3. Federal Incentives and Funding Sources

In addition to the inherent advantages associated with vanpooling, employers and various units of government also provide incentives to entice individuals to commute to work via vanpool. This chapter will review some of the major incentive programs that exist to encourage vanpooling.

At the outset, it should be noted that the incentives discussed in this chapter are not necessarily synonymous with one of the various ownership models discussed in Chapter 2. Employers may, for example, participate in and promote a vanpool tax incentive program regardless of the ownership model involved. Any one or a combination of the incentives discussed in this chapter may be available to one or more of the ownership models described earlier. As a result, a wide variety of ownership-incentive combinations are possible. Individual situations will dictate which combination is most advantageous to the entities involved.

It may be helpful to note that this chapter discusses general forms of incentives that are available to promote vanpooling. Chapter 4 takes these a step further and is devoted to discussing specific state and local programs, many of which utilize incentives which are made possible by the programs discussed in this chapter.

3.1 Federal Vanpool Incentives

While some commuters do not need additional incentives to entice them to participate in vanpools, the bare economic and societal values associated with vanpooling may be insufficient to warrant participation by many workers. Widely fluctuating fuel costs and interest rates also cause gyrations in participation.

Given the societal costs associated with commuting vehicles, Congress has taken several steps to encourage employees to commute via means other than by single-occupant automobiles. Some of these incentives include services and amenities such as ridesharing matching services and dedicated driving lanes for high-occupancy vehicles. In other instances, actual financial incentives have been created to encourage individuals to commute via transit, carpools, and vanpools.

Federal incentives to encourage vanpooling target commuters, their employers, and other units of government. These incentives come primarily from two sources, namely the U.S. Department of Transportation (DOT) and the Internal Revenue Service (IRS). The DOT, through its Federal Highway Administration and Federal Transit Administration (FHWA/FTA) encourages vanpooling by allowing federal funds to be used to make direct payments to establish and operate vanpools. IRS incentives relate to tax deductions that may be taken by both employees and employers if they participate in eligible commuting programs. These incentive programs are discussed in more detail in the following subsections.

3.1.1 Tax Incentives

Section 132(f) of the Internal Revenue Code governs congressionally authorized benefits which are available to individuals who commute to work via vanpool, carpool, or transit. To qualify for certain vanpool-related benefits, commuters must travel in a vehicle that is designed to transport at least six passengers, plus the driver.

The code also provides benefits to employers who encourage or facilitate ridesharing and/or transit use. It is important to note that federal law provides incentives to employers that offer vanpooling benefits to their employees. An employee cannot take advantage of corresponding federal tax incentives that are available to commuters if his or her employer chooses not to participate in the program.

Federal qualified transportation incentives work in one of two ways, both of which reduce a participating employee's taxable income. These reductions can occur either through employee elections in a flexible spending account or via direct transportation payments made by employers in lieu of corresponding salary amounts.

Under either scenario, both the employee and the employer realize savings as a result of lower gross taxable salaries associated with reduced federal income tax payments, lower Social Security withholdings, etc.

Figure 3.1 presents an example of savings that might result for an employee who commutes via vanpool and uses a flexible spending account to achieve related benefits.

Figure 3.1 Vanpool Tax Benefits

Using a flexible spending program to pay for vanpool commuting expenses saves an employee who earns $30,000 per year approximately $35 per month or about $420 annually. Related savings may be achieved by employers as a result of reduced tax remittances associated with lower gross taxable employee salaries.

In 2005, maximum allowable payments for vanpool commuting costs are $105 per month. This amount is adjusted annually by the Internal Revenue Service to reflect changes in the cost of living. An additional $200 per month may be deducted for qualified parking expenses.

Chapter 2's Table 2.3 presented pre-tax cost savings that vanpoolers enjoy vs. their counterparts who commute alone. Table 3.1 expands on that presentation to include the tax-related costs savings discussed above.

As Table 3.1 illustrates, vanpooling commuters may realize total operating cost and tax-related savings of $42 to $80 per month, depending on the cost of fuel. On an annual basis, these savings range from approximately $500 to $960. As indicated earlier, related tax savings are available only if the commuter's employer is willing to participate in federal incentive programs.

As indicated above, participating employers also benefit when employees vanpool. These savings occur because employees' net taxable salaries are reduced and corresponding reductions result in payroll taxes (Social Security at 6.2% and Medicare at 1.45%) and unemployment tax obligations at 6.2%. Assuming monthly tax-free benefits at $105 per month, annual savings approach $175 per participating employee. These financial benefits are in addition to other benefits that are typically associated with vanpooling (i.e. increased on-time performance, reduced need of parking, and greater recruitment and retention potential). These nonfinancial benefits are discussed elsewhere in this report.

Employers that chose to pay for vanpool costs as a company-paid benefit in lieu of payroll may do so via a voucher program administered by Commuter Check. Participating employers purchase vouchers from Commuter Check Services Corporation of Englewood, New Jersey, to give to their employees. These vouchers may be used to purchase transit tickets or to pay monthly vanpool expenses (www.commutercheck.com/home.html).

To be eligible for the vanpool commuting deduction, an employee must commute to work in a van with a seating capacity of at least six adults and at least half of the seating capacity must, in fact, transport employees. At least 80% of the vehicle's mileage must involve commuting.

3.1.2 Federal Funding Sources

Federal funding to promote and facilitate vanpool start-ups and subsequent operations come primarily from the Federal Highway Administration (FHWA) and the Federal Transit Administration (FTA), both of which are based in the U.S. Department of Transportation (USDOT).

Federal involvement with vanpooling started with the federal Surface Transportation Act of 1978, which required that special efforts should be made to promote commuter modes of transportation which conserve energy and reduce pollution and traffic congestion. The Act also provided that federal-aid primary, secondary, and urban systems funds could be used to promote ridesharing.

Neither the FHWA nor the FTA have funding sources that are solely designated for vanpooling. Rather, each agency's budget has programs which may be used for, among other things, vanpooling. Related provisions allow individual states and urban metropolitan planning organizations to use portions of their federally appropriated highway and transit funds to be used to administer and support ridesharing programs (Berman, 2005, and Menczer, 2005).

Despite the lack of funding sources that are specific to vanpooling, USDOT does have rules which govern the use of federal funds to support ridesharing programs (Title 23 Code of Federal Regulations Part 656 - http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfrsid=890000813700e8baa66b9de8e79b0aab&rgn=div5&view=text&node=23:1.0.1.7.30&idno=23). These rules identify eligible activities (vehicle acquisitions, promotional efforts, demonstration programs, etc.) and prescribe program parameters (vehicle sizes, acquisition repayments, etc.)

As a precursor to discussions on available funding sources, it should be noted that state departments of transportation must prepare a state transportation improvement plan (STIP) prior to spending FHWA or FTA funds. This plan is, in effect, a list of needs and corresponding cost estimates and recommended implementation dates. A STIP projects at least three years into the future and must be updated at least every two years. A state's metropolitan planning organizations must develop companion transportation improvement programs. These long-range transportation plans are subject to review and approval by both the FHWA and the FTA (www.fhwa.dot.gov/hep/23cfr450.htm).

The following subsections discuss some of the primary federal programs that are used by state and local governments to support vanpooling.

FHWA - Congestion Mitigation and Air Quality – One of the largest federal funding sources for vanpool programs is the FHWA's Congestion Mitigation and Air Quality (CMAQ) program. CMAQ pays for transportation projects and/or services that help reduce vehicle emissions in areas with substandard air quality. CMAQ funds are allocated to states but may then be passed through to local metropolitan planning organizations. Shared-ride services, including vanpools, are one of the activities that are eligible for CMAQ funding.

Funding for CMAQ projects is typically limited to three years but many state and local vanpool programs find ways to make their projects eligible for longer periods of time. Several CMAQ-supported vanpool activities will be discussed in Chapter 4.

North Dakota's air quality meets or exceeds federal standards and the state does not, therefore, have any CMAQ nonattainment areas. CMAQ funds are, however, distributed on a formula basis and every state receives at least some program funds each year. North Dakota's annual program allocation is approximately $8 million. These funds have been used primarily for roadway construction in urban areas. (Horner, 2005).

CMAQ funds typically require a 20% local match. The federal share of select projects, including commuter vanpooling, may, however, total up to 100% (www.incog.org/Transportation/Surface%20Transportation%20Program%202008.doc).

FHWA - Surface Transportation Program – The Surface Transportation Program (STP) provides flexible funding that may be used by states and localities for projects on any federal-aid highway; a portion of the program's funds may also be used for rural projects. Typical projects include highway and bridge construction and maintenance. Transit projects, including vanpooling, are eligible uses of STP funds (www.fhwa.dot.gov/tea21/suminfra.htm#nhs).

STP funds are distributed to states based on each state's lane-miles of federal-aid highways, total vehicle-miles traveled on those highways, and estimated contributions to the Highway Trust Fund. North Dakota's 2005 STP apportionment was $30.6 million. Projects typically require a 20% local match (www.fhwa.dot.gov/stea04/tbl4pt1a.htm).

FHWA - National Highway System Funds – The National Highway System (NHS) is a 163,000-mile interconnected system of principal roadways that facilitate commerce and serve the nation's population centers, border crossings, other transportation facilities, etc. Congress appropriates NHS funds to construct and maintain this system and to finance related projects, including vanpooling (www.fhwa.dot.gov/tea21/suminfra.htm#nhs).

NHS funds are distributed to states on a formula basis similar to the Surface Transportation Program described earlier. North Dakota's 2005 apportionment for NHS projects and programs was $56.7 million. Federal funding routinely requires a 20% local match (www.fhwa.dot.gov/stea04/tbl3pt3a.htm).

FTA - Section 3037 - Job Access and Reverse Commute (JARC) – JARC is a grant program that provides states and urban areas with funding to develop flexible transportation services related to employment. States, metropolitan planning organizations, transit agencies, etc. may apply for competitive grants. The federal Transportation Equity Act for the 21st Century (TEA-21) authorized $150 million per year for fiscal years 1999-2003. Grant funds may not be used to finance more than 50% of program costs but non-FTA federal transportation-related monies may be used to provide the 50% local share requirement. Funding flows directly to communities with populations of over 200,000; small communities receive program funding via designated state agencies. Vanpooling projects are an eligible use of JARC funds (www.fhwa.dot.gov/tea21/factsheets/jobaccs.htm).

FTA - Section 5307 - Urbanized Area Formula Grants Program – Section 5307 funds are apportioned to areas of 50,000 to 199,999 based on legislative formulas. For areas of 200,000 or more, the formula is based on population, population density, bus revenue vehicle miles, bus passenger miles, etc. The federal share is 80% of capital costs. 5307 money may be used to support vanpool program capital costs and vanpool miles may be included when calculating a community's 5307 apportionment. Grant recipients are required by statute to submit program data to the FTA for inclusion in the National Transit Database (www.fta.dot.gov/grant_programs/specific_grant_programs/urbanized/4133_7940_ENG_HTML.htm).

FTA - Section 5309 - Discretionary Capital Improvement and Acquisition Funds – Section 5309 funds are granted on a discretionary basis by the FTA for capital acquisition and improvement projects such as vehicle purchases, park-and-ride facilities, etc. Program funds may also be directed to specific projects by Congress. The federal share of 5309 projects is typically 80% but in some cases Congress has authorized 100% federal funding (www.pbworld.com/library/technical_papers/pdf/44_FTA_New_Starts.pdf).

FTA - Section 5311 - Rural Public Transportation Program – Section 5311 funds are apportioned to state and local governments, American Indian tribes, etc. to enhance personal mobility in nonurbanized areas with less than 50,000 residents. Apportionments are based on census figures. The maximum federal share of capital acquisitions is typically 80% but projects that meet the requirements of the federal Clean Air Act (i.e. vanpooling) may be eligible for 90% federal funding; 5311 operating assistance grants are limited to 50%. Section 5311 money may be used to support vanpool programs in rural areas (www.fta.dot.gov/grant_programs/specific_grant_programs/non_urbanized/4159_7945_ENG_HTML.htm).

3.1.3 Federal Promotional Efforts

The federal government has taken numerous and repeated steps to promote vanpooling, carpooling, and the use of transit by creating programs and materials which can be used to promote related concepts to employers and their employees. Federal agencies involved with these promotional efforts include the DOT, FTA, FHWA, and the Environmental Protection Agency (EPA).

Examples of some of the materials and programs involved with these efforts include:

• "Best Workplaces for Commuters" program sponsored by the EPA and DOT,
• "Vanpool Programs: Implementing Commuter Benefits Under the Commuter Choice Leadership Initiative" sponsored by the EPA,
• "Strategies for Increasing the Effectiveness of Commuter Benefits Programs" sponsored by the FTA, and
• "Vanpool Pricing and Financing Guide" developed by the University of Southern Florida and the FHWA.

In addition to providing program flexibility to allow available FTA and FHWA funds to be used for state and local vanpool programs, the federal government also provides funding to support local transportation demand management (TDM) programs. In many instances, these funds are used to support local transportation management associations or organizations (TMAs or TMOs) which operate programs and provide technical assistance to area businesses that are willing to promote ridesharing and transit to their employees. Funding for this program was initially provided in 1991 by the Intermodal Surface Transportation Efficiency Act (ISTEA). TMAs and TMOs will be discussed further in the following section.

3.2 State and Local Vanpool Incentives

Virtually all of the FHWA and FTA vanpool incentive programs discussed in the preceding paragraphs are programs that states and/or urban areas may utilize, if they so desire. In most cases, related programs, if offered, detract funding from other eligible programs and projects. Government-support vanpool programs must, therefore, compete with other highway and transit programs for available funds. It therefore becomes a matter of priorities when states and cities decide whether or not to use available federal funds to support vanpooling. The value of vanpooling as a component to a comprehensive transit and personal mobility program is evidenced by the fact that many states and urbanized areas do, in fact, utilize available federal funding to encourage and support vanpooling.

Some states also offer income and vehicle tax and/or licensing incentives to promote and recognize vanpooling. Other common forms of incentives include preferential parking for vanpool vehicles, special traffic lanes for high-occupancy vehicles, guaranteed emergency ride programs for vanpool participants, and start-up incentive payments to vanpool drivers. Some states also allow vanpool operators to purchase vehicles under state contracts and to obtain insurance coverage through state-run programs, thereby achieving lower purchase prices and related monthly payment savings for pool participant. Some states provide qualified vanpool vehicles with free annual vehicle registration and license plates.

As indicated earlier, many states, including North Dakota, provide an indirect incentive to vanpoolers who receive federal commuter tax benefits. To the extent that federal tax benefits reduce a participant's taxable income, corresponding savings are experienced relative to state taxes in those states where state income tax is based on federal taxable income.

Chapter 4 discusses a number of vanpool programs that are in place around the country, all of which use federal funds to encourage commuting via vanpool. Some of Chapter 4's presentations focus on state programs while others address locally sponsored programs.

As discussed in the preceding section, many cities and/or metropolitan councils of government have established "transportation management associations" or "transportation management organizations" to promote and facilitate "non-drive alone" commuting options. These organizations typically work closely with employers to promote ridesharing as a means of reducing traffic and parking congestion and improving air quality. Common promotional activities include on-site commuter fairs, commuter surveys, ride matching, transit information services, and informational e-mail newsletters.

TMOs and TMAs are eligible for federal funding support and operate primarily in metropolitan areas with populations of 200,000 or more. There are, however, also TMOs in smaller urban areas such as Missoula, Montana. There are currently over 125 TMO/TMAs in the country, five of which operate in the Twin Cities.

3.3 Employer Vanpool Incentives

Many employers across the country have embraced vanpooling to the extent that they offer incentives to employees to encourage them to share a ride to work. These incentives come in a variety of forms and are offered for a variety of reasons.

Given America's private enterprise system, businesses typically focus on activities that enhance profit, either by increasing income or reducing expenses. Businesses typically promote vanpooling to their employees because doing so makes good economic sense. Primary benefits include:

• Reduced payroll tax payments,
• Reduced need for employee parking spaces,
• Expanded recruitment and retention potential,
• Increased employee productivity (increased job satisfaction, reduced absenteeism, increased on-time arrivals, and less employee stress),
• Improved employer-employee relations,
• Improved public image, and
• Contributions to a healthier environment.

To achieve these benefits, employers may promote vanpooling in any of a number of ways. Promotional efforts may involve as little as employee newsletter articles or more aggressive initiatives such as ride matching services, reserved parking for vanpools, or even the provision of financial incentives to participating employees.

As indicated earlier, an employee may not participate in federal tax-related commuter benefit programs unless his or her employer participates. An employer must, therefore, provide either a tax-free employer-paid benefit for vanpooling and/or a pretax flexible spending account program with a vanpool option. Comparable options may also be made available for employees who have access to a transit system which meets their commuting needs.

The U.S. Department of Transportation and the U.S. Environmental Protection Agency co-sponsor a program entitled "Best Workplaces for Commuters" to promote employer participation in ridesharing programs and to recognize employers for related efforts. The program also provides employers with resources and ideas that may be used for individual employer programs (www.bwc.gov).

Employer vanpool incentives may be divided into two groups - nonfinancial and financial. Nonfinancial incentives include things such as preferential parking spaces for vanpool vehicles, expanded work-hour flexibility to facilitate vanpool operations, and ride-matching programs to bring willing employees together to form vanpools. While some of these "nonfinancial" incentives may have some indirect costs associated with them, these costs are typically minimal and nonrecurring in nature.

Employer-provided financial incentives may be relatively minor or they may take on a more significant profile. Perhaps the most significant form of employer incentive is one where the employer provides a vehicle to be used by vanpooling employees. The vehicle is obtained by the employer, either via purchase or lease. Pool participants may ride free or on a less than fully allocated cost basis, a benefit that is provided in lieu of salary. Related tax benefits accrue to both the employer and employees as a result of corresponding federal incentives and lower taxable salaries.

Similar tax savings may also be realized in cases where vanpool vehicles are owned or leased by one of the pool members. These savings may result if the employer has a flexible spending account program in place which allows employees to have commuting expenses deducted from their pretax salary. As discussed earlier, employees may deduct up to $105 per month. Corresponding tax savings result for both employees and employers. Many employers go beyond permissible federal tax incentives and pay for even those commuting expenses that are not deductible under federal or state laws.

One of the major impediments to vanpooling is participant fears related to needing to leave work in case of emergency, medical appointments, etc. Many employers address this issue by providing participants with a guaranteed ride when the situation warrants. In urban areas, these rides may be via employer-paid transit or taxi rides. In rural areas where transit and taxi services may not be available, employers may allow vanpool participants to use company vehicles for personal trips in emergency situations.

The need for a personal vehicle to make lunch hour meal or shopping trips may also discourage vanpool participation. Employers may choose to address this employee need by offering lunchtime shuttle trips between the work site and area shopping or restaurant sites.

Beyond the provision of actual incentives, many employers take other steps to promote vanpooling. These promotional steps many include providing employees with time and space to meet with rideshare promoters or sponsoring rideshare events to encourage participation. In some cases, employers may even work with other area employers to gain the critical mass necessary to make vanpools feasible.

Some employers may even sponsor promotional events to encourage or recognize ridesharing. Events may be as small as a coffee or ice cream social or something larger such as special drawings or gifts to acknowledge sign-ups or ongoing participation. Santa Barbara County in California provides employees who commute to work via walking, biking, transit, or ridesharing additional annual leave at a rate of 0.6 hours every two weeks (www.sbcountyhr.org/staffing/hb/hb4.html).