The strange side effects of parking subsidies

Parking policies are frequently bizarre. Parking is, after all, a private good – it is both rivalrous (two cars can’t park in the same space at the same time) and excludable (if you don’t want someone parking in your space, you can keep them out). In that respect, it is more like a refrigerator than a public park.

But unlike a refrigerator, there are all sorts of public subsidies and regulations affecting parking. Although refrigerators are arguably more of a necessity of life than parking, councils don’t impose minimum refrigerator requirement for homes and offices. Central government doesn’t provide a tax subsidy for employer-provided refrigerators. And councils don’t invest in (or subsidise) public refrigeration facilities.

And if they did, it would almost certainly result in some perverse outcomes.

A recent NZ Herald story provided an example of how parking subsidies can lead to odd outcomes. (It was also a fine example of meaningless “gotcha” journalism, but never mind that!)

They are the crack team of economic and planning experts charged with sorting Auckland’s future growth.

But a member of the Unitary Plan independent hearings panel has fallen foul of the city – after sneakily parking a jetski in a central city council carpark for almost a month.

The mystery jetski appeared three to four weeks ago, taking up a Queen St park reserved for the panel listening to submissions on the future of the city.

Here’s the jetski in question:

IHP jetski

The article implies that the panel member in question is rorting the system or acting unethically by using their employer-provided carpark to store a jetski. But, if you think about it, it’s actually a good illustration of the poor logic behind many existing parking subsidies.

Let’s back up a step: what subsidies are we talking about, exactly?

In the Auckland city centre, carparks have a market value, which is a good thing. The removal of minimum parking requirements in the 1990s led to an increase in the price of parking – and also to increased development as new buildings weren’t encumbered by the need to provide unnecessary but costly carparks. At present, Auckland Transport is leasing downtown carparks for between $110 to $490 a month – although the cheapest ones are fully sold out. Private operators seem to be supplying them at around $250-$300 per month.

So an employer-provided carpark in the city centre is likely to be worth somewhere in the range of $3000-$6000 per annum. Because fringe benefit tax isn’t levied on carparks, this is worth the equivalent of $4500-$9000 in salary for people paying the top marginal tax rate (33%). (As the panel members probably do.)

That’s a large public subsidy for a small bit of concrete!

In theory, the rationale for the tax subsidy on employer-provided carparks is that it makes it less costly for people to commute to work, and hence encourages people to enter the workforce. But the panel member’s jetski illustrates the absurdity of that approach.

For one thing, people have (or should have) a range of choices about how to commute. Some prefer to drive. Others may take the bus, train, or ferry, or walk or cycle to work. Consequently, a significant share of commuting trips don’t end in a carpark. Based on Census data, around half of the people working in the city centre in 2013 didn’t drive to work. A bit over one in four workers throughout Auckland didn’t drive to work.

Census journey to work Auckland mode share chart

Consequently, trying to subsidise commuting by subsidising parking is likely to be a distortionary and inefficient policy. Some people will change transport modes in response to cheaper parking, resulting in additional road congestion in peak periods. Others will be left with a subsidised parking space that isn’t much use to them.

The panel member who used their parking space to store a jetski probably falls into the latter category. They might walk to work, or take the bus or train. This leaves them with a bit of costly concrete that they don’t need to store a car – so why not use it to store another vehicle instead? I can’t blame them for that.

The jetski has apparently been removed from the parking space, but the policy distortions that led to it being there in the first place remain. So what could we do about that?

The key is to realise that our ultimate aim is to enable mobility, not to simply provide carparks, and make policy accordingly.

For some people, mobility means a monthly public transport pass, or a bicycle and access to a shower at work. But current fringe benefit tax policies discourage employers from offering those solutions to their employees – an employer-provided PT pass would be taxed as regular income, while a carpark is exempt from tax. We need to level the playing field.

The best way of doing so is by removing the fringe benefit tax exemption for carparks, but if that’s not political possible then a good alternative would be to exempt PT passes from FBT, as the Green Party has proposed.

Another alternative would be to offer people the option to “cash out” employer-provided carparks. It’s especially bizarre that employers aren’t required to offer this choice, as the current government changed employment law to allow people to exchange one week of annual holiday for the equivalent in cash. Why not adopt the same approach for carparks, which could easily be worth more than holiday pay for many workers?

Lastly, we also need to make some choices beyond how we price and subsidise parking. Getting a great range of transport choices will often require us to use existing road space differently. Sometimes the only way to get a dedicated bus lane or a safe, separated cycle lane is to remove a few on-street carparks. We need to look at those choices in a holistic way – i.e. do they improve overall mobility and access to destinations – rather than simply insisting that all carparks must stay in place.

How do you think we should address parking subsidies?

A fight looming over charging FBT on carparks

News hit yesterday of an unlikely alliance between a business association and one of the large unions. They were teaming up together to fight a proposal by the government make employer provided carparks subject to fringe benefit tax (FBT).

Unionists and business groups have joined forces in a rare alliance to lash out at a new tax on employees who receive free carparks as part of their remuneration packages.

The government is planning to extend a fringe benefit tax (FBT) of almost 50 per cent to employer-provided parking in the Auckland and Wellington CBDs.

The newly formed FBT Action Group is protesting that the legislation, now before a select committee, is discriminatory and pointless.

It says the new proposal means businesses would pay an extra $1,500 per year for every on-site car park, and almost $2,400 for commercially supplied parks.

The group’s founding members include the Employers and Manufacturers Association (EMA) Northern, the Property Council, and parking company Tournament.

The Unite Union, headed by Matt McCarten, is also ready to throw its weight behind the campaign.

McCarten said that while the tax appeared to target the untaxed benefits of well-paid workers, it would also capture the blue-collar workers who could least afford it.

I suspect that one of the key reasons that both employers and unions are so keen to fight the proposal is that they both know just how useful carparks are when it comes time for salary/ wage negotiations. It allows businesses to provide a benefit to workers without it directly impacting their salary budgets. But by its very definition that is a benefit that an employee is receiving outside of their salary and the exact reason that we have FBT for in the first place. This group, along with Labour have also attacked the idea due to the fact it is only expected to bring in around $17m of extra tax but that ignores an important point. We currently have a loophole in our tax system that helps to create distortions in our transport policy.

The distortion comes about because an employer providing a free car park can do so without paying FBT yet if they were to pay for an PT fares of an employee, they would have to pay FBT on them. I can understand why business groups and unions object but opposing proposals like this is one of he things that should make people question Labours commitment to improving transport, particularly public transport.

If it turns out that this is just too hard politically hard to get though, perhaps an alternate idea could be proposed that removes FBT from employer provided PT passes. Along with that we should also consider similar rules as to what exists in California where employees that are provided with a free carpark are allowed to swap it for an equivalent increase in their salary/wages.