Subsidizing employer-paid parking clogs streets, boosts emissions and isn’t fair to commuters who can’t use this perk. But there’s an easy way to fix it.
Donald Shoup and Don Pickrell
July 14, 2021, 3:28 PM EDT
The Power of Getting Paid Not to Park at Work
Free parking at the office is a popular work perk. But is it fair?
Cities, states and the federal government are trying to reduce traffic congestion, air pollution and
carbon emissions, but a Catch-22 in the federal tax code works against these goals. The income
tax exemption for employer-paid parking subsidizes solo driving to work, which helps explain
why 81% of American commuters drive to work alone.
The tax exemption for employer-paid parking creates three big problems. First, free parking at
work increases the number of cars driven to work by about a third, mostly at peak hours. Second,
higher-income commuters are more likely to get tax-exempt parking subsidies. The tax
exemption is also worth nothing to the 44% of American households who pay no income tax
because of their low incomes. Third, free parking doesn’t help transit riders, who are
disproportionately communities of color. In Los Angeles, for example, 92% of Metro riders are
people of color.
Repealing the tax exemption for a popular fringe benefit is unlikely, but the discussion doesn’t
end there. In a bid to reduce driving and increase fairness, the District of Columbia enacted
its Transportation Benefits Equity Amendment in 2020. If an employer with 20 or more
employees subsidizes parking at work, the law requires the employer to offer an equal benefit to
employees who do not drive.
Called “parking cash out,” this policy gives commuters flexibility to choose between free parking
or another benefit of equal value. Commuters can continue to drive and park free, or they can
take the cash value of the parking subsidy and use it for anything they want, such as putting it
toward the rent of an apartment within walking or biking distance of work.
California enacted a similar cash-out law in 1992. The California Air Resources Board examined
the law’s effects in a travel study of 1,694 commuters at eight firms in Southern California.
The 1997 study found that after employers offered the cash option, solo driving to work fell 17%,
carpooling increased 64%, transit ridership increased 50%, and walking or biking increased 39%.
These changes reduced vehicle travel to work by 12% — equivalent to removing from the road
one of every eight cars driven to work. Employers reported that parking cash out was cheap, easy
to manage and fair. It also helped them to recruit and retain workers.
Adding 22 words to the Internal Revenue Code can benefit almost everyone at almost no cost to anyone.
Compliance with the cash-out law costs employers little because the laws in both California and
D.C. apply only to parking spaces an employer rents from a third party. When a commuter
cashes out a parking space, the money the employer previously spent to rent the parking space
becomes the commuter’s cash allowance, and the firm breaks even. After employers offered
parking cash out in California, their total cost for transportation subsidies increased by only $2
per employee per month.
If commuters can choose between free parking or its cash value, all those who take the cash and
stop driving will be better off (or they wouldn’t choose the cash). Even the remaining solo drivers
will be better off because parking cash out reduces traffic congestion.
While other states and cities could adopt this almost-costless reform, there’s an even more
straightforward solution: Amend the U.S. Internal Revenue Code’s definition of employer-paid
parking that qualifies for a tax exemption.
Here is the current definition of employer-paid parking that is tax-exempt, followed by the 22-
word amendment in italics:
Section 132(f)(5)(C): QUALIFIED PARKING – The term “qualified parking” means parking
provided to an employee on or near the business premises of the employer . . . if the employer
offers the employee the option to receive, in lieu of the parking, the fair market value of the
Parking cash out is a simple change to a traditional fringe benefit because it merely gives
commuters choices about how to receive this benefit. If an employer offers commuters a fair deal
— free parking or an equivalent benefit — the parking subsidy will continue to qualify as tax-
exempt. Commuters can drive to work and park free, or they can use the parking subsidy’s value
for any other purpose they choose, including a tax-exempt contribution to health insurance or a
pension plan. But if an employer offers commuters an unfair deal — free parking or nothing —
the free parking does not merit a public subsidy, and its cash value should be taxable income.
Tax revenue will increase when a commuter chooses taxable cash instead of tax-exempt free
parking. In California, federal income tax revenue increased by $48 a year per employee offered
parking cash out, because some commuters preferred taxable cash to a tax-exempt parking
subsidy. State income tax revenue increased by $17 a year per employee.
Parking cash out will ensure equity in commuting subsidies, increase transit ridership, reduce
traffic congestion, improve air quality and reduce carbon emissions. It will also increase tax
revenue without raising tax rates, and improve employee benefits without significantly
increasing employers’ costs. Employers who oppose offering cash out will have to defend their
right to subsidize only drivers — at taxpayers’ expense.
Adding 22 words to the Internal Revenue Code can benefit almost everyone at almost no cost to
anyone. Subsidizing people rather than parking will improve tax equity, transportation
efficiency, and economic and social justice.
Donald Shoup is a distinguished research professor of urban planning at the University of
California, Los Angeles Luskin School of Public Affairs and the author of The High Cost of Free
Cities are changing fast.
Don Pickrell is the chief economist at the U.S. Department of Transportation’s Volpe Center and
a lecturer in the department of civil engineering at MIT