The Commuter Parking Tax Break

Many employers provide parking to employees who commute to work, which can be viewed as an untaxed fringe benefit of their jobs. The value of this benefit depends on where the parking is located. If the employer is in a uncongested suburban or rural area, where parking is generally free for everyone, then the value of this fringe benefit is low. But if the employer is in the part of an urban area with traffic congestion and where parking usually has a monetary price, then the value of this benefit can be higher.

Tony Dutzik, Elizabeth Berg, Alana Miller, and Rachel Cross, considers the tradeoffs in their report, “Who Pays For Parking? How Federal Tax Subsidies Jam More Cars into Congested Cities, and How Cities Can Reclaim Their Streets” (September 2017), published by TransitCenter and the Frontier Group. They write:

“Because employer-provided and employer-paid parking is excluded from an employee’s income, the parking tax benefitaccounts for an estimated $7.3 billion in lost federal and state income and payroll tax revenues every year. … While the vast majority of Americans drive to work, most do not gain from the commuter parking benefit. The reason is that parking is so abundant in many places—especially in suburban and rural areas—that it essentially has no value as defined by the Internal Revenue Service. As a result, only about one-third of commuters benefit from this policy. In fact, most Americans are net losers from the commuter subsidies, as they must endure higher taxes or reduced government services—as well as increased congestion—to subsidize parking for a minority of commuters. … The parking tax benefit disproportionately assists commuters who work in dense employment centers, such as downtowns, where parking is most valuable.”

To IRS has tried to tax the value of employee parking a few times over the decades with minimal success. However, the US government did enact a policy to offer a counter-subsidy by making it possible pay for transit and carpooling out of pretax income. (And yes, this means the official policy is both not to tax the benefit of free parking, thus encouraging people to drive to work, and also not to tax the value of transit passes, thus encouraging people not to drive to work.) But the transit benefit is relatively small-scale in size.