Policy Study

Commuting, Congestion, and Pollution

The Employer Paid Parking Connection

Executive Summary

Urban areas increasingly face problems associated with traffic congestion and vehicle air emissions. Employer-paid parking-a form of matching grant whereby an employer offers to pay the cost of parking if employees are willing to pay all other costs of driving to work-contributes to the tendency of employees to drive alone to work.

In downtown Los Angeles, the average employer-paid parking subsidy is equivalent to 11 cents per mile traveled to and from work. Thus, imposing a congestion toll of 11 cents per vehicle mile traveled would raise the cost of driving to the Los Angeles CBD by only as much as employer-paid parking already lowers it.

A survey of 5,060 commuters to downtown Los Angeles was used to estimate how employer-paid parking affects transportation system performance. The results show that employer-paid parking:

  • increases the number of solo drivers by 44 percent;
  • increases parking demand by 34 percent;
  • increases automobile vehicle miles traveled to work by 33 percent;
  • increases gasoline consumed for driving to work by 33 percent;
  • increases the cost of automobile travel to work by 33 percent;
  • increases the total cost of parking at work and driving to work by 33 percent.

Although employers spend an average of $750 per employee per year for parking subsidies ($563 in replaced employee spending, and $187 in stimulated spending), the employees’ own average spending for parking and driving declines by only $183 per year. The net effect is that the employer must spend $4.10 on parking subsidies for every $1 the employee saves on the cost of parking and driving.

This disproportion between the large amount employers pay and the small amount employees save is explained by employer-paid parking’s strong stimulus to spending on both parking and driving: the stimulus to parking demand inflates what employers have to pay, and the stimulus to driving diminishes what the employees save.

In offering to pay for their employees’ parking at work, employers are responding to the Internal Revenue Code’s so-called “special rule for parking,” which defines employer-paid parking subsidies as a “working condition fringe” that is exempt from income taxation. Given the political difficulty of taxing employer-paid parking subsidies, an alternative policy would be to amend the special rule for parking in Paragraph (4) of Section 132(h) as follows:

The term “working condition fringe” includes 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 subsidy, either as a taxable cash commute allowance or as a mass transit or ridesharing subsidy.

The nonitalicized portion is the full text of the existing special rule for parking, and the italicized portion is the proposed change.

This proposed cash-out option has several important advantages. No employee would lose any existing parking subsidy, but offering employees the option to choose between a free parking space and cash makes it clear that parking has an opportunity cost, which is the cash not taken. Therefore, many employees who are now offered free parking at work would begin to behave as though they paid for parking. Federal and state income revenues would increase when anyone chooses the taxable cash option in lieu of a tax-exempt parking subsidy, and the lowest-paid workers would gain the most after-tax cash from a taxable cash allowance in lieu of employer-paid parking, because they are in the lowest income-tax brackets. Finally, employers are no worse off if an employee chooses the cash option because the cash alternative is no more costly than the parking subsidy.

Offering the cash option to employees who now receive employer-paid parking would reduce their solo driving share by an estimated 20 percent, and the number of vehicle miles traveled (VMT) per employee by 17 percent. This VMT reduction would reduce the total cost of automobile commuting to downtown Los Angeles by $40 million per year, and would save 3.5 million gallons of gasoline per year.

By allowing market prices to influence commuters’ travel choices, a regulation requiring employers to offer employees the option of the equivalent cash value of any parking subsidy would reduce traffic congestion, air pollution, and gasoline consumption, and would increase federal and state income-tax revenue. It would do all this simply by allowing commuters to make travel choices according to their own preferences about how they wish to spend their own income.