Cash in lieu of using a parking space
Don Shoup, the father of parking cash-out (cash in lieu of using a parking space),
explains how federal law has been changed to make PCO available to more employees. While
focusing on California, it is applicable to all states. Demand it from your employer.
14 Aug 97
FROM: Don Shoup
Thanks for your invitation to explain to the Sierra Club how the recent federal tax
bill will affect parking subsidies. I will explain what I think has happened.
California law requires many employers to offer commuters the option to choose cash in
lieu of any parking subsidy offered. This cash-out requirement applies to employers of 50
or more persons in regions that do not meet the state's clean air standards, but only for
parking spaces that employers rent from a third party. Thus, if a commuter trades a
parking space for cash, the money previously allocated to renting a parking space directly
funds the commuter's cash allowance.
Unfortunately, the federal Internal Revenue Code has prevented California from
enforcing this cash-out law. Until last week, Section 132(f)(4) of the Internal Revenue
Code provided that if an employer offers commuters the option to choose cash in lieu of a
parking subsidy, the parking subsidy itself ceases to qualify as a tax-exempt fringe
benefit. Therefore, commuters who were offered the cash option but continue to take the
parking were supposed to pay income taxes on the market value of the previously tax-exempt
parking subsidy. This adverse tax impact of offering to cash out employer-paid parking has
prevented California from enforcing its cash-out requirement, and has led California
business interests to seek a repeal of the cash-out requirement.
Fortunately, the Taxpayer Relief Act of 1997 (the recent "balanced budget"
agreement passed by Congress and signed by the President) has removed the tax barrier to
cashing out employer-paid parking subsidies. The tax code now specifically allows
employers to offer commuters the option to choose taxable cash in lieu of a parking
subsidy. This federal tax change does not require employers to offer commuters the cash
option, but it will allow California to enforce its own parking cash-out requirement
without encountering any tax problems.
Just as the federal tax code was being changed, a bill was introduced in the California
Senate to repeal the state's cash-out law, on the grounds that it hadn't worked (which it
hadn't, because of the tax problem). Fortunately, this bill (SB 1320, Hurtt) was later
amended to serve another purpose that had nothing to do with parking cash out, and the
attempt to repeal the cash-out requirement appears to have failed in the legislature. The
strong opposition to repealing the cash-out law was in large part due to the hard work of
the Sierra Club, and especially of Bonnie Holmes-Gen and Megan Mullan in the Club's
So the upshot of all this is that (1) the Internal Revenue Code now allows employers to
offer commuters the option to choose between either a tax-exempt parking subsidy or
taxable cash, and (2) California law requires many employers to offer commuters the option
to choose taxable cash in lieu of any parking subsidy offered.
Although the Internal Revenue Code now allows parking cash out, it continues to favor
solo driving to work because parking subsidies remain tax exempt. Therefore, merely
allowing employers to offer commuters the option to choose taxable cash in lieu of a
tax-exempt parking subsidy may seem a small reform. But as Justice Ginsberg recommended in
her Senate confirmation hearing, "Justice is not to be taken by storm. She is to be
wooed by slow advances."
Some firms in California have already begun to offer their employees the option to cash
out parking subsidies, and I have recently completed case studies of eight firms that have
complied with California's cash-out requirement. For the 1,694 employees of these eight
firms, the solo-driver share fell from 76 percent before cashing out to 63 percent after
cashing out. The carpool share rose from 14 to 23 percent, the transit share rose from 6
to 9 percent, and the combined walk and bicycle share rose from 3 to 4 percent.
Per 100 commuters, cashing out employer-paid parking induced 13 solo drivers to shift
to another mode. Of these 13 former solo drivers, 9 joined carpools, 3 began to ride
transit, and one began to walk or bicycle to work. These mode shifts reduced the number of
solo drivers by 17 percent, increased the number of carpoolers by 64 percent, increased
the number of transit riders by 50 percent, and increased the number who walk or bike to
work by 39 percent.
Vehicle miles traveled for commuting fell by 12 percent, equivalent to removing from
the road one of every eight automobiles used for commuting to the eight firms. Carbon
dioxide emissions from commuting fell by 807 pounds per employee per year.
The eight firms' spending for commuting subsidies rose by $2 per employee per month
because payments in lieu of parking increased slightly more than spending for parking
declined. Federal and state income tax revenues increased by $65 per employee per year
because many commuters voluntarily traded tax-exempt parking subsidies for taxable cash.
Employers praised the cash option for its simplicity and fairness, and said that it
helped to recruit and retain employees. The benefit/cost ratio of the eight cash-out
programs was at least 4/1. In summary, these eight case studies show that cashing out
employer-paid parking can benefit commuters, employers, taxpayers, and the environment.
If you would like a copy of my recent research on the effects of cashing out parking
subsidies, please call me or e-mail me and I will send you a copy.
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