Monday, May 14, 2007

Airline Tax Proposal: Consumers v. Executives?

Sorry the blog has been quiet for a while. I have been away for a few days, including a conference on international law and trade in Istanbul. (www.iltc.eu) We had a wonderful time thanks to our hosts, Lejla and Emre from Istanbul Bilgei University, along with their research assistants and staff. More to come on that in future posts.

For today, let me mention a few words on taxes for airline travel. I just completed a trip from Milan to Istanbul and back. The ticket cost was approximately equal to the taxes collected by the applicable governments. That means not much cost for the actual transport, but significant contributions to government coffers. I note that our international flight from the US did not share the same proportions in taxes – which is quite a good thing.

Today’s Drudge report contains a link to a Bloomberg story on a proposed shift in air travel tax burdens from airlines to private aircraft operators, including those fractional jet services like NetJets. http://www.bloomberg.com/apps/news?pid=20670001&refer=home&sid=a_weVSOX_Ito

It seems that the taxes an airliner pays to support the air traffic control system are quite a lot higher than paid by a corporate jet owner. However, both take the same amount of time from air traffic controllers. The idea is that the airline should bear a little less, and the private jet owners a little more. The private jet tax would rise, for example, from about $200 on a particular flight (NY to FL) to about $800, while the airliner tax share would decline from a little over $2000 to about $1200.

This seems utterly sensible to me, as the real costs of air travel should be borne by users. Of course, it is easy to pass on these kinds of costs to airline ticket passengers, which would only pay a few dollars each. However, it is a fair question why the general public flying coach should effectively subsidize business jet travel.

One could argue for a per capita tax -- i.e., everyone who flies benefits equally from the protection. However, the proliferation of flights which has occurred due to the hassles of security burdens in commercial air travel is adding to the burden of providing for sky safety. Raising the marginal cost of adding to that burden may have a salutary effect of causing some of those new costs to be internalized. As critics point out, it may also reduce business travel to smaller locales. Perhaps the system could be fine tuned here -- add higher taxes for congested airports, and lower taxes for rural ones.

Berkshire Hathaway shareholders have benefited from the private jet boom through the ownership of Netjets, which sells fractional jet interests. Raising taxes on the business jet flights will make jet travel slightly more costly for executives, and slightly less costly for the general public. I would think that is an easy concept for politicians to sell. However, rising fuel costs may indeed cause both kinds of travelers to consider teleconferencing or staying home.

It should be noted, however, that the press here seems to be sensationalizing this story. The title “Buffett Battles Bush As Corporate Jet Owners Fight Tax Increase“ seemed misleading – since Buffett refused to comment on the matter. The topic is interesting enough without injecting personality into the mix.

Happy Tuesday.
EAM

2 comments:

AeroObserver said...

Ed,

The airlines have already gone on record as saying that they will raise air fares commensurate with the ticket tax reduction, meaning consumers won't notice any difference in air fares if the ticket tax is reduced or eliminated.

And shifting costs to general aviation will only hurt this part of the industry, and thereby cities such as Wichita (home to Cessna, Beechcraft and Learjet) that depend on a thriving general aviation industry.

Also, general aviation is much more than just "executive" flying. Lots of ordinary people own small two or four-seat piston airplanes and are already struggling with the climbing cost of aviation fuel. Adding more taxes on these airplanes would be the straw that breaks the camel's back, causing many to stop flying altogether. The general aviation industry contributes much to the GDP, and the 50 cent per gallon fuel tax increase being proposed would devastate this segment of aviation.

Ed Morse said...

Good points on the effects on general aviation. But that is why a more nuanced approach is needed. An approach that gives cost incentives for flying into smaller cities and airports would reduce congestion as well as benefit the local economies in those areas. If you want to fly your small aircraft into a large congested area, there are costs to be borne. I question whether airlines will raise fares if taxes go down, though. Where does that come from? Thanks for your comments.