# The Impact of Government

- Imposed Taxes

and Fees on Consumers and the Aviation 

# Industry

John P. Heimlich

Vice President & Chief Economist 

## Presentation to DOT Advisory Committee for

Aviation Consumer Protection October 29, 2014

## U.S. Federally Imposed or Approved Taxes and Fees on Commercial Aviation

The “Modern” Era

Government

- Imposed/Approved

Tax/Fee 1972 1992 21

- Jul

- 2014



### Passenger Ticket (Excise) Tax 8.0% 10.0% 7.5% Passenger Flight

- Segment Tax

- - $4.00
Frequent

- Flyer Tax (on sale of miles )

- - 7.5% International Departure Tax (IDT) $3 $6 $17.50



### International Arrival Tax (IAT)

- - $17.50 Cargo Waybill Tax 5.0% 6.25% 6.25%

Commercial Aviation Jet Fuel Tax

- - 4.3 cpg Leaking Underground Storage Tank Tax

- 0.1 cpg 0.1 cpg 

### Passenger Facility Charge (PFC) (maximum)

- $3/$12 $4.50/$18

September 11 th 

### Fee

- - $5.60 per

OW APHIS Passenger Fee

- $2 $5

APHIS Aircraft Fee

- $76.75 $70.75

Customs and Border Protection Fee

- $5 $5.50 Immigration and Customs Enforcement

Fee

- $5 $7 2

# Air Travel is Taxed as if It Is Still a Luxury Item

airlines.org



## “[N] ew and increased taxes have been levied without a serious examination of the equity, efficiency, and financial viability

of the current aviation tax structure...



## The mentality underlying the current tax structure has its

roots in the World War II era , when air travel was explicitly discouraged in order to protect capacity for military uses. Like furs and jewelry, air travel was considered a luxury item 

## and subjected to high excise tax rates . Since then, however, airlines have become the principal commercial intercity carrier. April 9, 1996

3

# Air Travel is Taxed as if It Is Still a Luxury Item, Continued.

Despite this transformation, the federal government has continued to tax air travel as if it were a luxury item , even as other luxury excise taxes have been repealed. Even in 1970,

when aviation excise taxes were re

- rationalized as user fees to 

## finance the airport and airway infrastructure, the taxes were in effect spillovers from a prior tax regime , rather than user fees justified on true cost grounds.”



## -- Rudy Barnes and John Heimlich, Master’s Thesis, “Reassessing the U.S. Airline Industry’s Federal Excise Tax Structure,” Harvard University Kennedy School of Government, 

## April 9, 1996

airlines.org 4

### U.S. Federal Commercial Aviation Tax Burden* Reached Record

- High $19.3B in 2013 Note: FAA Portion Reached Record $13.3B in FY2014; PFCs Projected to Reach $2.85B

FY2013 Collections ($Millions) from Airlines/Customers

$2,811 $1,879 $372 $672 $345 $525 $8,769 $2,911 $619 $377 $19,281 Rate rose from $2.50 per flight

segment 

### to $5.60 per one

- way trip eff. July 21, 2014



### DHS = $3.79B 

### FAA = $12.68B

* Federally levied/approved commercial aviation taxes/fees only; some taxes/fees sho w n include collections from non

- U.S. carriers

Sources: Department of Homeland Security, FAA Airport and Airway Trust Fund (AATF), Office of Management Budget, Transportati on Security Administration, A4A

airlines.org 5

## Federal Tax

- and

- Fee Approach to a $300 One

- Stop Domestic Round Trip* Over Time Growing Governmental Take Leaves Less Revenue for Carriers to Reinvest

July 21, 2014

9/11 Fee Hike 

### 21% ($63)* 1971

- 1972 AATF Begins 7% ($22)* 1992

- 1993

PFC Begins 13% ($38)* POTUS

Proposed 

### FY15 Budget 26% ($77)* 2002 9/11 Fee Begins 19% ($58)*

Taxes Airfare

AATF = Airport and Airway Trust Fund

* Sample itinerary is a domestic round trip with one stop each way and maximum passenger facility charge (PFC) per airport; t ot al ticket price includes taxes
Source: A4A analysis of federal tax code, including IRS Revenue Bulletin 2013

- 47, Rev. Proc. 2013

- 35, Bipartisan Budget Act of 2 013, and President’s FY2015 budget

airlines.org 6

## Who Legally Pays a Tax Has No Bearing on Who Bears its Economic Burden

“The statutory incidence of a tax indicates who is legally responsible for the tax... Because prices may change in response to the tax, knowledge of statutory incidence tells us essentially 

## nothing about who is really paying the tax... The [economic] incidence of a unit tax is independent of whether it is levied on consumers or producers... The key point to remember is that nothing about the incidence of a tax can be known



## without information on the relevant behavioral elasticities .”

Harvey S. Rosen,* Public Finance (4 th 

## Ed.), Chapter 13

*John L. Weinberg Professor of Economics, Princeton University,

and former Chairman, Council of Economic Advisers

airlines.org 7

### Who Legally Pays a Tax Has No Bearing on Who Bears its Economic Burden, Continued



## “And it would make no economic difference whether this premium was charged to the passenger directly as he came into or left the airport or to the airline that carried him... 

## Whether airline or passenger ultimately bears the cost of an airport fee depends on the conditions of supply and demand rather than on who is assessed the charge . All this was recognized by... the Anti

- Head

- Tax Act.”



## Indianapolis Airport Authority v. American Airlines, Inc., 733 F.2d 1262, 1267 (7th Cir. 1984)

airlines.org 8

## While Estimated Elasticity Values Vary, They Are Negative Across the Board

Price elasticity is a measure economists use to capture consumers’ sensitivity 

## to price changes for a particular good or service. It is defined as :

% Change in Quantity Demanded ÷ % Change in Price

Route/Market Level National Level

Short Long Short Long

Domestic

- 1.54

- 1.40

- 0.88

- 0.80

Transatlantic

- 1.85

- 1.68

- 1.06

- 0.96

Transpacific

- 0.92

- 0.84

- 0.53

- 0.48

Source: “Estimating Air Travel Demand Elasticities ,” InterVISTAS Consulting Inc. (Dec. 28, 2007); includes econometric analysis of data from 1994 through 2005

airlines.org 9

### Airline Creditworthiness Lags Airports & USA, Which Tout Stronger Balance Sheets

All S&P

- Rated U.S. Airports and the U.S. Government Enjoy Investment

- Grade Credit

BOS HOU* LAS LAX MSP NYC* OKC OMA PDX PHX SEA SNA WAS* + U.S.A.

ABQ ATL AUS BDL BNA BUR BWI CHS CLE CLT CMH CVG DAY DEN DFW DSM
DTW ELP FLL GEG GSO HNL IND JAX LIT MCI MCO MDW MEM MIA MSY MYR OAK ONT ORD PBI PHL PIT RSW SAN SAT SDF SFO SJC SMF STL TPA TYS

ALB COS CRP FAT FNT GRR GUM MHT MOB PNS

PVD PWM TUL VPS Southwest

Alaska, Allegiant, Delta

American, Hawaiian, JetBlue, United AA ±

A ±

BBB ±

BB ±

B ± Investment Grade

Speculative Grade

* HOU = HOU/IAH; NYC = EWR/JFK/LGA; WAS=DCA/IAD Source : Standard and Poor’s

airlines org 10

### FAA’s Cost Allocation Analysis Has Consistently Found That Airlines and Their Customers Cover More Than Their Fair Share of Air Traffic Control System Costs

User Group % of Costs 1 % of Revenues 2

Passenger Airlines: U.S. Mainline 37.0 64.8
Passenger Airlines: U.S. Regional 20.9 12.4
Passenger Airlines: Foreign 4.1 9.4
Cargo Airlines: U.S. 4.1 5.0
Cargo Airlines: Foreign 0.2 0.0
Subtotal: Passenger and Cargo Airlines 66.3 91.5

Air Taxis, Fractionals , Others 7.2 5.3

General Aviation: Turbine 9.7 2.9

General Aviation: Piston/Rotor 5.9 0.3

Public Users (Military/FAA/Ambulance ) 4.8 n/a Flight Service Stations (FSS) 6.1 n/a

Grand Total 100.0 100.0

1 FAA Air Traffic Organization (ATO) costs, FY2005 2 Airport and Airway Trust Fund (AATF) revenues, FY2005

Source: FAA ATO Cost Allocation Study published Feb. 14, 2007; see http://www.faa.gov/news/fact_sheets/news_story.cfm?newsId= 814 7

airlines.org 11

## DHS Rates by User: Individuals

User Customs Immigration AQI (APHIS) TSA

Airline passenger $5.50 $7.00 $5.00 $5.60 each way

Cruise passenger * $1.93 or $5.50 $3.00 or $7.00 NONE NONE

Rail passenger NONE NONE NONE NONE

Bus passenger NONE NONE NONE NONE

Private aircraf t psgr

. NONE NONE NONE NONE

Motorist NONE NONE NONE NONE

Boater NONE NONE NONE NONE

Pedestrian NONE NONE NONE NONE

Sender of foreign mail $5.50 NONE NONE NONE

* Passengers from Canada, Mexico, U.S. territories or adjacent islands pay the lower rates

airlines.org 12

## FY2011 Costs and Revenues ($ Millions) by User Group: Immigration

User Identified



### Cost Fee



### Revenue % Fee



### Funded

Commercial

aviation 654.6 620.2 95

Cruise ship or 

### ferry 70.4 39.3 56

airlines.org 13

## FY2011 Costs and Revenues ($ Millions) by User Group: AQI (APHIS)

User Identified Cost Fee Revenue % Fee

- Funded

Commercial aviation 452.9 483.3 107

Cruise/ferry/cargo vessel 119.8 26.8 22

Trucking 74.4 15.2 20

Freight rail 5.2 8.9 171

Passenger rail 1.6 NONE 0

Buses 23.1 NONE 0

Cars 129.4 NONE 0

General aviation 11.4 NONE 0

Private boating 4.9 NONE 0

Pedestrians 34.6 NONE 0

Military 4.0 NONE 0

airlines.org 14

## Comparison of Traveler Value and Traveler Taxation Across Modes Example: One

- Way Trip from WAS to BOS on Nov. 7, 2014 (priced on Oct. 10, 2014)

Vehicle/Flight No. 172 NE Regional n/a US 2104

No. of Stops 35 1 None

Travel Time 7h 50m 9h 20m 1h 22m

Base Fare $150 $48.50 $71.63

Govt. Taxes/Fees Subsidy* None $19.47

Total Ticket Price $150 $48.50 $91.10

Tax % of Total Subsidy* 0% 21.4%

Travel Time per $ Spent ~3m ~12m ~1m

Federal Fuel Tax 0.1 ¢/gallon 0.1 ¢/gallon 4.4 ¢/gallon

* Combined capital and operating subsidies averaging $40 to $50 per passenger over the past several years

Sources: Amtrak, Federal Budget Appendices, Federal Railroad Administration, Greyhound, US Airways

airlines.org 15

## Comparison of Federal Reporting / Disclosure Requirements Across Modes Asymmetry of Information for Consumers, Planners, Regulators and Operators

Number of Operations X X  (1)

Seats and Miles Supplied X X  (1)

Passengers and Miles Traveled X X  (1)

Fare Paid X X  (2)

Cancellations/Diversions/Delays X X  (3)

Complaints to U.S. Government X X  (3)

Other X X  (4)

1. Monthly by route segment

2. Quarterly by origin

- destination airport pair

3. Monthly by flight and category of causation

4. Quarterly revenue (by region), expense (by region and aircraft type) and balance sheet data; quarterly oversales ; monthly freight/mail/animals/mishandled baggage

airlines.org 16

### Illinois and its Local Jurisdictions Impose the Highest Domestic Tax on Jet Fuel

Combined State & Local Effective Tax Rate on Jet Fuel at Selected U.S. Locations

0.00

0.00 0.07 0.35 0.50 1.00 1.10 1.70 2.00 2.70 3.00 3.00 3.20 3.30 4.00 4.00 8.97 12.10 12.70 14.90 15.00 16.10 16.60 21.88 26.25 27.00 32.75

DAL/HOU,... Cleveland,... Baltimore,... Newark, NJ New York,... Indianapol... DCA/IAD,... Phoenix, AZ Milwaukee... Minneapol... Philadelph... Salt Lake... Anchorag... St. Louis,... Las... Des... FLL/MIA, FL New... Denver, CO MEM/BNA... Atlanta, GA Honolulu, HI Boston, MA Detroit, MI San... Los... Chicago, IL

Source: A4A analysis of state and local tax codes; assumes price paid for jet fuel of $3.00 per gallon

airlines.org 17

## Recap

» The U.S. government isn’t the only authority to impose taxes or



## fees on airlines or their customers

– we must be cognizant of those imposed at the state/local/international levels.

» Today’s tax regime is largely a vestige of the regulated days when air travel was a luxury good, inaccessible by the masses;

it was never recalibrated to a true user fee system.

o This legacy is exacerbated by having airlines and their customers subsidize homeland security functions

– arguably a public good, as well as being largely singled out to help reduce the federal deficit, in the early 1990s and again last

year.

airlines.org 18

## Recap, Continued.

» Taxes levied by federal agencies and some states are often 

## inequitably applied across “users,” as confirmed by various

federal cost allocation studies and state tax codes.

» Whether levied on airlines or on passengers/shippers, and whether they are called taxes or user fees, taxes matter

– they impact supply and demand as well as the sustainability of specific routes or frequencies; the impact varies over time and

across markets.



## o Ironically, the travelers most sensitive to tax increases or

fees for mandatory services are those who are least affluent and whom regulations often purport to protect.

airlines.org 19

## www.airlines.org