Friday 17 March 2023

Fringe Benefit Follies

I like the Fringe Benefit Tax.

Other places wind up in all kinds of nonsense by putting tax-preference on things if they're employer provided. It's one reason health care is messier than it should be in the US.

And New Zealand also used to have a similar problem in the era of very high income tax rates and very nice tax-free employer-provided cars. 

Tax reforms in the 80s tidied all that up. If the employer provided you with something valuable, the employer would be liable for paying tax on it as though the employer had paid you salary. 

And what exceptions there have been, as best I'm aware, have been where things get just too messy. 

Employer-provided car parks can be messy.

Suppose you have a commercial office tower with a parking level. You lease out floors to different companies. Some of the leases come with car parks; some don't. Whether you work the price of the carpark directly into the lease charge or as a separate line-item doesn't much matter. Some tenants will put a lot more value on a space than other tenants; you might want to keep things a bit opaque just to be able to better bargain on those margins. 

If a company gives one of those parking spaces to an employee, what's its value for FBT purposes? Tough to say. If you require that the commercial building put separate line items for parking so that you can make it FBTable, all the tenants with car parks will want a higher rate for their floor space lease and a lowballed car park space. Sorting it out would not be simple. What would IRD do: force each commercial building to auction off the spaces among tenants each year? If it's a small building, you're likely to hit collusion issues. 

And what do you do about spaces in places where the market clearing price is plausibly zero? 

Anyway - not straightforward. You could do something like a deemed-value charge on it. It would be a bit messy because a space right in your building might be more valuable than one you'd have to walk some distance to access, but spaces in commercial buildings can also have a lot of disamenities that make them less valuable than others - they're spaces in buildings not designed to be parking garages and so they're even worse to navigate than commercial car parks. 

So far, it's all been in the too-hard basket. I generally expect that when IRD declines to tax something, it's because it's actually hard rather than because they don't like taking peoples' money. 

And at least in principle, the FBT-exemption for employer-provided car parks creates a distortion. Imagine someone who's close to indifferent between driving in to work and taking the bus. If they have to pay for the bus out of after-tax income, but get to pay for the parking spot out of before-tax income (through a bargain with the employer that they'll have a slightly lower salary than otherwise and have a car park), that worker might choose to drive rather than take the bus just because of the tax advantage provided to parking. 

It never seemed likely to be that big of a distortion. In places where parking isn't scarce, the cost of a carpark is so close to zero that it can't matter. In places where parking is scarce, are there really that many people who receive an employer-provided car park? Among those, are there many who would have forgone a company-provided car park if they had to take a bigger salary cut to get one? What's the real effect at the margin here?

The government passed legislation this week exempting a pile of driving-substitutes from FBT. Employer-provided transit passes, e-scooters, scooters, bikes and e-bikes will all be FBT-exempt.

That feels like a fairly substantial inframarginal transfer. How many people use transit to get to work as compared to having an employer-provided car-park in places where car parks are scarce? How many people who walk to work would like to have an e-bike or e-scooter for recreational purposes and will claim that it's for getting to work? 

Remember that the higher-end e-bikes and e-scooters aren't cheap. An employer-provided one will come at a hefty tax discount for higher-earners. And where employer-provided parking is naturally limited by the number of spaces that can be found in a crowded downtown, pretty much anyone on a higher salary who'd be keen on an e-bike could enjoy the discount. 

Suppose you're on the 39% tax rate. An $11,500 e-bike contains $1,500 in GST. You have to purchase it out of after-tax income. So you have to earn an extra $18,850, at the margin, to get the $11,500 to pay for the e-bike. But your employer could give you the same e-bike for $10,000, assuming that the employer can wipe the GST as a business expense (while charging GST on the firm's final output). 

The legislation has provision for setting maximum allowable costs or for setting requirements on the FBT-exempt vehicles. Depending on how this gets set, I'd expect a whole lot of recreational e-bikes purchased for higher-earning employees rather than cash raises - regardless of whether the things get used in commuting. Who's going to monitor? 

And remember that the distortion is greatest for those on the highest incomes. They'll have strongest incentive to request e-bikes out of before-tax earnings. 

It all has me wondering whether it's better to use some deemed rate for employer provided parking, and ditch the new subsidies for employer-provided bikes. 

Or maybe we should get FBT-exemptions for shoes for those who walk to work. I've worn out a hell of a lot of shoes going up and down the Kaiwharawhara bridle path to make the trek into town. 

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