Among the many changes to the tax code proposed in the “trillion-dollar blunder” of a bill barreling its way down Capitol Hill is a proposal to change how employer-provided commuter benefits are taxed.
“It’s clearly a negative for commuters who are spending a lot of money on public transportation,” the American Public Transportation Association's Rob Healy told AP. However, the proposed text of section 13304(c) of H.B. 1 might not affect the way that most Washingtonians pay for their transit benefits.
“Qualified Transportation Fringe Benefits” (QTFBs) are defined by the IRS to include vanpools, parking, and transit that facilitate employees' daily commutes between home and work. Current law also has a small bicycle commuter tax benefit, which H.B. 1 abolishes.
Under current law, QTFBs are exempt from federal taxation in two ways:
- They're considered a business expense, and thus can be deducted from corporate income tax.
- If employees pay for QTFBs, those costs are exempt from taxes levied on payrolls (e.g., FICA) and wage income (e.g., individual income tax).
What H.B. 1 abolishes is the first tax deduction. (This only applies to corporations that pay federal income taxes, so it has never affected government employees. It does affect non-profit organizations that pay “unrelated business income taxes.”) Section 13304(c) lists many cuts to what can be counted as business expenses under 26 USC 274, “Computation of Taxable Income.” For instance, it would limit the extent to which companies can write off the cost of providing free food at the office — a prized perk at many big tech companies.
It would also stop companies from writing off the cost of employer-paid QTFBs from their income tax returns. If your employer currently directly pays for your commuting expenses, they will no longer be able to count those costs as a business expense when computing their tax bill. This might change how generous employers are about directly paying for their employees' parking spaces, for sending pampered employees home via a car service, or for buying everyone transit passes.
Many of us with workplace “transit benefits” (and who aren't government employees) won't be affected, as we pay for our QTFBs via the second path — as a pre-tax deduction made by employees from their own paychecks, which are then loaded onto a SmarTrip card or debit card. This tax exemption isn't changed in H.B. 1, since it affects employees' incomes rather than employers' incomes.
Federal government employees receive their transit passes under Executive Order 13150, which also isn't altered by this bill.
If H.B. 1 passes, the tax code will favor the latter approach to providing QTFBs. This might make employees a bit more cost-conscious about their transportation choices, which might encourage people to make better choices. However, because giving commuter benefits will cost employers more, fewer might opt into these programs in the first place.
Another aspect of the tax bill that has changed in recent weeks is the House bill's proposal to severely curtail funding for affordable housing, economic development in high-poverty areas, and rehabilitating historic buildings. The most recent versions of the bill leave these areas relatively unchanged.
Even though the bill itself doesn't cut funding levels for these tax credits, the ultimate impact of these credits will be substantially diminished as lower tax rates dim investor demand for tax-advantaged investments, like municipal bonds and syndicated tax credits.