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Transit. It’s taxing.

One of the less heralded benefits of the 2009 Recovery Act is a change in pre-tax commuter benefits. As with pre-tax health care and child care plans, commuter benefits allow you to set aside some of your paycheck before it’s taxed, and use that money to pay commute expenses – transit passes and parking. Employers also benefit from commuter benefits because they don’t pay employment taxes on your set-aside.

The Recovery Act boosted the limit on how much money could be set aside each month for transit passes, from $120/month to $230/month. The Act did not change the allowance for parking, which was already at $230/month.

Yes, you read that right. You got more tax-free funds for parking than you did for transit. A lot more.

But the Recovery Act changed all that, equalizing this bizarrely lopsided incentive.

Unfortunately, like many of the Recovery Act’s provisions, this change is set to expire on December 31. (Actually, it was set to expire December 31, 2010, but like many other provisions, was extended for a year.) The set-aside amounts will return to their original levels on January 1… except no, wait! The transit set-aside will return to its original level – $120/month. The parking allowance will go UP to $240/month!!

This frosts me.

I’m not going to debate here the relative societal benefits of driving to work vs. using mass transit. There are plenty of reasons why people drive to work. If Congress wants to give a break to those who have to drive to urban or otherwise congested areas for work, I’m not going to complain. But creating a lesser incentive for transit – where is the logic in that? Whose idea was this anyway?

A bit of research reveals this inequity goes back quite a ways. Congress enacted the law which enabled pre-tax commuter benefits for transit in 1998. But a year earlier, as part of an omnibus bill full of surprising loopholes (“Taxpayer Relief Act of 1997”), employers were given the ability to provide pre-tax benefits for parking. Those benefits were an expansion of an even older tax provision, which allowed employers to provide free parking (even in non-employer-owned lots) without affecting employee taxable income, provided the effective value of that benefit did not exceed a certain amount.

As best I can tell, the tax laws were trying to accommodate what were then considered ordinary employer practices by exempting such practices from taxation. Company cars. Free parking. In fact, these items enjoy tax-free treatment automatically adjusted to inflation. Transit passes as an employee benefit are much newer, and have never enjoyed the same treatment.

I say, we have matured as a society. If we are going to muck around in differential tax treatment of employee benefits, those differential benefits ought to reflect the social benefits provided, not just what used to be common practice. Let’s make both the transit benefit equal to the parking benefit, and let’s tie that transit benefit to inflation.

(If you’d like to send a message to Congress on this issue, this website makes it easy.)

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