Policy Documents

The Taxation of Air Transportation

Kenneth Button –
April 1, 2005

Taxes serve a purpose. The U.S. government requires revenue to fulfill its numerous functions, and there is no reason why the air transportation sector should not, in an appropriate way, contribute to the national treasury. The crucial issue for the airlines (and the public more generally) is thus not taxation per se, but rather its level, structure, and impact. Because it is somewhat concentrated—which makes revenuegathering relatively cheap for the collection agency—and often perceived as a provider of a luxury service, the airline industry is especially vulnerable to high levels of taxation.

These factors sub-optimally limit the growth of the air transportation, because ultimately taxes are either passed on in the form of higher fares and cargo rates or reduced levels of service, especially in a highly competitive environment. In the short term, particularly in today’s marketplace for air services, the taxes are not passed on but rather absorbed by the airlines in the form of weakened financial results. Yet even when the airlines bear the immediate burden of taxation, businesses and individuals must adjust downward their levels of service, either in quantity or quality, to be able to absorb the tax.

Taxation invariably distorts markets. Therefore, a well-structured tax regime should minimize the distortions that it imposes downstream on the various sectors of the economy. In the context of airlines, these distortions take a number of forms:

• the taxation of airlines is disproportionately high, retards the industry’s development vis-à-vis the overall growth in the economy, and limits its potential contribution to economic wellbeing;

• the level of taxation distorts competition with other transport service suppliers (e.g., differential taxation on rail versus air transportation on the northeast corridor routes);

• the structure of taxation imposes burdens further up the air-services value chain, thus imposing additional costs on the airlines and their customers;

• taxation influences the competitive position of domestic airlines versus international competitors in increasingly global air transport markets; and

• taxation disguised as government-imposed user charges results in: (i) services being supplied to the airlines in excess of the level the airlines would purchase in an open market (“gold plating”), (ii) those services being supplied inefficiently, or (iii) the masking of government obligations to serve unrelated public policy objectives (i.e., customs, border protection) under the guise of user “services.”

In this context, this study aims to: analyze objectively the tax burden on U.S. commercial air transport; isolate items that may be reasonably seen as user fees or quasi-user fees and, where possible, comment on whether  these lead to gold-plating; evaluate how the tax burden is distributed across the industry; and compare the burden of a pure tax with that found in competing transport sectors.

Using existing data sources and contemplating the dynamics of the situation, the study aims to determine if U.S. airlines are being inflicted with an excessive burden of taxation—either directly or through the larger supply chain—that ultimately harms social and economic welfare. In addition to analyzing the immediate financial impact of the tax structure on airlines, the work seeks to convert this impact into more concrete parameters, including: the number of potential passengers “priced” out of the market, examples of services that would be offered under an alternate tax structure, implications for international trade, and lost or foregone jobs in the airlines and associated industries.