wuyts created a model using Belgian data to evaluate the effectiveness and costs of parking cash out. Their model results showed that parking cash out reduced car commuting by approximately 8.5 percent and increased transit use by 17 percent (2009). Within the model, congestion was also significantly reduced, with average speeds rising to almost 50 km/hour from 40 to 43 km/hour. Actual benefits will vary by geography. Shoup notes that trip reductions will depend "on the market price of parking at the worksite" (1995, 15).

Even if users are paying for their own parking in the form of a fixed-cost monthly parking pass, such a product can be redesigned to reward regular parkers with reduced costs or rebates for days they do not park. Such a redesign might be instituted by the parking operator or an employer offering a parking subsidy, but in either case it may be considered "daily parking cash out" if a financial incentive is provided for each day that parking is foregone. Alternatives to monthly parking passes were tested in Minneapolis, Minnesota, in 2010 and 2011. This research targeted purchasers of monthly parking passes and examined the effects of various alternative incentives. These incentives were either bundled with the parking pass or offered in the form of a restructured parking pass enabling both onsite parking and a choice of financially-attractive alternatives. Programs tested included:

• Buying Flexibility, where a heavily discounted monthly transit pass (i.e., $20 instead of $130) was made available for purchase in combination with the parking pass (despite very heavy marketing, only 14 people purchased this, and while results clearly seem to indicate reduced parking and more transit use, the sample size was too small to find statistical significance);
• Disincentive Removal, where a monthly transit pass was provided for free to purchasers of monthly parking passes;
• Marginal Rebate, where a monthly transit pass was provided free to purchasers of monthly parking passes, and those taking transit instead of parking any day of the month received a $2 rebate, which is reflective of the marginal parking cost of $7 per day and the marginal transit cost of $5 per day; and
• PayGo Flex-Pass, which is the same as Disincentive Removal, except that a rebate of $7 would be provided on days where neither parking nor transit was used (with the total monthly rebate capped at half the cost of the monthly parking pass).

The most flexible and successful of the incentive programs studied, PayGo Flex-Pass, led to a decline in driving days from 78.5 percent to 56.5 percent, a large reduction (Lari, et al., 2011).

Travel allowances have also proved successful at changing travel behavior. Los Angeles County replaced free parking for its employees with a travel allowance and saw solo driving decrease from 53 to 47 percent of commute trips. CH2M Hill in Bellevue, Washington, replaced free parking with a travel allowance and saw solo driving decrease from 89 to 64 percent of commute trips (USDOT, 1994).

As with any changes made to parking, cash-out programs and travel allowances can present challenges, but they may be overcome with careful implementation. The programs are also likely to increase costs slightly for employers; if employees do not use their payments for tax-deductible transportation expenses, employers must pay employment taxes on the amounts. Employers will also incur administrative costs. All these costs could, however, be offset by small reductions in travel allowances or parking subsidies (i.e., charging employees who decline a cash-out offer a small fee for parking).

The United States Government has developed a number of documents to assist governments and employers that are interested in implementing cash-out programs. The FHWA's Non-toll Pricing: A Primer (2009) provides an overview of parking cash out. The Federal Transit Administration's (FTA's) TDM Status Report: Parking Cash Out (1994) provides travel reduction benefit estimates and implementation steps for government agencies wishing to implement parking cash out. The EPA's Parking Cash Out: Implementing Commuter Benefits as One of the Nation's Best Workplaces for Commuters (2005) is a how-to guide for employers wishing to implement a parking cash-out program. The EPA's report also includes information on employer benefits and tax considerations. Less information has been published regarding travel allowances; however, the two strategies do not differ significantly in terms of implementation or cost.

4.2 Unbundled Parking

Photo credit: FHWA

The cost of parking for residential units and commercial space is often included or "bundled" in lease or purchase costs. This means that parking costs are "sunk" and cannot be avoided regardless of actual need. This serves as a disincentive to companies to offer cash out, as any reduction in parking space utilization will not be accompanied by an equivalent reduction in parking costs. It also encourages car ownership because residential renters or lessees will see no financial gain from reducing their off-street parking needs. "Unbundling" the cost of parking from commercial and residential leases and purchases addresses these issues by allowing buyers and lessees to purchase or lease only as much parking as they need.

The unbundling of parking at commercial locations has no direct effect on travel behavior if employers pay for their employees' parking. However, unbundling creates a financial incentive for employers to implement strategies that decrease the number of employees who drive to work. Unbundling also places a clear price on parking that employers may choose to pass on to employees.

In the residential setting, unbundling of parking can directly impact travel behavior. An analysis of the impacts of off-street parking on car ownership and vehicle miles of travel in New York City "strongly suggests that the provision of residential off-street parking effects commuting behavior" (Weinberger, et al., 2009, 24). Thus, decreasing the amount of off-street parking, which unbundling encourages, is likely to result in decreased vehicle trips among commuters.

An interesting study on managing residential parking in San Francisco with car sharing and unbundling examined the effects of two residential parking requirements there: that residential projects of 50 units or more offer one or two car-sharing spaces, and that off-street parking at residential projects of ten units or more be leased or sold separately from the property. The study found these policies to result in a significantly lower rate of household vehicle ownership and a higher rate of car-sharing membership. The most significant finding of the study was that the combination of unbundling parking with on-site car sharing vehicle access corresponded to an average vehicle ownership rate of 0.76 per household—which was a statistically significant reduction from the statistically indistinguishable rates of 1.03, 1.09, and 1.13 vehicles per household—where buildings had neither car sharing nor unbundling, car sharing only, and unbundling only. Clearly, then, there is a market in San Francisco, and likely elsewhere, for housing with unbundled parking and car sharing where residents respond with reduced vehicle ownership, and presumably take some of their savings and spend it for better housing and to occasionally use car sharing (ter Schure, et al., 2011).

Some developers have expressed concern that unbundled parking requirements may affect their ability to obtain loans. If parking utilization rates are lower than anticipated, the developer may not realize as much revenue as expected, which could affect loan repayment. It is therefore important that cities not require parking minimums when asking or requiring developers to offer unbundled parking.

Ideally unbundled parking will allow residents and employees to purchase parking on a monthly or even daily basis. In the case of commercial parking the spaces can be rented through the property management association or a third-party parking manager. In the case of residential parking, spaces can be leased through the homeowners' or umbrella owners' association. Each option allows businesses and residents to purchase only as much parking as they need.

4.3 Parking Taxes and Fees

Parking taxes and fees can affect travel behavior by decreasing the amount of available parking, increasing the cost of parking, or encouraging employers and developers to pass the cost of parking onto drivers. Fees and taxes do this by increasing the construction or maintenance cost of parking or by directly increasing parking rates. Drivers are able to respond to higher parking rates or lower availability by parking in another location, changing their travel mode, or changing the timing of their activities (Feitelson and Rotem, 2004). Taxes and fees are most appropriate when applied to parking that is not mandated or required by land use regulations.

The effect of parking taxes and fees is dependent on the type of tax used and the manner in which it is charged. Taxes can be placed into two primary categories: (1) taxes and fees charged to users and (2) taxes and fees charged to parking facility owners. User taxes and fees are typically charged on a per-transaction basis. They may be a percentage of the cost to park or a flat amount and typically only affect facilities where users are charged to park; although, such a limitation is not necessary. Taxes and fees charged to facility owners can be based on land value, surface area, or number of available parking spaces. These taxes and fees are extremely flexible: lots that charge parking fees can be excluded, credits can be issued when preferred spaces are offered to carpoolers or car-share vehicles, and garages and subterranean lots can be excluded or charged based on land area rather than facility square footage. Owner fees and taxes can exclude facilities that are charging market rates, which allows facilities that are already engaged in efficient parking management to avoid the fees and taxes. Funds from parking taxes and fees can be invested in transit and other transportation improvements that increase the number of travel options available.

User fees and taxes increase the cost of parking and encourage the use of non-auto travel modes and/or the shifting of travel times. Chicago currently charges a $3.00 per day tax for all vehicles that park in the central business district. San Francisco has a fee structure that provides a $2.00 discount to vehicles that enter a parking garage before 7:30 a.m. or leave after 7:30 p.m. and stay for at least 3 hours (for a total discount of up to $4.00). The discount is designed to encourage travel outside of peak congestion periods. Numerous other cities charge taxes that are a percentage of parking fees paid by drivers, including Cleveland at 8 percent, Santa Monica at 10 percent, San Francisco at 25 percent, and Pittsburgh at 37.5 percent, the nation's highest (Alleghany Institute 2011). The taxes do not affect parking lots where parking is provided for free.

Selecting an appropriate fee or tax rate must be done carefully. Richard Voith developed a model that identifies parking tax rates that maximize central business district (CBD) size and land values (1998). His model showed that appropriate parking taxes can increase land values and community size and that failure to charge a tax may result in excessive congestion, which reduces community size and land value. However, if taxes are set too high the result will be lower congestion but smaller CBDs and lower land values. Additionally, transaction taxes may encourage some employers to move from paid parking to free parking in order to avoid the tax.

Unlike most user fees and taxes, facility-owner fees and taxes can impact parking facilities even if parking is offered for free. However, fees charged based on number of parking spaces or surface area remain relatively uncommon in the United States. The fees have been successfully implemented in Sydney, Perth, and Melbourne in Australia. Sydney charges a flat fee per parking space, Perth charges a variable fee based on use, and Melbourne charges a fee only for spaces that are designated for long-term use. All three cities charge an annual fee; however, fees could also be charged at the time of construction or issuance of a use permit. If annual fees are charged they can be collected with property taxes or individually. Calculation of fee amounts can be made using data from tax databases, data from storm water agencies that collect information on impervious surface area, site visits, and aerial photographs. Excluding properties that charge minimum parking rates from the taxes can encourage pricing of lots that would otherwise be free.

Feitelson and Rotem argue in support of taxing surface parking (2004). They suggest that a "flat surface parking tax should be considered as an alternative to minimal (or maximal) parking requirements" and note that, "A flat parking tax will clearly raise the cost of providing surface parking" (Feitelson and Rotem, p. 324). At least some of the increased cost will be passed on to users in the form of higher costs, which will affect parking patterns. Unfortunately, it is not clear what percentage of a parking tax will be passed onto employees (Calthrop et al., 2000). For parking taxes to affect the behavior of commuters, they must be passed onto the commuters (Gerard et al., 2001). Therefore, the effectiveness of parking taxes may be limited depending on the response of employers.

4.4 Implementation

To help employers implement commuter parking strategies, numerous tools and references exist, some of which were cited previously. This section focuses on implementation options and considerations for municipalities and States wishing to encourage employers to implement cash out and transportation allowance programs, encourage developers and property managers to offer unbundled parking, or institute parking fees or taxes.

California has been the most aggressive State when it comes to the implementation of commute options programs. In 1992, the State passed a parking cash-out law that requires employers with 50 or more employees in air basins designated as non-attainment areas and that provide subsidized parking to their employees to instead offer a cash allowance in lieu of the parking space. The law does not require that employers provide a commute subsidy of any type nor does it require them to raise the cost of parking—it simply requires that employers choosing to subsidize parking also offer a choice in their benefits package, thus removing some of the incentive to drive. A related California code requires cities or counties to grant appropriate reductions in parking requirements to new and existing commercial developments that offer parking cash-out programs.

Fairfax County, Virginia, encourages parking cash out and unbundled parking programs during the development review process. Certain developments are required to implement transportation demand management (TDM) programs and obtain specified vehicle trip reductions. TDM plans must be submitted to the county prior to development approval, and development proffers guarantee that promised cash out and unbundled parking programs (and other TDM strategies) are implemented. This policy is relatively new, and its long-term benefits are not yet known. Many other communities throughout the United States require developers and employers to implement TDM plans; however, inclusion of cash out, transportation allowances, or unbundled parking programs is typically voluntary.

San Francisco encourages unbundled parking through low parking maximums. In downtown San Francisco developers can build only 0.75 parking spaces per housing unit and that number drops as low as 0.5 in some neighborhoods. Preventing developers from constructing at least one parking space per housing unit can be a big inducement to unbundle parking at residential units. In such cases, developers failing to unbundle parking would be left with the unappealing prospect of having to sell or lease units that are guaranteed to lack access to off-street parking.

The mechanism through which parking taxes and fees can be implemented will vary by state and local government. The process should be well known to government officials, but careful consideration is recommended. The Ontario provincial government unsuccessfully attempted to implement a commercial concentration tax, similar to a property tax, that affected large-scale, paid-parking facilities. The tax had the adverse effect of causing those controlling suburban parking facilities that had charged low fees to discontinue those fees to avoid the tax. In most cases the tax exceeded the earned parking revenue, which made it cheaper for parking facilities to stop charging for parking than to pay the tax. This resulted in the majority of the tax's revenue being generated in the Toronto CBD where the tax represented a small cost in proportion to total parking revenue. While tax funds were coming primarily from the CBD they were being spent outside of Toronto, causing significant discontent. These negative impacts were not anticipated and the law was quickly repealed (IBI Group, et al. 2000).

When implementing commuter parking pricing strategies, government agencies need to consider a number of items that are described below.

• Any new policies should be developed in coordination with developers and employers.
• Many communities have regional or local commute options agencies that can assist with strategy development and program implementation.
• Developers should not be forced to construct and maintain more parking than there is demand for. The policies that fail to assure this will force developers to work to simultaneously reduce parking demand while financing and maintaining unused parking spaces. As is the case in California, developers should be allowed to decrease the number of available parking spaces if demand decreases.
• Parking cash-out policies are likely to create spill-over effects if nearby parking is not restricted or priced. Some sites have documented that occasionally employees who accept a parking cash out continue to drive but park in a nearby neighborhood where parking is free. Employers can help address this externality by developing policies that prohibit cash-out recipients from parking in residential neighborhoods and revoking program eligibility for employees who fail to comply. Government agencies can help address this issue by following the model of California's cash-out law, which explicitly allows employers the ability to revoke eligibility when employees fail to comply with company established cash-out guidelines. Charging or requiring permits for parking in affected residential neighborhoods, as discussed in the Residential Parking Permit section of this primer, can also address the issue.
• Programs must recognize that most employees will occasionally need their vehicle for errands before work, at mid-day, or after work and should provide parking options for these individuals. This can generally be done by providing commuters with a limited number of free parking days or allowing them to purchase parking on a daily basis.
• All programs should include measureable performance goals that are tracked after program implementation.

An effectively implemented commuter parking pricing strategy can reduce vehicle trips. The strategies discussed assign a value to parking that would otherwise be free or offered at an artificially low rate to the user. Overall, commuter parking pricing strategies offer some solutions to address the market distortions created by the supply of free commuter parking.

²Car sharing is a business model wherein users sign up for a membership and are able to rent cars by the hour. It is particularly suited for urban areas where car ownership is less desirable due to the prevalence of public transportation. This demand management mechanism is discussed in greater detail in section 5. [Return to note 2.]