Hidden in the Tax Code, A Potential Surplus of Transportation Funds

For transit agencies in need of more operations funding, a reexamination of federal tax law may be in order.

Washington Metro Smithsonian Station Flickr user intothelens4149

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There are two principal ways in which the federal government helps pay for the transportation needs of Americans: One, it offers direct aid to states and cities for the construction and maintenance of highways and transit systems; two, it allows employees to receive a tax-free commuting benefit worth several hundred dollars a month, resulting in lost federal tax revenues worth hundreds of millions of dollars annually. The merits of the latter, though taken advantage of by several million people from coast to coast, is rarely discussed. But with transit agencies grasping about for more funding in the face of a difficult economic period, perhaps that ought to change.

The commuting benefit, which allows employers to give their workers up to $230 monthly tax-free to spend on driving or taking public transit, is especially popular in the country’s major cities, where rail and bus operators work with big companies to ensure that employees take advantage of this money-saving program. The program is essentially a federal transportation subsidy in which the government absorbs a percentage of commuting costs by agreeing not to tax some of the money people spend to get to work. Here, I’ll mostly focus on the public transportation side of this discussion, though I’ll reference the driver benefits at the conclusion.

For transit agencies, this program may promote higher ridership by decreasing individual transportation expenditures, and thus encourage more fare revenue. For the average worker, it reduces expenses and allows the purchase of monthly passes that they might otherwise not buy.

In Washington, DC, 285,000 people take advantage of the program each month to ride the Metro rail and bus system. In New York, the program allows the average person to get back in tax rebates 33 percent of the cost of their monthly transit passes. If the same ratio holds up in the capital, this indicates that the federal government is subsidizing about $115 million worth of rides over the course of the year in the Washington region alone — and probably just as much or more in other transit-oriented metropolitan areas.

(These rough calculations assume an average fare of $2.50 per ride, taken twice a day every workday, adding up to $100 in transit costs per month per person. The tax benefit is based on a federal tax rate of 15 percent; the specific amount saved depends on the respective salary and resulting income tax of each individual. No transit agency I contacted had specific data on the amount of benefits claimed overall by its users.)

The Washington Metro receives about $400 million a year in direct funding from the national government, though most of this money is spent on capital expenses since federal rules make spending national money on operations virtually impossible.

The situation is similar across the country. In San Francisco, BART’s commuter rail service receives about $70 million annually from Congress to maintain the system. But 46 percent of riders, about 170,000 a day, also receive tax benefits that cover an average of $92 worth of commuting expenses a month — costing the federal government about $32 million in potential tax revenue every year.

Is the transportation tax-benefit program benefiting the people who need help paying for their commutes? And depending on that answer, could federal government find a better way to collect and spend the funds?

Last month, a story by Dorothy Rowley in the Afro Newspaper pointed out that the majority of those getting tax rebates for transportation are people with steady, relatively well-paying jobs from large companies or the public sector. That’s because in order to get the rebate, you need the cooperation of your employer.

This means that the government is basically subsidizing the transportation choices of middle and upper-middle class people while doing little for people in a more marginal position, who to make matters worse rarely have access to discounted transit passes even in the most progressive American cities. People without steady jobs cannot benefit from the federal transportation subsidy, despite the fact that they’re the people who need it most.

Does the tax benefit encourage people to use transit instead of driving to work? Perhaps, but the fact that drivers can benefit from similar subsidies to pay for gas and vehicle maintenance indicates that most of those using the program would likely still ride transit even if they had to pay the full fare.

Though an IRS spokesman told me that the government agency does not collect specific information related to how much money in tax revenues the treasury doesn’t collect each year thanks to this benefit program, assorted evidence from a number of transit agencies with whom I spoke indicate that the federal government may be losing more than a billion dollars a year on these round-about subsidies — and that’s just on the public transportation portion.

Transit agencies across the country are currently increasing fares and cutting service to compensate for the devastating effects of the recession on their revenues. What if the government taxed transportation expenditures and then directed the revenues to operations aid for agencies in need? Those agencies could use some of the money to provide reduced fares to low-income riders who are unlikely to benefit from the existing program and the rest to ensure the provision of adequate rail and bus services.

The amount of revenue lost at the local level because of lower ridership resulting from the eliminated tax benefit could be minimized by simultaneously eliminating the problematic car commuting subsidy. The new federal tax funds collected as a result of that law change could then be redirected to appropriate transportation investments, such as more transit services, a winning proposition both for those currently benefiting from the subsidy and those who are not.

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Yonah Freemark is a senior research associate in the Metropolitan Housing and Communities Policy Center at the Urban Institute, where he is the research director of the Land Use Lab at Urban. His research focuses on the intersection of land use, affordable housing, transportation, and governance.

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Tags: public transportationwashington dcsan franciscogovernancetransit agenciestaxesyonah freemarkgrassroutes

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