Evaluation of untaxed travel allowances

CE Delft, together with Significance, was commissioned by the Ministry of Finance to evaluate untaxed travel allowances. This scheme allows employers to provide employees with an untaxed allowance for travel expenses incurred for business and/or commuting purposes.

The Ministry is using this assessment to fulfil its obligation to periodically evaluate all tax schemes in accordance with the Periodic Evaluation Regulations (Regeling Periodiek Evaluatieonderzoek). In addition, this study explored the request of the Lower House for a better understanding of options for modernising travel allowances.

The main findings of the evaluation are:

• The objectives of the scheme are not formulated clearly and SMART in the legislative text or specific policy documents. Based on a reconstruction of the policy history, two likely main objectives were identified:
  • preventing the allowance received by employees for business expenses from being improperly taxed as wages;
  • providing support, including tax support, for a well-functioning labour market.

However, the precise interpretation of both objectives is unclear.

• The scheme is effective with respect to both of the above objectives. In most cases, the maximum untaxed travel allowance that may currently be provided is sufficient to provide an untaxed allowance for variable travel costs for small and mid-size cars. In addition, the scheme contributes to a better functioning labour market, including by facilitating better geographic matching of labour supply and demand.
• The scheme has some significant negative side effects, including its substantial contribution to congestion and greenhouse gas and air pollutant emissions.
• The scheme is deemed to be efficient, suggesting that the objectives are unlikely to be achieved more cheaply through any other policy instrument. In addition, the study shows that the social benefits of the scheme, especially in the form of a better functioning labour market, are likely to be of the same magnitude or exceed the social costs (congestion costs, environmental costs, etc.).

The analysis of possible modifications to the scheme shows that there are options to significantly reduce the negative environmental and congestion impact of the scheme, mainly by scaling back the scheme. However, these modifications do result in a decrease in positive labour market effects. There is an important trade-off at this point. There is no possible modification of the scheme that combines these two social objectives.