Greater Greater Washington

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Fiscal cliff deal restores transit benefit

Congress reached a deal to avert the so-called "fiscal cliff," and transit riders get a bonus: the Senate included a provision raising the federal transit benefit to $240 per month.


Photo by thisisbossi on Flickr.

Today, employers can offer their workers a pretax deduction for transit of up to $125 per month, and some employers, including the federal government, will give that much in transit fare to workers outright as an extra perk. The benefit was $230 per month until the beginning of last year, when a provision in the law expired and it reset to a lower level.

There's a similar benefit for parking costs, but workers can deduct more than for transitup to $240 per month since the start of 2012. Some members of Congress had been trying to restore parity between transit and parking benefits, and got it into the Senate's transportation bill in March, but the provision didn't survive into the final bill.

The bill Congress just approved for the "fiscal cliff" contains this provision, meaning benefits go up to $240 per month, several people have confirmed. Unfortunately, it's still only temporary, as this new level expires again at the end of 2013 unless Congress extends it once more.

Technically, the new level is also retroactive until the start of 2012, but unlike with tax credits you can claim on this April's taxes for activities in 2012, there's no way for riders to realistically take advantage of it for months gone by.

Tom Bulger, a WMATA board member and lobbyist who's been pushing for the extension, noted that Congressional Republicans had been strongly opposed to any changes in law that increase any taxes, including letting previous tax cuts expire, but hadn't extended that same passion to the transit benefit.

Even if House Republicans just went along somewhat reluctantly with a Senate deal yesterday, in approving this extension, they were now able to give many American workers a tax cut along with helping our cities function more effectively and ending one small example of the many ways government "picks winners and losers" among transportation modes.

David Alpert is the Founder and Editor-in-Chief of Greater Greater Washington and Greater Greater Education. He worked as a Product Manager for Google for six years and has lived in the Boston, San Francisco, and New York metro areas in addition to Washington, DC. He loves the area which is, in many ways, greater than those others, and wants to see it become even greater. 

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Wohoo! Finally tax relief that actually means something to me. Now let's see how fast my employer figures this out...

by Jasper on Jan 2, 2013 9:35 am • linkreport

So now the most important question for the DC area, and WMATA, is whether OPM will authorize an increase in monthly transit benefits to a maximum of $240. All this fiscal cliff bill does is it allows employers to take a pre-tax deduction for transit benefits up to $240. It says nothing about whether the federal government will actually choose to extend this added benefit to its employees, which of course will mean increased spending, and hence sure to meet objections from some House Republicans.

by JJ on Jan 2, 2013 10:14 am • linkreport

This is great news, for say, someone who commutes from Vienna-Metro center. $5.30 at peak, $10.60 a day, assume a 250 day working year: $2650. If you can deduct $240 a month, that's $2880, more than you spend. If you're in the 25% marginal bracket filing singly (35k-85k), you can save .25*2880, or $720 on your federal taxes. Last year (ignoring the weird retroactive thing), you could have saved .25*1500, or $375. That's a $345 extra to transit riders. Woooohooo!

You save more if you're in a higher bracket, but then you're taking the BMW to work.

by Steve on Jan 2, 2013 10:17 am • linkreport

Too little, too late- After 1.5 years commuting 70+ minutes via metro/bus to work, and 7 years without a car in DC, I now have a car and have cut my commute to 25 minutes.

by Aaa on Jan 2, 2013 10:55 am • linkreport

Wouldn't a better way to encourage mass transit be to take the amount of lost tax receipts from this benefit and instead directly subsidize Metro? After all, there is no point in subsidizing riders to utilize a system which is falling apart. Also--many folks dont utilize the tax benefit so it ends up being wasted.

by Matt Engel on Jan 2, 2013 11:27 am • linkreport

@Matt

Seems to be basically the same thing, except getting a subsidy out of the current congress is a non-starter. The idea is that more people with expensive metro rides will be using the system now that it is deductible. This is a big win, and should go a long way to winning back ridership.

by Kyle-W on Jan 2, 2013 11:31 am • linkreport

Kyle- Assuming that a subsidy is the same as a tax deduction then i would rather give the money directly to Metro. If folks dont use the deduction, then metro still suffers.

by Matt on Jan 2, 2013 11:43 am • linkreport

@Matt

Giving the subsidy directly to Metro would be better for Metro but giving Metro extra money isn't what the tax benefit is about. The benefit isn't really a "benefit" at all but rather an allowance of what should be normal accounting. For example, let's say a business sells something for $100 but spent $90 making it. The business should only pay taxes on the $10 profit, right?

Now consider an employee. If they earn $100 in wages but have to spend $10 in employment related expenses, shouldn't they only get taxed on their $90 "profit"? Commuting to work is an employment related expense and that's the rationale for allowing employees to subtract it from their wages.

by Falls Church on Jan 2, 2013 11:56 am • linkreport

So there's not going to be any way for me to get this retroactively, is there? I've been getting a $199.50 MTA TLC pass every month for a while now, and just paying for the amount over $125 post-tax.

by Gray's in the Fields on Jan 2, 2013 12:00 pm • linkreport

I'd rather see loss of both the parking and WMATA benefits. The WMATA benefit means that a large section of the riders are completely immune to price rises. As a result, WMATA has less incentive to control costs, and less incentive to improve service.

The parking benefit only works if you have a monthly parking pass, and so forces you to be either a driver OR something else. Once you elect to drive, you essentially paid for the rest of the month, and are discouraged you from taking alternatives.

If we all paid out of pocket, we would find the optimal method of transportation, perhaps take transit, bike or walk more, etc.

by SJE on Jan 2, 2013 12:20 pm • linkreport

@Matt

I am not disagreeing with you here, but to get approval for a new subsidy right now through the current congress is an absolute non-starter. With that said, I will take what I can get.

The people paying $240 a month to metro from Vienna are needed, to maintain the system the reaches far into the suburbs. I don't see where there is a limit at all, if someone commutes from Vienna, they could be exceeding the $240/month even excluding parking at the station, but that is another story.

by Kyle-W on Jan 2, 2013 12:22 pm • linkreport

Falls Church: the tax system does not work that way, nor should it. My employment related expenses include my clothes, haircuts, food, car etc. Should I get more if I buy nicer clothes? Why give people more to commute by car than, e.g.,walk?

by SJE on Jan 2, 2013 12:25 pm • linkreport

Interesting about Bronzeville. No mention that gentrification in that general area by African Americans began in the early 80s, a little north in the "Gap" neighborhood near IIT. In DC, African-Americans played a big role in early gentrification in LeDroit and are invisible E of the River. Part of the problem is that the usual suspects in the media and in civic orgs just don't know many African-americans.

by Rich on Jan 2, 2013 12:28 pm • linkreport

@SJE:
The WMATA benefit means that a large section of the riders are completely immune to price rises.
That's not true at all. The benefit provided to many Federal employees has this effect, but the ability to pay for transit in advance tax-free does not make riders immune to price increases. It makes them slightly less sensitive to price increases, sure, but feeling 70% or 80% of a price increase is almost as bad as feeling 100% of the increase--and definitely very different from feeling 0% of it.

The bigger problem with having a de facto transportation subsidy operating this way is that it preferentially benefits those in higher tax brackets. On top of that, only employees of certain (usually large) employers can take advantage of this benefit at all. So I do agree with you on this: as a way to encourage transit use, it's kind of a mess.

by Gray's in the Fields on Jan 2, 2013 12:28 pm • linkreport

@ SJE:I'd rather see loss of both the parking and WMATA benefits.

You are correct that this is one of too many tax-exemptions in the tax code. I'd be happy to give it up, if other people (and remember: "Corporations are people, my friend") give up their tax breaks as well.

The WMATA benefit means that a large section of the riders are completely immune to price rises.

Incorrect. Not everybody is a federal employee. In fact, a lot of people pay for their own Smartrip benefits. I am one of them. Quite frankly, this is one of the most direct tax breaks I feel in my wallet simply because I spend more than $125 a month, and I literally have to spend money from my wallet to keep riding the train.

The only other tax break that is as significant is/are the medical exemptions, but even they go though my paycheck, so they are much more hidden.

by Jasper on Jan 2, 2013 12:31 pm • linkreport

@Falls Church
My understanding of the tax code is that regular commuting expenses are generally not tax deductible as an "employment related expense." This is a special exception meant to incentivize transit use.

by Wilsonia on Jan 2, 2013 12:54 pm • linkreport

"The WMATA benefit means that a large section of the riders are completely immune to price rises."

I think WMATA has said in the past - and this is from memory -- that about 2/3 of rush hour riders have some form of the transit benefit. Given the size of the federal workforce, I'd guess about 1/2 of the riders are riding for free.

Much lower for Metrobus?

by charlie on Jan 2, 2013 1:01 pm • linkreport

My employment related expenses include my clothes, haircuts, food, car etc. Should I get more if I buy nicer clothes? Why give people more to commute by car than, e.g.,walk?

I'd agree with abolishing both the transit and parking benefits because they implicitly penalize anyone not using transit or parking to get to work. From a policy perspective, that would be best but the accounting logic of allowing the deduction as an employment expense still stands.

As for your haircut, clothes, car, etc., if it was practical to segregate out the portion of those expenses that were employment related, then there would be an argument to allow their deductibility. In the rare instances where its possible to show that 100% of the costs of clothes or a car is employment-related, then those benefits do not count as income. For example, if you're in the military and are provided free uniforms, it's not a taxable benefit. Similarly, if you're provided a car for work which can only be used for business purposes, it's also a tax deductible benefit for your employer just like parking/transit.

Food is not normally an employment related expense since you don't consume more of it just because you're employed. However, if your employer provides you food because you're working late, that expense is tax deductible for them (just like the transit/parking benefit) because it is clearly employment related.

The difference between these deductions and parking/transit is that if you pay them instead of your employer, then there's no deduction if you're a W2 wage earner. OTOH, if you're a 1099-MISC contractor, then you can still deduct them (as long as you keep careful records showing the expenses were truly 100% work related).

by Falls Church on Jan 2, 2013 1:04 pm • linkreport

My understanding of the tax code is that regular commuting expenses are generally not tax deductible as an "employment related expense."

That's true. Not because it makes sense from an accounting standpoint but largely because it would be tedious and impractical to have everyone keep track of their commuting expenses. However, if you're a contractor, you can still deduct what are essentially regular commuting expenses by declaring your home your primary place of business.

by Falls Church on Jan 2, 2013 1:10 pm • linkreport

I said "a large section" of transit riders, which encompasses those who can do all their travel within the current benefit. Even if you pay half the cost, you are still less sensitive to price rises.

The end result is that someone is paying for you to ride Metro, and so Metro has an almost guaranteed pool of customers almost irrespective of service quality or price.

by SJE on Jan 2, 2013 1:18 pm • linkreport

Falls Church: I would prefer that they remove most employment related tax incentives because, as you note, it is an administrative nightmare and also because it has distorting effects. It also is inconsistent. I understand why work clothes for construction might be tax deductable, but on the same reasoning a lawyer could rationalize an Armani suit as employment related, since he is unlikely to wear the suit anywhere except at work.

by SJE on Jan 2, 2013 1:23 pm • linkreport

Parking and Transit Benefits should be $0. Just lower taxes.

by jcp on Jan 2, 2013 1:25 pm • linkreport

@jcp: While I have argued in the past for a zero benefit for transit/parking, I think it would end up being fairly complicated to implement and enforce.

Everyone that currently drives to work and parks for free on the employer's land would have to estimate the value of a year's worth of parking and report it as additional income, and then be taxed on it.

I suppose employers could file a 1099-whatever to tell the IRS how much their provided parking space was, but what basis would you use?

Most locations require so much parking to be built that they have to give away the parking for free, is that the right amount of additional income?

Relevant previous argument: http://greatergreaterwashington.org/post/5859/is-the-federal-transit-benefit-actually-bad/

by Michael Perkins on Jan 2, 2013 1:41 pm • linkreport

@Perkins

An estimate of the value of free parking has to be made even in the present situation. That's the only way to determine whether its value is more or less than the $240/month tax free max.

by Falls Church on Jan 2, 2013 2:25 pm • linkreport

The end result is that someone is paying for you to ride Metro, and so Metro has an almost guaranteed pool of customers almost irrespective of service quality or price.

Really? And who are the people paying for others to ride metro?

But if the transit benefit is the best we got out of the deal, then we're on our way to nowhere at warp speed. I personally don't care if they raised or kept it at the same level. But I'm also not one of the "over[insert term] federal gov't worker" either.

BTW, we all know that this tax argument was really a sham anyway...on both sides. The next sham will be the deficit debate. Besides, people are always in favor of raising someone else's taxes. See democratic politics.

by HogWash on Jan 2, 2013 2:28 pm • linkreport

The federal government is paying.

by SJE on Jan 2, 2013 2:55 pm • linkreport

The federal gov't pays for people to ride the metro for free? Sounds like news to me.

by HogWash on Jan 2, 2013 4:00 pm • linkreport

I get a $100/mo transit benefit per tax rules. It does not come out of my salary. Sounds free to me.

by SJE on Jan 2, 2013 4:07 pm • linkreport

@SJE:
I get a $100/mo transit benefit per tax rules. It does not come out of my salary. Sounds free to me.
How is this "per tax rules"? The tax rules just allow you to pay for up to $125 in transit each month before taxes, assuming your employer sets up a way to do it. You still pay for it, you just pay less than you would if you used post-tax dollars like you do for (almost) everything else.

If you're receiving $100/month benefit for free from your employer, that is a completely different thing.

by Gray's in the Fields on Jan 2, 2013 4:33 pm • linkreport

It does not come out of my salary. Sounds free to me.

Many agencies and private sector places of employments have cafeterias, break rooms (some provide coffee and more) that are perks to working there. Very few (if any) of these businesses deduct the amount of the perks from their salaries.

I would be more open to your point if the gov't simply doles out freebies to its workers and it (and metro) get nothing in return.

by HogWash on Jan 2, 2013 4:43 pm • linkreport

The federal government pays for employee commute transit up to the maximum because that saves the federal government huge amounts of money in parking infrastructure it doesn't have to build and maintain.

I'm not sure how much of an effect this has on the prices WMATA can charge. Sure, a large portion or riders may be "immune" to the price increases in that they won't stop riding, but driving a car into the district and parking it every day is still really expensive. If driving was such an attractive alternative wouldn't those people who do pay out of their own pockets be leaving in droves? Maybe some of them are given the recent ridership downturn.

by MLD on Jan 2, 2013 4:55 pm • linkreport

Nice! I've been wondering if they would ever bring back the subsidy.

by King Terrapin on Jan 2, 2013 7:14 pm • linkreport

Wouldn't a better way to encourage mass transit be to take the amount of lost tax receipts from this benefit and instead directly subsidize Metro?

No. Because the goal of this benefit is give people a small nudge to switch.
A subsidy to Metro helps everyone who rides Metro at all times of the day. That may seem good, but that means your helping people who would ride Metro no matter what and also people who ride at off-peak hours. A commuter benefit should more accurately target people who would otherwise drive at rush hour.
Making metro good enough to encourage the same amount of behavior modification would cost a lot more money.

by David C on Jan 2, 2013 10:11 pm • linkreport

My understanding of the tax code is that regular commuting expenses are generally not tax deductible as an "employment related expense." This is a special exception meant to incentivize transit use.

Partly correct. The real idea is that drivers already have a benefit and this was intended to level the playing field. They have a fringe benefit that is excluded from taxes (up to a maximum).

Basically it works like this. Many people get free parking from their employer. Normally a benefit such as this - a fringe benefit - is taxed. "A fringe benefit is a form of pay (including property, services, cash or cash equivalent) in addition to stated pay for the performance of services.... Fringe benefits for employees are taxable wages unless specifically excluded by a section of the Internal Revenue Code." So, for example, if your employer provides you lunch everyday, that is a taxable fringe benefit and you're supposed to report it as income.

it used to be that parking was the only transportation fringe benefit available tax-free. Mostly because of the hassel it would be to account for it. But this incentivizes people to drive instead of take transit so they added a transit benefit. Then they added a commuter vehicle benefit, and recently a bicycle commuter benefit.

I think WMATA has said in the past - and this is from memory -- that about 2/3 of rush hour riders have some form of the transit benefit.

Perhaps, but I would bet that an even higher percentage of road commuters have free parking waiting for them at work.
How is this "per tax rules"? The tax rules just allow you to pay for up to $125 in transit each month before taxes, assuming your employer sets up a way to do it.
See above. Employers can give you money for your commute and it is tax free. They can give you up to $240 a month and you get it all, which makes it "cheaper" than giving you a $240 raise since they would have to give you more than $240 for your take-home pay to go up that much.

Tax rules also allow you to pay for your transit benefit with pre-tax dollars, but that is not the only option.

If you're receiving $100/month benefit for free from your employer, that is a completely different thing.

They're different, but related. I wouldn't call them completely different. I think they were defined in the same law in the 1990's in fact.

Many agencies and private sector places of employments have cafeterias, break rooms (some provide coffee and more) that are perks to working there.

True, but they aren't excluded from fringe benefit taxes. So if you get free coffee from work everyday - if it's routine, you're supposed to pay taxes on that.

by David C on Jan 2, 2013 10:36 pm • linkreport

This isn't just for federal employees - it's for the workforce in general throughout the country. I had it when I lived in Atlanta (although my cost was only $80/month, well under the $125 limit).

by Midwest Girl on Jan 3, 2013 9:32 am • linkreport

Wrong!!! read this http://www.federaltimes.com/article/20130102/BENEFITS01/301020002/Fiscal-cliff-deal-increases-transit-benefit-feds?odyssey=tab%7Ctopnews%7Ctext%7CPay%20&%20Benefits

Increase to 240 for federal employees, not a question of IF.

by ap17 on Jan 3, 2013 9:44 am • linkreport

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