PARKING CASH OUT
Donald C. Shoup
Department of Urban Planning
University of California, Los Angeles
Los Angeles, CA 90095-1656
shoup@ucla.edu
Funded by Year 13 Research Grant
PARKING CASH OUT
EXECUTIVE SUMMARY
Employer-paid
parking is the most common fringe benefit offered to workers in the US, and 95
percent of American automobile commuters park free at work. Free parking at work amounts to a matching
grant for commuting by car: employers pay the cost of parking at work
only if commuters are willing to pay the cost of driving to work. Commuters who do not drive to work do not
receive an equivalent subsidy. This
matching-grant feature of employer-paid parking helps to explain why 91 percent
of commuters drive to work, and why 91 percent of their cars have only one
occupant.
Many
solo drivers who park free at work would drive to work alone even if they had
to pay for their parking. But some of
them would carpool, ride public transit, walk, or bike to work if they had to
pay to park; these commuters drive to work because they can park
free. Case studies and statistical
models suggest that employer-paid parking increases the number of cars driven
to work by 33 percent when compared with driver-paid parking.
A few
employers offer commuters the option to take the cash equivalent of any parking
subsidy offered. Offering commuters the
choice between a parking subsidy or its cash equivalent shows that even free
parking has an opportunity cost—the foregone cash. The option to “cash out” raises the effective price of commuter
parking without charging for it.
Commuters can continue to park free at work, but the cash option also
rewards commuters who carpool, ride public transit, walk, or bike to work.
Parking
cash out does not prevent commuters from driving to work whenever they want,
because firms can offer the cash-out option on a daily basis. For example, consider the case of a firm
(described in Chapter 23) that estimates its cost to provide commuter parking
is $3 per space per day. The firm
offers all employees free parking, but also offers them a credit of $3 on any
day they arrive at work without a car.
Therefore, commuters can either park free or take the cash value of the
free parking, and they can make different choices on different days. Although everyone can park free at work,
commuters who drive to work alone forfeit $3 a day. The daily cash option therefore encourages everyone to consider
choosing the alternatives to solo driving whenever possible.
This
daily cash-out arrangement is simple, fair, and flexible for both the firm and
its employees. Another important
advantage is that all employees are automatically enrolled in the program even
if they usually drive to work solo.
Every employee can earn a $3 bonus on any day simply by showing up at
work without a car. Rather than charge
commuters for parking, the firm pays them for not parking. Although this arrangement seems uncommonly
generous to commuters who do not drive to work, it merely levels the playing
field among modes, and it does not favor the alternatives to solo
driving. Offering the same subsidy to
all commuters is unusually generous to nondrivers only because most firms offer
them nothing.
CALIFORNIA’S PARKING
CASH-OUT LAW
California
law requires many employers to offer parking cash out if they subsidize
commuter parking in spaces they rent from a third party, and the evidence
suggests that parking cash out produces significant benefits. Case studies in Southern California found
that the commuters’ solo-driver share fell from 76 percent before employers
offered parking cash out, to 63 percent afterward. For every 100 commuters, parking cash out induced 13 solo drivers
to shift to another mode. Of the 13
former solo drivers, 9 joined carpools, 3 began to ride public transit, and one
began to walk or bike to work. Three
times more commuters switched to carpools than to public transit, which shows
that parking cash out can reduce solo driving to work even where public transit
is not available. By encouraging
carpools, parking cash out takes advantage of many empty seats in cars already
on the road to work.
These
substantial reductions in solo driving reduced vehicle travel by 652
vehicle-miles traveled to work per employee per year. This reduction in vehicle travel saved 26 gallons of gasoline per
employee per year. Finally, the
reduction in fuel consumption for commuting reduced CO2 emissions by
367 kilograms per employee per year.
Because American motor vehicles consume one eighth of the world’s total
oil production, and because commuting to work accounts for about 16 percent of
total oil consumption in the US, parking cash out has significant potential to
reduce total oil consumption and carbon emissions. In 2001 the US imported $104 billion of petroleum, which
accounted for 8 percent of total imports and 29 percent of the nations’s
balance of trade deficit. A reduction
in the domestic demand for gasoline can therefore significantly reduce both petroleum
imports and the balance of trade deficit.
Quite aside from this financial benefit, reduced petroleum imports will
also increase national energy independence.
Parking
cash out increased the employers’ costs by only $2 per employee per month
because they saved almost as much on parking as they paid in cash to
commuters. Federal and state income tax
revenues rose by $65 per employee per year because many commuters voluntarily
traded their tax-exempt parking subsidies for taxable cash. Employers praised parking cash out for its
simplicity and fairness, and said that it helps to recruit and retain
employees. In summary, parking cash out
provides benefits for commuters, employers, taxpayers, and the
environment. All these benefits result
from subsidizing people—not parking.
Parking
cash out also eliminates any unintended bias inherent in employer-paid
parking. Women and minorities are less
likely than other commuters to drive to work solo, and more likely to ride
transit. For example, 78 percent of
white commuters drive to work solo, and only 2 percent ride public transit,
while only 58 percent of black commuters drive to work solo, and 16 percent
ride public transit. Because parking
cash out gives an equal benefit to commuters regardless of their mode choices,
it eliminates inadvertent discrimination based on gender, ethnicity, or any
other demographic variable, and avoiding bias in transportation policy is
simple transportation justice. Because
commuting to work accounts for almost one third of all automobile travel in the
US, and because employer-paid parking is a tax-exempt fringe benefit, parking
cash out promotes equity in both transportation and taxation.
EMPLOYER-PAID PARKING AS
A TAX-EXEMPT FRINGE BENEFIT
Because
employer-paid parking is a tax-exempt fringe benefit, the federal government
subsidizes solo driving to work. To
solve this problem I have proposed two simple amendments to the tax code: (1)
require parking cash out as an alternative to employer-paid parking, and (2) allow
the inclusion of employer-paid parking in cafeteria plans for tax-exempt fringe
benefits.
(1) Require Parking Cash Out as a Condition
for Tax Exemption
First,
parking cash out can be required by putting a condition on the tax exemption
for parking subsidies. Employer-paid parking should be a tax-exempt
fringe benefit only if an employer offers commuters the option to cash it
out. The non-italic text quoted below
is the Internal Revenue Code’s existing definition of employer-paid parking
that qualifies for a tax exemption; the italic text is the proposed
amendment.
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.
If this proposed
amendment is adopted, employers will choose whether their parking
subsidies are tax exempt. The cash-out
requirement can be interpreted as a test that an employer’s commuter transportation policy must
pass. Any policy will pass this test if
it subsidizes the alternatives to driving to work alone (such as transit,
walking, cycling, or carpooling) as much as it subsidizes parking at work. A policy will fail this test only it if
subsidizes parking more than the alternatives.
If an
employer offers commuters a fair deal—free parking or its fair
market value—the free parking will remain a tax-exempt fringe benefit. Commuters will be able to convert the
tax-exempt parking subsidy into a tax-exempt transit subsidy, or to pay income
taxes on the parking subsidy’s cash value and use the after-tax cash for any
purpose they choose. But if an employer
offers commuters an unfair deal—free parking without the option
to choose its fair market value—the subsidy does not merit tax exemption. This minor amendment to the tax code will
give commuters more choices and it will reduce the economic and environmental
costs of employer-paid parking. Commuters
who cash out their parking subsidies will reduce traffic congestion, energy
consumption, and air pollution. The
amendment will also significantly increase income tax revenues from commuters
who voluntarily choose taxable cash in lieu of tax-exempt parking subsidies.
(2) Include Parking in
Cafeteria Plans
Second,
cafeteria plans for fringe-benefits permit employees to select among one or
more non-taxable benefits or taxable cash, so each employee can design his or
her individual fringe-benefit plan.
Nevertheless, a quirk in the Internal Revenue Code excludes
employer-paid parking from these cafeteria
plans. The text quoted below is the Internal Revenue Code’s existing definition
of cafeteria benefit plans that qualify for a tax exemption; the proposed
amendment is to delete the italic text.
Section
125(a): Cafeteria plans – No
amount shall be included in the gross income of a participant in a cafeteria
plan solely because, under the plan, the participant may choose among the
benefits of the plan.
Section 125(f): Qualified benefits defined – For purposes of this section,
the term “qualified benefit” means any benefit which . . . is not includible in
the gross income of the employee by reason of an express provision of this
chapter (other than section . . . 132).
Because “other than
section 132” here refers to the tax exemption for employer-paid parking,
the tax code prevents employers from allowing commuters to give up free parking
in exchange for health insurance or any other tax-exempt benefit offered in a
cafeteria plan. Therefore, deleting the words “other than section 132”
from Section 125(f) will allow employers to offer commuters the option
to take other tax-exempt fringe benefits in lieu of free parking at work. Why not allow commuters to choose health insurance in lieu of free
parking at work? This offer will
increase the after-tax opportunity cost of the free parking, and it will thus
reduce solo driving to work. It will
also increase the number of employees with health insurance, and it will
improve employers’ fringe benefit packages at no cost to the employers.
CONCLUSION
The
tax exemption for employer-paid parking should be amended in two ways. First, employer-paid parking should
qualify as a tax-exempt fringe benefit only if the employer offers commuters
the option to take cash in lieu of the parking itself. If an employer wants to offer free parking
without the option to cash it out, the parking subsidy should not be
tax-exempt. Second, employer-paid
parking should qualify for inclusion in cafeteria benefit plans. Employers should be able to offer commuters
the option to trade away free parking in exchange for other tax-exempt fringe
benefits. These two tax reforms will
give commuters more choices and will significantly reduce the economic and
environmental costs of employer-paid parking.
Commuters who trade away their parking subsidies will reduce traffic
congestion, air pollution, energy consumption, and the risk of global warming. Commuters who voluntarily choose taxable
cash in lieu of tax-exempt parking subsidies will also increase income tax
revenues. Requiring employers to offer
commuters the option to cash out their tax-exempt parking subsidies, and
allowing employers to offer commuters the option to choose other
tax-exempt fringe benefits in lieu of free parking will reduce traffic
congestion, conserve gasoline, improve air quality, reduce the risk of climate
change, increase tax revenues without increasing tax rates, and increase
employee benefits without increasing employers’ costs.
Two
minor tax reforms can provide all these economic and environmental benefits
simply by allowing commuters to choose how they wish to spend their own income.
PUBLICATIONS
Donald Shoup, “Parking
Cash Out,” in Managing Commuters’ Behaviour, a New Role for Companies, Report
of the Hundred and Twenty First Roundtable on Transport Economics, Paris:
European Conference of Ministers of Transport, 2002, pp. 41-173.
Shoup, Donald C., "In Lieu of Required Parking," Journal of Planning Education and Research, Vol.18, pp.307-320.
Shoup, Donald C., and Jeffrey Brown,
"Pricing Our Way Out of Traffic Congestion: Parking Cash-Out and HOT Lanes,"
California Policy Options 1998, Mitchell, J.B. and Mary Richardson, eds., The School of Public Policy and Social Research, UCLA and The UCLA Anderson Forecast.