www.airlines.orgFAAC Competition SubCommitteeAnalysis of Industry Tax PolicyAugust 4, 2010OVERVIEWOVERVIEW•Industry is doing itsjob –providing more flights, to more places,formore people (andshippers), at lowerprices:•With overall U.S. inflation (CPI)easilyoutpacing airfares, US Carriers have fulfilledtheirmission to make airtravel saferand more affordable to all Americans•With respect to tax recommendations, previous commissions have been ignored•The US Aviation Tax model is broken•Burden is out of synch withindustry financial wherewithal•More emphasis by Congress/USG on raising collections than on efficient use of funds•Federal tax policy inconsistentacross modes of transportation•States increasingly seeking to tax aviation to solve local fiscal problems•Industry and customersnot getting commensurate benefitsfrom theirtax dollars•Proposals fornew and highertaxes continue to surface•Taxes will hinder U.S. aviation economiccontribution and globalcompetitivenessThe Evolution of Air Travel:From Luxury to CommodityDomestic Scheduled Service: All U.S. Passenger Airlines19902009$220* tofly1,000 miles630 millionpassengers19902009424 millionpassengers$121* tofly1,000 milesPREMIUM OFFERINGLimited/exclusiveUnique/highly differentiated set of offeringsAspirationallydriven purchase decisionCOMMODITIZED OFFERINGUniversal/commonLess differentiatedset of offeringsFunctionally driven purchase decision*ATA analysisofBureauofTransportationStatisticsdata,inconstant2009 dollars,net ofallgovernment-imposedchargesPrevious Presidential Commissions Have Been Rebuffed“Tax policies often have had a major and adverse effect onthe industry. Although the Commission concluded that taxchanges alone will not restore the industry to profitability, webelieve there areseveral tax provisionsthatimpede theability of the industry to return to financial health.We believethose provisions violate reasonable principles ofcommon sense and good public policyand we are of theopinion changes must be made to relieve the airlineindustry’s unfair tax burden.”The National Commission to Ensurea Strong Competitive Airline Industry“Change, Challenge and Competition: A Report to the President andCongress”(August 1993)“Special”Aviation Tax Burden* Exceeded $16B in 2009In Addition to Typical Federal,State and Local Corporate Taxes (e.g., Income, Property, Sales)* Federallylevied/approved commercial aviation taxes/fees only;sometaxes/fees showninclude collections from non-U.S. carriersSources: Department of Homeland Security,FAA,Office ofManagement Budget, Transportation SecurityAdministration, ATADHS = $3.5BFAA = $10.3B2009 collections ($millions) from airlinesFederal Aviation Administration (FAA)DepartmentofHomelandSecurity(DHS)U.S. AirportsGrowing Tax Bite on $300 Domestic Air Trip* SiphonsRevenue From U.S. Airlines to Compete Globally1972 Taxes7% ($22)*1992 Taxes13% ($38)*2010 Taxes20% ($61)*AirfareTaxes* Sample itineraryassumes one-stop domestic round tripwith maximum passenger facility charge (PFC)per airport; $300 total price includes taxes and fees.Source: ATA analysis of federal tax codeIndustry Taxation Out of Synch With Financial Wherewithal2001-2009 Annual Average, in BillionsSources: ATAand various federal agenciesIn Transportation, Only Aviation Funds Homeland Security$ per passengerenplaned*Air5Bus0Rail0Vessel0*Approximateaverageforrecentyears based on alltaxescollectedbyDHS anditsrespectiveagenciesIn Transportation, Only Airline Customers Pay a PFC$ per passengerenplaned*AirUp to 4.50Bus0Rail0Vessel0*Approximateaverageforrecentyears based on alltaxescollectedWe’re Not Getting a “Return”On Our Tax “Investment”2009 On-Time Airport Departure Rate (%)* EWR, JFK, LGA and PHL.Source: ATA and FAAU.S. Airports Have Identified UnrealisticPer-Passenger Capital “Needs”Airline Industry Tax Burden2001-2009 AverageACI-NA Capital Needs*2009-2013 Average$21 per enplanement$26 per enplanement* $18.9 billionperyearasapplied toFAA-projectedenplanementsof 730.4million peryear(avg2009-2013)Proposals to Increase Airline Tax Burden ContinueSelected Examples Below$ Billions/Year(est.)Passenger Facility Charge29/11 Security Fee Increase1.7U.S. Climate Change Taxes5EU Emissions Trading Scheme*3.5UK Passenger Duty Tax*4.1Developing Nations Tax*10* GlobaltaxestimateInappropriate Taxes Can “Seriously Distort”the Market for Air Transportation Services“The nature of air transportation...superficially makes it a convenient subject ofindirect taxation. As a high-revenue (though nothigh-profit) sector with relatively fewsuppliers, aviation tax collection is inexpensive and convenientfor the Treasury....There is also an ingrained common perception, largely misplaced in the twenty-firstcentury...that taxation of air transportation constitutes a tax on a luxury good.”“Inappropriate taxes, either in terms of their magnitude or theirform, can seriouslydistort the market for air transportation services. Because the demand for airlineproducts is often derived from the final demands of society for goods and services,as well as from the desire for individuals to travel for leisurepurposes or to meetfriends and relatives, distortions to ticket prices have the potential of adverselyaffecting national output and the larger welfare of the country.In particular, theypenalize those industries most relianton high-speed, scheduled transportation—industries generally having the greatest potential to improve and sustain the nation’seconomic wellbeing.”Prof. Kenneth J. Button,“The Taxation of Air Transportation,”(April 2005),http://www.gmupolicy.net/transport2003/airlinetaxation.pdfProposed Sub-Committee RecommendationsNo new taxes and fees on an industry that is at a sensitive juncture in itsrecovery•Oppose proposed hikes of existingU.S. taxes (PFC, 9/11 fee)•Oppose imposition of new federal and state taxes (e.g. cap-and-trade, fuel andproperty, ancillary, travel and tourism, etc.)Don’t discriminate against airlines as compared to other transport modes•Fund homeland security from general taxpayer base, not from airlines and theircustomers•Othercompeting modes do not pay federaland local infrastructure taxes (PFC, AIP)Aviation taxes must fund programs that benefit aviation taxpayers in theform of improved safety/reliability, infrastructure, and environment•Taxes should not fund non-aviation programs (e.g., social causes, surface transport,etc.)ornon-commercial aviation programsRevisit earlier tax recommendations from previous airline industrycommissionsProperly Funding Homeland Security Is Not a New Idea“It is almost bizarre to tax air travelers for our response to terrorism.Ifwe believe that it is the nation thatis atwar with terrorism —as isobvious —the fight shouldn’t bewaged on user fees levied againstair travelers. Security is everyone’s business, not just the airlines’andtheir passengers’concern. Terrorism that turned passenger airlinersinto missiles should have underscored the common need for security.Sadly, thesecurity tax compoundsthe damage terrorists inflicted onthe nation’s economy generally and, in particular, on the air travelindustry. It makes no sense to cripple the airlines with taxes,especially for security...”Editorial Board —Seattle Post-Intelligencer“User fees burden troubled airlines”(October 7, 2002)Possible Additional Areas of Further Investigation•Investigate /analyzeequity oftax burden among aviation users•Investigate / analyzeimplications/ benefits of non-U.S. tax regimes•Review existing studies / recommendations (including both academicwork as well as reports by previous federal aviation commissions)BalislesCommission Tax Recommendations (1993)1.Amend the AlternativeMinimum Tax so that airlines and other capital intensive industries arenot forced topay taxes at a time when they report losses.2.Roll back the ticket tax and cargo waybill tax to their pre-1990 levels of8% and 5%, respectively (currently10% and 6.25%).3. Reduce the FAA budgetallocation from the trust fund from 75%to 70% to recognize the overpayment byairline users, and the public benefits of aviation.4.Exempt airline fuelfrom any proposed transportation fuel tax (the tax thatthe Commission was concernedwith was never enacted,however this recommendation applies justaswell to any proposed“energy/environmental taxes”).5.Expenditure of funds on improvingfacilitation of passengers andcargoarriving in the US should be inrough approximation to the amounts collected in Customs, INS andAgriculture inspection fees ((theCommission stated that the fees collected by those agencies werenot being used inways to improvepassenger and cargoscreening processes).6.Ensure that airport revenues are not divertedto non-airport purposes.7.Approve only PFC applications thatmeet the PFC statutes criteria.8.When jet fuel prices rise substantially due to war or othernational emergency, release crude oil from thestrategic reserve to address the adverse impact of those price spikeson the airlinesand our economy.MinetaCommission Tax Recommendations (1997)1.In general, funds raised for aviation purposes should be available for aviation purposes.In the samevein, services provided to the users should be supported by themfinancially.However, the services thatare of a general publicbenefit should be supportedby the general tax payers.•Tax revenues raised should be directly linked to supporting FAA programs and shielded fromdiscretionary budget caps2.The Commission recommends thatthe FAA be primarily funded through cost-based user charges forcommercial passenger and cargo air carriers and afuel tax for general aviation aircraft.... TheCommission recommends a continuation of the fuel tax for generalaviation.Notwithstanding thisrecommendation, it is clearfrom existing aviationcost allocation studies that the current level of taxpayments does not cover the costs general aviation imposes on the FAA. The Commission believes thatfuel taxes imposed ongeneral aviation should be re-evaluatedbased on an accurate analysis of thecosts of providing ATC andrelated servicesto them.3.The Commission recommends thatthe Congress look to AIP and Passenger Facility Charges (PFCs) assources of additional revenues to financefuture airport capitalneeds.4.FAA management mustbe performance-based