Payroll/Employer Tax
General
For more information on the contents of this section, view the Transit Cooperative Research Program 2009 report, Local and Regional Funding Mechanisms for Public Transportation.
- Payroll taxes, typically collected quarterly, are imposed on employers based on the amount of gross payroll within a specific region, and can be enacted in transit districts and used to fund both capital and operations. Specific regulations and guidelines in each states’ legislation determine the types of wages and payments to which the taxes can be applied, as well as any organizations which can claim exemption. Generally, payroll taxes are administered by state revenue agencies on behalf of transit agencies.
- Advantages
- Payroll taxes are generally easy to administer and difficult to evade.
- Unlike some other taxing mechanisms, such as motor fuel taxes, payroll taxes have the benefit of being responsive to inflation. Motor fuel taxes are generally paid at a flat rate per gallon of fuel purchased (for example, the federal gas tax is currently 18.4 cents per gallon). As a result, unless rates are adjusted to reflect the gradual rise in U.S. fuel prices over time due to inflation, revenue streams generated by motor fuel taxes get proportionally smaller and smaller compared to the actual amount spent by consumers on motor fuel. Payroll taxes are different, in that they are paid as a percentage of gross payroll in a region (currently $6.72 for every $1,000 of payroll in Portland’s TriMet district, a rate of .672%). This means that revenues from payroll taxes naturally rise over time in proportion to gradual inflation-related increases in gross payroll levels.
- Disadvantages
- Payroll taxes can create incentive for new businesses to locate outside of transit jurisdiction lines, discouraging Transit-Oriented Development.
- Payroll taxes are somewhat subject to the state of the economy due to the direct link between unemployment rates and revenues from the taxes.
- Like sales taxes, payroll taxes are generally viewed as regressive, though income thresholds could be set to counter that effect.
Where Have Payroll Taxes Been Used to Fund Transit?
Portland, OR
Portland’s Tri-County Metropolitan Transportation District (TriMet) gets approximately 55% of its operating funds from a district-wide payroll and self-employment tax. This tax is collected on behalf of TriMet by the Department of Revenues of the State of Oregon. In 2008 TriMet received approximately $215 million from the tax, an increase of close to $8 million from the previous year. TriMet’s total operating budget for 2008 was approximately $396 million, and the other 45% of this budget came primarily from the farebox (21% of total funding), and federal grants (which cover approximately 24%).
In 2004, the TriMet Board of directors approved Ordinance No. 279 which increased the payroll tax rate by $.0001 each year. This increase went into effect on January 1, 2005, when the rate was raised to .006318 (or approximately $6.32 for every $1,000 of payroll), and will continue until January 1, 2014, when the rate will be capped at .007218. As of the start of 2010, the rate will be .006818, or $6.82 per every $1,000 of payroll. (For more information, view TriMet’s 2008 Annual Report.)
Despite these annual increases, the recent economic downturn and the high unemployment rate in Portland have raised concerns about the revenues TriMet receives from the payroll tax (which are directly impacted by every layoff). Though funding from the tax increased in 2008, the rate of growth of 2.7% was substantially less than the 7.7% growth rate for FY2007. In February of 2009, TriMet announced that it expects to face a $13.5 million shortfall for the 2009-2010 Fiscal Year. (For more information, view this OregonLive.com article.)
New York City, NY: MTA’s New Payroll Tax
In May of 2009, NY’s Governor Patterson passed a bailout bill for New York City’s struggling Metropolitan Transportation Authority (MTA) with the goal of raising approximately $1.8 billion. The bulk of this funding is expected to come from a .34% permanent payroll tax ($3.40 for every $1,000 of payroll) applied to all twelve of the counties served by MTA. The rest of the expected revenues from the bill will come from a combination of additional fees on learner’s permits, driver’s licenses, yellow cab trips, and vehicle registration, as well as an additional 5% sales tax on car rentals. The payroll tax was originally expected to raise $1.53 billion. (For more information, view this Gotham Gazette article from May of 2009.)
In contrast to the initial estimation, recent December revenue projections for MTA’s 2010 fiscal budget ran approximately $200 million lower than originally expected, a development which has been referred to as ‘shocking,’ due to both the magnitude of the decrease in projected revenues and to the late notice. More information on this sudden drop will likely be available in the last couple weeks of December 2009 when the MTA’s FY2010 budget is published, but major service cutbacks are currently under consideration. (For current information, view this New York Times article from Dec. 7, 2009.)
The decreased projections are not the only challenge the payroll tax has encountered; the bailout bill has faced continuous opposition since its announcement in May. Critics have argued that the payroll tax discourages new businesses from opening. In addition, many existing businesses in the more suburban counties affected by the tax continue to express outrage at having to pay the same rate as inner-city businesses, which they argue receive greater benefits from their proximity to MTA lines. A recent proposal involved removing the payroll tax in four Hudson Valley counties and making up the difference through increased fares in those counties, but this idea poses some logistical problems. (For more information on these criticisms, as well as counter-arguments that have been made, view this article published by the Tri State Transportation Campaign.)