When the tax costs of operating in New York are only a fifth of the cost of locating the same operation in Wyoming, something unusual is going on. Yet that’s exactly what we find for new research and development (R&D...
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- Transportation Security Administration Fees Rise Today
Transportation Security Administration Fees Rise Today
Transportation Security Administration (TSA) per-passenger fees rise today, from $2.50 for non-stop flights and $5.60 for connecting flights to $5.60 for all flights. I’ve written about this fee hike before, discussing how direct airline ticket taxes and fees can be a large portion of the total ticket price. As I explained then, there is some theoretical justification for special taxes on airline tickets in order to pay for essential Federal Aviation Administration functions and effective security. However, also as I noted then, “probably very few of us wake up in the morning hoping we get to pay $2.50 (let alone $5) to walk through a full-body scanner and then get frisked.”
Those issues aside, purchasers of airline tickets face many other taxes as well, ranging from Passenger Facility Charges at each airport to a tax for each flight segment to a 7.5 percent excise tax on the ticket price. Beyond those direct taxes, airline customers also ultimately foot much of the bill for fuel taxes. As we showed in a recent map, fuel taxes can range widely around the nation, with Ohio, Texas, and Delaware charging no tax, while Illinois, for example, charges 32.8 cents per gallon. On top of state taxes, the federal government also levies an excise tax or 4.4 cents per gallon for commercial carriers.
Again, as a way of funding essential public support services for aviation, these taxes and fees have sound theoretical justifications. But many of these collections don’t go to air traffic controllers and other essential support services; they go to numerous extra functions assigned to the FAA and TSA, including regulation and law enforcement-type activities. We don’t expect police departments to be fully funded by speeding tickets and license fees, so it’s not clear why we should try to entirely fund aviation regulators from similarly tied revenue.
The deeper reasoning behind higher airline fees has to do with federal budgetary needs. Due to being a narrow constituency often perceived as being wealthy, airline passengers are an easy group to tax. The most recent Presidential budget proposal, for example, proposed to increase numerous aviation-related taxes and fees, raising $17 billion over ten years from airlines and their customers. The current fee increase is due to a budget deal arising in December, 2013, with higher airline fees an essential pay-for to make the deal work without raising taxes.
However, such high aviation taxes and fees are problematic on economic and tax policy grounds. Airline taxes are likely much higher than is necessary to pay for associated services and any potential externalities (like “noise pollution” at airports and rare aviation accidents). Such high rates on a narrow base (just one good) are practically the definition of bad tax policy. Plus, the beneficiaries of a more safe and secure airplane may not all be passengers: drivers, for example, clearly benefit from reduced congestion externalities on roads during peak holiday travel seasons, while major beneficiaries of increased aviation safety may be people on the ground. Estimating these burdens is not simple.
That effect is compounded by the role that aviation plays as a business input. Business travelers and any firm using air mail have to build these excess taxes into their cost structure, even as their final sales may be subject to sales taxes at the state level, creating potential for tax pyramiding. Thus excess taxation of business inputs beyond what is necessary to cover essential user costs, especially for a major infrastructural input like aviation services, creates economic burdens.
To appropriately tax airlines, we need a clear accounting of exactly how much it costs to provide essential safety and support services for airlines, and how much of the benefits of those services are obtained by passengers and airlines versus the general public. Otherwise, policymakers are flying blind about what an appropriate airline tax policy would really be.
Read more on transportation and infrastructure taxes here.
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