Airline Taxes and Fees Rise in President Obama’s Budget

March 05, 2014

The last week appears to have been tax week at the federal level, with Chairman Dave Camp’s (R-MI) proposal coming out in late February, and President Obama’s FY 2015 budget proposal released yesterday. We’ve written on both proposals, offering detailed descriptions of tax changes in the Camp plan, and a review of changes proposed in the president’s budget. However, President Obama’s budget contains more than just tax changes. It also includes substantive increases in other federal revenue sources, such as fees applicable to air travel. In fact, the President’s budget directly raises taxes and fees on airlines and passengers through three main channels:* higher security fees, a new surcharge to finance the Federal Aviation Administration (FAA), and higher passenger facility charges (PFCs).

September 11th Security Fee

I’ve written before on these taxes and fees, and how they are often only dubiously defined as “fees,” and can compose a remarkably large share of the cost of air travel. It’s common for taxes and fees to equal 20 to 25 percent of the cost of a plane ticket. With taxes so high, it may seem strange to raise them even higher. But, as part of the budget deal in December, the aviation passenger security fee (also known as the September 11 Security Fee or 9-11 fee, as it was implemented after the terrorist attacks of September 11) was doubled to $5 each way, $10 for a round trip.

However, despite having recently been doubled, President Obama’s budget proposes to increase the September 11 Security Fee still higher. The official budget documents don’t provide an exact amount, but a back-of-the-envelope calculation can give us a hint. In 2013, the Transportation Security Administration received $1.87 billion in revenues from the 9-11 fee, with rates set at $2.50 per security check. The President proposes to raise $650 million in new revenues by the time the security fee is fully implemented in 2018, above and beyond new revenues to be raised from the already-implemented hike to $5 per security check. If we assume that revenues raised will remain proportional to the fee level, then the fee hike should be about $0.75, or about a 30 percent fee increase. This would bring the total 9-11 fee to $5.75 per security check, up from $2.50 a few months ago.

Mandatory Surcharge for Air Traffic Services

But that’s not the President’s only cost added to aviation. His budget also proposes to establish a new mandatory surcharge for air traffic services. The Department of Transportation budget section does not explain this new surcharge, so its exact structure is unclear. However, we do know that it amounts to over $700 million every year. Presumably, this money would go to the Airport and Airway Trust Fund, which finances the Federal Aviation Administration. In 2011, the AATF had $11.7 billion in total revenues, so a $700 million revenue increase is nothing to sneeze at, and deserves attention.

If those $700 million in new revenues were added on to the existing 7.5 percent excise tax on airline tickets, using the same kind of back-of-the-envelope calculations as for the 9-11 fee, it would mean a tax hike to about 8.2 percent of airplane ticket prices. That’s about a 9 percent tax hike.

The net effect of these tax and fee changes is, over the next decade, almost $14 billion in new taxes and fees on airline passengers.

Passenger Facility Charges

But, as it happens, there’s actually a third, less clearly-defined component of this plan. A note in the Department of Transportation budget section indicates that large airports will be given increased authority to levy higher passenger facility charges. PFCs are a way that airports charge passengers for using their services. In that sense, they’re clearly-defined fees, and one of the more economically sound ways of financing aviation infrastructure. However, the president’s budget doesn’t use PFCs to replace some other less economically sound funding source, but actually strips funding from the largest, most heavily-used airports, in order to give preferential funding for less-used regional airports.

The result of this is simple: passengers flying into busy airports will pay higher FAA surcharges to subsidize little-used regional airports they don’t use, followed by even higher PFC charges in the airports they do use.

Conclusion

These taxes will place a renewed burden on an industry that already faces large tax burdens. It pays special taxes on its fuel, the infrastructure it uses, and additional excise taxes on the product it sells. It is subject to an enormous burden of regulation on top of all of that. Furthermore, according to our research, airports right now are already reasonably well-funded, especially compared to roads. It’s unclear why we need even higher airline taxes. These taxes narrowly target a select group of people and, because air travel is a key business input in many industries from manufacturing to shipping to tourism to finance, could ultimately slow down growth throughout many sectors of the economy.

Revenue Estimates for Aviation-Related Tax and Fee Changes in President Obama's FY 2015 Budget

Source: OMB Summary Tables of 2015 Budget

Tax or Fee Change

Revenue Increase in Millions

 

2015-2019

2015-2024

Direct Tax and Fee Increase

 

 

Establish a mandatory surcharge for air traffic services

$3,928

$8,533

Reform aviation passenger security user fee to more accurately reflect the costs of aviation security

$1,935

$5,370

     Total, direct tax and fee increases

$5,863

$13,903

 

 

 

Indirect Tax and Fee Increase

 

 

Allow large airports to increase Passenger Facility Charges, decrease funding to said airports

N/A

N/A

Modify depreciation rules for purchases of general aviation passenger aircraft

$1,759

$3,210

Establish a co-insurance program for aviation war risk insurance

$33

$27

     Total, indirect tax and fee increases

$1,792

$3,237

 

 

 

Total, all tax and fee increases

$7,655

$17,140

 

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