Taxing The System
Proposed hikes in aviation fees are drawing the ire of airlines and many travel groups. But how much is too much? By:Tom Belden
| BTE December 2011
|DataSource: The requested DataSource ff8d257b-8692-49ac-b6ae-ff6da464bd89 is not accessible.
To hear the US airlines tell it, the Obama administration wants to saddle the industry with a “crushing” new set of “job-killing” taxes that could severely damage its already fragile financial condition. Over the last few months, in advertisements, congressional testimony, speeches, conference calls with analysts and op-ed essays, industry leaders and the Air Transport Association lobbying group – which has just changed its name to Airlines for America – have used those charged terms repeatedly as they castigated the administration for asking Congress to make what would appear at first glance to be modest increases in federal levies on air travel.
A consultant’s study of the tax proposals and other administration air-passenger regulations, released in November, concluded much the same thing: If the taxes and fees were to be adopted, the study concludes, demand would take such a big hit that hundreds of thousands of jobs across the travel business, along with billions in revenue, will go straight down the drain. The airline association has lined up an impressive list of more than two dozen aviation- and travel-related business organizations and unions that it says support its position.
But to some longtime industry observers, this may be a case of, as Shakespeare might have portrayed it, “the lady doth protest too much.” Virtually all of the 17 existing taxes and fees paid by airlines, their customers and other aviation users, and one of the administration’s proposals, really take the form of user fees that go directly to pay for aviation or airport operations and infrastructure, not to the general revenue. To the libertarian-leaning Reason Foundation and others, that fact alone should logically make the airlines and their passengers happy.
What’s more, according to a report by the Government Accountability Office, about a third of the Federal Aviation Administration’s budget for air-traffic control and other work in recent years has come not from the user fees but from general tax revenue. And, industry analysts add, the proposed fees would raise the cost for the typical passenger less than the fees for ancillary services that most airlines have adopted over the last three years – fees on which no taxes are levied. In part, because only air fares and not those fees are subject to the 7.5 percent federal airline excise tax, the FAA’s Airport and Airway Trust Fund for infrastructure projects, like NextGen air traffic control technology, and general FAA operations has dwindled to its lowest level in years, the GAO report says.
Whose Cost Is It Anyway?
Critics of the administration revenue plan talk about “doubling” and “tripling” the tax on flyers. But in hard numbers, the proposed security fees would go from the current $2.50 to $5 in 2012 and eventually to $7.50 per ticket. “Any time you increase the price of something the rational response of the marketplace is that it will mean people will buy less,” says Robert W. Mann, an airline consultant and former industry executive. The problem with the airlines’ position, Mann says, is that the industry “has raised fares 11 times this year, and raising prices causes fewer people to fly. I find the industry to be hypocritical in many respects. They want infrastructure improvements but aren’t willing to pay for them.”
Whether the proposed airline taxes will ever be fully debated in Congress is unclear at this point. According to the airlines, opposition was building in Congress in late October to the administration’s proposals. The collapse in late November of the so-called “Super Committee,” the bipartisan congressional group that was supposed to come up with a deficit-reduction and revenue-enhancement plan for the federal budget, left numerous interest groups, not to mention government agencies and employees, wondering what comes next.
“We are totally in gridlock,” said Kevin P. Mitchell, chairman of the Business Travel Coalition, the advocacy group for corporate travel programs. “Aviation used to be one of those issues that was non-partisan. Now it gets bogged down in all the partisan issues in Congress.”
The ATA also complained that under the administration proposal, only some of the new tax revenue would go to pay for things like security, air-traffic control or airport infrastructure. A portion would be used for deficit reduction that, at least according to the administration’s accounting, is intended to help the whole country. In addition to raising the security fee to $7.50 by 2017, the administration sought a $100 per-flight surcharge on all aircraft using FAA-controlled airspace. Besides the airlines, corporate and general aviation organizations joined the opposition to the surcharge because of the greater effect it would have on their flight operations.
At the heart of the industry’s objections to the security-tax increase, according to airline association spokesman Steve Lott, is the belief that security is “a national function.”
“Aviation security costs should be borne by the federal government,” Airlines for America president and chief executive Nick Calio said in testimony before Congress this fall. “Basic fairness dictates that. Those seeking to harm our country utilizing commercial aircraft are attacking the entire US population and our way of life – airlines are the surrogate, not the ultimate goal of those attacks.”
Calio contended that the $3.4 billion paid by passengers and air carriers in security taxes and fees in 2010 represents “an enormous contribution from one segment of the private sector for what is a national responsibility. It makes air travel far more expensive for the consumer and is a substantial financial drag on US airlines.”
The airlines argue against the tax proposals in two other ways: pointing out their own lack of profits, and protesting that the tax rates paid by airlines and their customers are often as high or higher as the rate for “sin taxes” paid by consumers of alcoholic beverages and tobacco.
“To put this into perspective, the US airline industry’s total profit last year was $3.7 billion, just one of three profitable years over the last decade in which US airlines lost $55 billion and shed nearly 160,000 jobs,” Calio said, concluding: “Further increasing our tax burden will further undermine the industry’s financial health, thereby undermining the overall economic recovery.”
The Blame Game
In making its arguments, the airline association blames its troubles to some extent on volatile fuel costs, but makes little mention of another factor that has hurt profits over the last decade: industry overcapacity. How many airplanes are flying how many seats to how many cities is a problem of the airlines’ own making; only in the last two years or so have they started to address it.
Nor has there been any mention in the industry’s position papers of other factors responsible for the plunge in airline employment. Those include mergers and consolidation; outsourcing of maintenance work and other jobs; technological changes like self-service kiosks that have cut the number of human employees whom passengers interact with at airports or on the phone; and the use of the bankruptcy process by several large carriers to reduce personnel costs.
The airline group’s testimony noted that the federal tax on a typical $300 domestic round-trip ticket has gone from $22 to $63 since 1972 and now makes up a quarter of the industry’s federal tax burden. While these numbers may be accurate, mandatory taxes and fees for individual travelers vary greatly, depending on how much a ticket costs. The tax rate on a $450 domestic round-trip ticket that includes one connection in each direction is almost 16 percent. For a $5,240 international business class ticket – that’s what a round trip in January between New York and London would cost, for instance – taxes and fees total about $267, for a rate of just over 5 percent.
The airlines maintain their objections have a sound economic base, and they enlisted the help of the Oliver Wyman consulting firm to estimate job losses. Wyman concluded that raising the security fee to $5 will cost airlines and their customers an additional $734 million in 2012 and to $2.7 billion in 2017. The $100-per-flight surcharge would add almost $1 billion annually in costs to passenger airlines. Because cost increases will mean fewer passengers, airlines will have to cut capacity on marginal routes, leading to employee layoffs and ultimately to fewer jobs in other industries that benefit from travel, Wyman said. The total job loss in 2012 could be as high as 181,000, the firm said.
The American Aviation Institute, a Washington airline consultancy, said in its study that the administration’s proposals and the consumer-protection regulations already implemented since 2009 would result in airline service cutbacks so severe that cities nationwide would lose billions of dollars in visitor spending and local tax revenue from those visitors.
Another authority on airline fees, Jay Sorensen, president of IdeaWorks, the Wisconsin firm that estimates carriers worldwide will collect $32.5 billion in ancillary revenue in 2011, says he’s sympathetic to the industry’s financial condition and agrees that taxes and fees can dampen demand for travel. But what is really behind the opposition to increasing the security tax, he says, is the fact that before 9/11, airlines spent 26 cents per enplaned passenger on security, and today they spend $7.50 per passenger. “What the airlines are reacting to is the whole cost structure when it comes to security,” Sorensen says. With all the increased spending, carriers want to know, “is airline security 30 times better now?”
Some of the sharpest criticism of the whole ticket-tax system comes from Robert W. Poole Jr. the Reason Foundation’s director of transportation studies. In his October ATC Reform newsletter, he chastised the airlines for their love of fees, and for not making clear that most of the taxes they dislike are effectively user fees.
“What really frosts me about ancillary revenues,” Poole wrote, “is that they enable airlines to make a partial end run around the 7.5 percent ticket tax – the largest single source of user-fee revenue for the Trust Fund. By shifting more and more of what used to be included in the fare to a la carte pricing, airlines have managed to reduce the base against which the 7.5 percent is calculated, thus starving the Trust Fund of funds that would otherwise be going into NextGen and airport improvements.” The NextGen Poole refers to is the FAA’s Next Generation, satellite-based air traffic control system. He concludes: “I don’t understand why the airlines think starving aviation infrastructure investment is a good thing.”
On the other hand, critics of the FAA point to massive cost-overruns and chronic delays in the program as the real source of NextGen’s problems. Some have even gone so far as to suggest there might be a better private sector solution for the woes of air traffic control. Who’s right in this debate, as in the larger argument over the tricky questions of revenues and funding, comes down to where the public places its confidence – in the government or in private enterprise.
These days, nobody seems to be winning on that score. Polls put Congressional approval at historic lows, the perception of bureaucratic competence is dwindling and the airline industry frequently is its own worst enemy, with more than one self-inflicted public relations black eye.
The Business Travel Coalition’s Mitchell believes the airlines lost significant credibility in their battle against taxation last summer when gridlock in Congress resulted in the lapse of the 7.5 percent federal ticket tax for almost two weeks. Rather than lowering ticket prices by the 7.5 percent to give customers a break, and possibly induce greater demand, some carriers raised fares by a similar amount to reap a $400 million windfall.
“Instead of showing leadership to Congress, instead of trying to increase demand, they just pocketed the difference,” he said. “It’s right up there with the whole disingenuous argument that ticket taxes are like [alcohol and tobacco] sin taxes … It’s hard to take an industry seriously when they cry wolf. That’s how you erode your credibility over time.”