FILE – In this June 2, 2008 file photo, rush hour commuters ride on the Metro train in Washington. Mass transit riders can save up to $1,000 a year under a federal tax break that will be reduced after Dec. 31, 2010. Unless Congress acts, their savings will be cut nearly in half. (AP Photo/Kevin Wolf, File)
Just about everyone is about to get a tax cut, but one tax break about to expire will force hundreds of thousands to pay more for a daily expense: Their commute to work.
Mass transit riders can save up to $1,000 a year under a federal tax break that will be reduced after Dec. 31. Unless Congress acts, their savings will be cut nearly in half. The squeeze will be especially painful because it comes on top of increased transit fares in New York, Washington and other cities.
The tax break works like many health savings accounts. Workers can set aside up to $230 a month to cover transit costs. The money isn’t taxed. It goes into a separate account to pay for mass transit costs.
Starting next year, the accounts will be limited to $120 a month. Congress temporarily raised that limit as part of a stimulus package it passed in 2009. Some Democrats are still fighting to renew the higher limit. But the Senate rejected it last weekend as part of broader legislation.
Supporters say the higher limit encourages commuters to choose mass transit over cars, reducing traffic and pollution. Drivers can already use up to $230 a month in pre-tax money for parking. Mass transit advocates say it’s only fair to give riders the same savings.
“If we’re going to be providing a tax break for parking, at a minimum we ought to have the same break for people who take public transit,” said Randy Rentschler, a spokesman for the Metropolitan Transportation Commission in Oakland, Calif.
By boosting mass-transit ridership, the tax break helps offset the environmental harm caused by millions who commute by car every day, Rentschler added.
About 850,000 workers use the mass transit tax break, according to TransitCenter, a nonprofit that helps employers offer the benefit. Commuting costs will rise 18 percent for workers who max out on their pretax accounts.
The expiration of the higher subsidy comes just as commuters are paying more to ride public transportation, figures from the American Public Transportation Association show. Bus fares in Los Angeles are up 40 percent since 2009. Dallas’ commuter rail system raised prices 67 percent last year and an additional 40 percent in October.
New York City transit riders will pay up to 17 percent more starting Dec. 30. It will be the third fare increase in three years.
Many metro riders in Washington, D.C., paid 18 percent more starting last summer. And fares for New Jersey Transit riders rose by up to 44 percent in May. In Seattle, bus riders paid one-third more starting in June — and face another hike in June 2011.
In some cases, the fare hikes result from states seeking to close their budget gaps in part by reducing their contributions to transit agencies. The agencies, in turn, are raising fares. About 73 percent of transit agencies increased per-ride fees in 2010 or planned to do so, according to a March survey by the public transportation association.
The head of the largest transit agency in Massachusetts predicted the smaller federal tax subsidy would reduce ridership, especially for people living furthest from Boston, who must buy the most expensive train tickets.
“I’m sure we’ll lose some ridership,” said Richard Davey, general manager of the Massachusetts Bay Transportation Authority. “Given our fiscal situation, I’m trying to do everything I can to build ridership.”
Quiana Cameron, a saleswoman at a San Francisco produce company, said the less generous tax break will force her to spend less on other expenses, such as travel or clothing.
“It will definitely put a strain on my finances,” said Cameron, 32, who spends up to $300 a month commuting from Richmond, Calif., to downtown San Francisco.
Here’s how the change would affect her:
Under the current system, Cameron puts $230 of her monthly paycheck into the pretax transit account. That saves her about $89 that would have gone to taxes for income, Medicare and Social Security. For the year, the program boosts her take-home pay by about $1,068.
After Jan. 1, Cameron will be able to set aside only $120 a month. That lower limit will cut her take-home pay by $511 for the year. Some of that loss would be offset by a proposed one-year reduction in workers’ Social Security tax that would increase their take-home pay.
The transit tax break has existed since 1984. But its amount always lagged behind the amount for parking subsidies, until it was raised last year.
News of its expiration has passed largely unnoticed. At an annual cost of $106 million a year, it’s much smaller than the expiring income-tax cuts. Those breaks sparked a high-profile conflict between Republicans and President Barack Obama that led to a tentative deal this week to extend the tax cuts for two years as part of a broader package.
An effort to extend the higher mass-transit subsidy failed when the Senate defeated it as part of legislation that would have let tax cuts for the highest-earning Americans expire. Republicans opposed that legislation, insisting that no one, regardless of income, should pay higher taxes next year.
Republican and White House negotiators are forging a compromise to extend the tax cuts and renew jobless benefits for the long-term unemployed. But some Democrats are fighting the plan.
Democrats want the deal to include extensions of tax breaks such as the transit subsidy that were part of the stimulus law. Republicans are prepared to let the mass-transit tax break revert to its lower limit.
Sen. Robert Menendez, D-N.J., is circulating a letter to his Senate colleagues calling for the larger tax break to be extended. It’s drawn support from Democrats and at least one Republican, Sen. Scott Brown of Massachusetts, staffers said.
Democratic champions of the tax break argue that it eases traffic congestion and provides crucial savings for workers during an economic downturn.
“I think there are a lot of middle-class families that have come to rely on this benefit,” said Michael Mershon, a spokesman for Rep. Jim McGovern, D-Mass., who supports legislation to extend the higher threshold.
Supporters will push to include the extension in any tax legislation Congress sends the president, Mershon said.
Companies that help employers administer the program have been e-mailing clients and customers, trying to rally support for the higher pre-tax limit before it reverts to the lower level.
But critics say the program is too costly at a time of trillion-dollar budget deficits. They say the tax code shouldn’t be used to influence consumer choices, such as one mode of transportation over another.
These are “things that tax purists would say wouldn’t belong in the tax code,” said Joseph Rosenberg, research associate at the Tax Policy Center, a nonpartisan think tank in Washington. “They’re also extremely popular.”
Keith Baumwald, a New York City commuter, said his employer lets him use a pretax account to buy subway passes for him and his girlfriend. The couple spends a combined $178 on subway passes each month, and he estimated the tax break saves them $1,000 a year.
Baumwald, an online marketing director, said he could still afford to ride the train if the tax break shrinks. It’s still cheaper than owning a car in New York. But his commute already was set to become pricier when the subway authority raises its rates next year.
Baumwald said his company’s human resources department recently reminded employees to sign up for the tax break next year. But he didn’t see anything about the benefit level being cut.
“It’s bad news,” he said. “It will still be helpful, but not as helpful as it has been.”
Leonard reported from St. Louis, Wagner from Washington.