Tax Incentives for Public Transit

WHY IT MATTERS

Despite the Chicago region’s extensive transit network, 77% of its commuters drive to work.¹ As the transportation sector is the largest source of greenhouse gas emissions in the United States,² city policymakers should incentivize public transit usage.

Commuter benefit programs allow employees to set aside tax-free dollars for commuting costs. If an employer sets up such a program, the IRS allows employees to elect a pre-tax paycheck deduction up to $270 per month for transit or vanpooling expenses, and up to $270 per month for work-related parking expenses. Effectively, such programs make transit up to 40% cheaper for riders.

Several of the nation’s biggest municipalities have adopted mandatory commuter benefits ordinances,³ which require certain employers to offer their employees access to pre-tax transit benefits. Maximizing access to transit-based tax incentives would help curb greenhouse gas emissions and air pollution, promote economic equity for those who do not own a car, and reduce traffic-related fatalities.

HOW IT WORKS

Modeled off of ordinances in other U.S. cities, a Chicago commuter benefit ordinance would apply to all employers (public, private, or non-profit) with at least 20 employees who work at least 20 hours per week. Employers would register their business via a centralized platform, and offer at least one of the following benefits to their employees:

1. Pre-Tax Benefit: Employees can set aside a portion of their paycheck, up to the IRS monthly maximum (currently $270), for transit or vanpool commuting costs. This set-aside would be excluded from their taxable income.
2. Direct Subsidy: Employer directly provides transit passes or vanpool subsidies to their employees which either cover the monthly costs of their commute or meet the IRS monthly maximum.
3. Telework Policy: In order to limit commuting, eligible employees are allowed at least one day per week of remote work. For any employees who cannot perform their work remotely, the employer must offer them one of the above alternatives.

In order to promote public transit over driving, the ordinance would not mandate that employers provide their employees any parking-related commuter benefits.

BACP would enforce the ordinance, charging employers who do not offer the transit benefit $270 per month (equivalent to the IRS benefit maximum) per employee.

WHAT'S NEXT

• Convene a team from the Mayor’s Office, CDOT, and local transit advocacy groups to draft the ordinance and garner support from City Council members.
• Develop a marketing campaign targeted at both employers and Chicago residents to encourage use of pre-tax transit benefit programs.
• Explore ways to make transit benefits even more appealing than parking benefits, such as congestion pricing.
• Leverage IGA to advocate for increased transit-based and bike-based commuter benefit allowances at the federal level. Push for a decrease in the maximum allowable parking benefit, as such benefits amount to a federal subsidy for congestion.

SOURCES

1. “2020 Regional Mode Share Report.” Active Transportation Alliance. 2020.
2. “Sources of Greenhouse Gas Emissions.” Environmental Protection Agency. 2019.
3. These include New York City, Washington, D.C., New Jersey, Seattle, and several municipalities in California. “Mandatory Municipal Commuter Benefit Ordinances.” Tri-Ad. 2021.