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Transportation Security Administration Fees Rise Today

By: Lyman Stone

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 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es 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 taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on the ticket price. Beyond those direct taxA direct tax is levied on individuals and organizations and cannot be shifted to another payer. Often with a direct tax, such as the personal income tax, tax rates increase as the taxpayer’s ability to pay increases, resulting in what’s called a progressive tax. es, 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 taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es at the state level, creating potential for tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. . 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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