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 11th 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

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“[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other luxury excise taxes have been repealed.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

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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 shown include collections from non-U.S. carriers

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

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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)*

POTUSProposed

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; total 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 2013, and President’s FY2015 budget

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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 (4th Ed.), Chapter 13

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

and former Chairman, Council of Economic Advisers

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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)

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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

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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

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

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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 Costs1 % of Revenues2

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=8147

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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 aircraft 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

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

User Identified

Cost

Fee 

Revenue

% FeeFunded

Commercial 

aviation 654.6 620.2 95

Cruise ship or 

ferry 70.4 39.3 56

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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

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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

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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

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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 4.008.9712.10 12.70 14.90 15.00 16.10 16.6021.88 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

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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.

oThis 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.

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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.

oIronically, 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.

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