With Transit Benefits, the Rich Pay Less and the Poor Pay More

As the Metropolitan Transportation Authority prepares to raise fares next March, here’s one way to lower how much you spend getting to work: earn more money.

That’s because if you pay for MetroCards through TransitChek or a similar program, you are using income that you do not need to pay income tax on. That translates into a discount equivalent of one’s marginal tax bracket.

The system saves people money. But since high-income people are in higher tax brackets, it means the more you earn, the less you effectively pay for the same monthly card.

“I don’t think it’s fair,” said Yvette Vargas, an accounting clerk for the City Comptroller’s Office. “If someone makes less money they should get the bigger discount.”

Vargas says she earns about $40,000 a year, which means her marginal tax bracket is about 33 percent. So her $112 monthly MetroCard effectively costs her just $75. (Another way to think about it: If Vargas were to spend that money on clothing, she’d only have $75 to spend, since she would have spent the rest on taxes. But instead, she gets a transit card worth $112.)

Meanwhile, an individual with no dependents earning $200,000 with a marginal tax rate of about 40 percent would have to pay just $65 for the same MetroCard by using pre-tax dollars. That’s $8 less a month than Vargas. (The transit accounts exempt income from federal, state and local taxes. It is also exempt from Social Security taxes, though people only pay Social Security tax on the first $117,000 of their income.)

Really wealthy riders could save 50 percent off of the cost of the MetroCard by using pre-tax dollars, while a working-class family would save less than 10 percent, according to Len Burman, the director of the Tax Policy Institute in Washington.

“For the $2.50 fare, the low-income person saves 25 cents in taxes and the high income person saves a buck and a quarter,” said Burman, co-author of Taxes in America: What Everyone Needs to Know. “There are so many things messed up with the tax code. This is just one example.”

The inequitable system is compounded by the fact that larger companies, which pay higher wages, are more likely to offer transit benefits in the first place. One survey, conducted by the TransitCenter, public policy foundation, and analyzed by the Riders Alliance, found that just a fifth of New York City’s commuters use pre-tax dollars to buy transit fares. A law slated to go into effect in 2016 should increase that number: it will require all employers with more than 20 New York City residents on its payroll to offer pre-tax benefits.

In addition, transit advocates and elected officials have been trying to get Congress to raise the maximum amount that workers can put into their pre-tax accounts, from $130 a month to $250 a month, which is how much workers can use for parking fees.

That proposal is intended to create an incentive for suburbanites to take mass transit instead of driving. But it would not prevent high-earners from saving more than low-earners.

Instead, Burman said the government could fix the problem by turning the pre-tax transit benefits into a tax credit you would claim when filing your taxes, and to cap that credit at a certain amount – perhaps 20 percent of a year’s worth of MetroCards (roughly $250).

“The benefit wouldn’t depend on your tax bracket,” Burman said. “It would be the same 20 percent for everybody.”