An Assessment of the Expected Impacts of City-Level Parking Cash-Out and Commuter Benefits Ordinances

Appendix F. Non-Employee Financial Impacts: Employer Costs and Government Tax Revenues

Chapter 1. Background covered some financial impacts and benefits related to parking cash-out and commuter benefits policies. Here, some additional elaboration on financial impacts is provided, which may be useful for those considering implementation of such programs, or ordinances requiring such programs.

Employer Costs

As discussed previously, to the extent employers can reduce their parking expenses when their employees who had been driving accept a parking cash-out offer, the policy would on its face appear to be revenue neutral to employers.

For employees driving to and parking at work who forfeit a parking space leased by their employer to accept a cash-out offer, employers should be able to cover the cost of a cash-out payment through savings on parking lease costs if the lease allows this or if the lease at least allows the employer to sublet the parking to another user. But changes in benefits can add to employer costs. Parking benefits that are cashed out and taken as a wage increase impose a small payroll tax burden on employers (and employees). Similarly, some employees accepting a cash-out offer may previously have declined a parking benefit prior to cash-out having been offered. In such instances, employers could not use parking cost savings to fund the cash-out payments. As employers, however, retain complete control over the level of commuter benefits that they offer, and can change such level at any time of their choosing, they can thus make changes to their programs after a parking cash-out requirement is imposed—such as by levying a very small charge on employee parking—to ensure that their commuter benefits related expenditures do not rise. Combining parking cash-out with transit or vanpool benefits, which offer equivalent payroll tax savings as parking subsidies do for employers, would reduce the taxable portion of commuter benefits resulting from cash out.

As with parking benefits, employers can save on payroll taxes both in the provision of employer-paid commuter benefits (e.g., monthly transit/vanpool passes, as modeled in Scenario 2) or the provision of pre-tax transit benefits (e.g., allowing employees to set aside pre-tax income for transit, as modeled in Scenarios 3 and 4). Recall that as a qualified transportation fringe benefit under Public Law (Pub. L. No.) 115-97, employers may pay up to $300 per month (as of 2023) for their employees’ transit or vanpool commuting without any payroll tax or employee income tax obligation being incurred.³⁷ With respect to pre-tax commuter benefits, employers save on payroll taxes for each dollar deducted for eligible commute modes by employees. At the Federal level, savings on payroll taxes include those levied under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) (Employers Resource 2018). In contrast, almost all States’ payroll taxes are levied solely for Unemployment Insurance (UI) tax purposes,³⁸ and all States’ UI taxes use taxable wages as defined under FUTA. The Federal taxable wage base for FUTA is quite low, at only $7,000 per employee. Many States use a taxable wage base at or near the Federal amount for State UI tax purposes. Given most employees have income that far exceeds the taxable wage base, exclusions for commuter benefits may not make much of a difference in terms of total UI tax liability (K. Loughead, Tax Foundation, email message to study team, July 13, 2022). As such, payroll savings at the Federal level may be more substantial than at the State level.

The above considerations related to parking cash-out, employer-paid commuter benefits, and pre-tax transit benefits are relevant in considering cost implications for Scenarios 1–4. Of all the scenarios modeled, Scenario 5 is unique in its requirement that all employers offer an incentive for non-SOV travel and eliminate parking subsidies. Employers that were previously subsidizing parking under this scenario could apply recovered costs toward the incentive offering. For employees who use the incentive for transit or vanpool commuting, all employers may save on payroll taxes per Pub. L. No. 115-97. Employers that were not providing parking subsidies may incur some new costs with this additional benefit offering. All employers may, however, benefit from increased employee satisfaction associated with this new offering, which may help employers competitively recruit and retain employees, reducing subsequent costs with each.

Government Tax Revenues

The modeled scenarios implementing parking cash-out (Scenarios 1, 3, and 4) have potential to raise revenues in the form of increased income taxes. As stated by Shoup (1997), “[b]ecause cash in lieu of a parking subsidy is taxable, while the parking subsidy itself is tax exempt, commuters who voluntarily choose taxable cash in lieu of a tax-exempt parking subsidy will pay more in Federal and State income taxes. Tax revenues rise without an increase in tax rates, and without eliminating the tax-exemption for parking subsidies” (p. 32).

Consider a simplified example based on Scenario 1 in the presented analysis, estimating the employee population receiving free workplace parking only who would switch their commute away from non-SOV driving to take the parking cash-out offer.³⁹ Based on the number of employees making the switch and the average benefit taken, the research team estimates an additional $316 million in State and Federal tax revenue annually for the nine cities studied in this analysis alone. Further, while the presented analysis considered only State (including Washington, D.C.) and Federal taxes in modeling prices, cities with local income taxes⁴⁰ could also stand to benefit from the increased tax revenue provided by parking cash-out programs.

While not analyzed as part of this study, cities looking to raise revenues from commuter parking could tax such parking, and if they are already taxing it and worry that less usage would mean less tax revenue, then they could raise their parking tax rates to meet their revenue goals. This would have an added benefit of further discouraging commuter driving and parking.