Congress Sadly Eyes a Tax On U.S. Air Travel

It is something that probably doesn’t occur to most people when they purchase an airline ticket: an assortment of hefty government fees and taxes are baked in the cost of flying these days.

Anybody who doubts this should have a close look at the airline receipt on his or her next trip. On a $350, roundtrip flight with a connection, for example, the government collects nearly $60, a sum that amounts to nearly 17 percent of the total ticket cost.

Now, airport executives across the country are aggressively lobbying Congress for an infusion of cash to help finance renovation and construction projects at airports. And lawmakers, in turn, are considering legislation that would slap even more fees on an airline ticket.

Specifically, a group of lawmakers from both parties are championing a number of proposals that would stick it to air travelers by increasing what’s known as the passenger facility charge, an obscure fee on airline tickets that provides airports a steady stream of money annually for construction and renovations.

If these lawmakers get their way, the cost of flying will be steep for many American families. One proposal would nearly double the passenger facilities charge from the current $4.50 to $8.50 per flight, while another would allow airport officials to set the fees themselves.

The problem is that it is difficult to justify such an increase. One reason is that the passenger facilities charge already provides a windfall of cash to airports precisely for the kind of projects airport executives have in mind. And that windfall comes on top of an already sizable increase in airport revenues over the last two decades that has enabled a rapid expansion and improvement in airport infrastructure.

Yet airport executives and their allies in Congress argue that a hike in the passenger facility charge is necessary because the fee has not been increased since the charge was first implemented in 2002. And without such an increase, airport executives and staff would be largely unable to undertake much-needed improvements at airports at a time of increased travel, they say.

But that is a specious argument, in large part because the revenue generated by the passenger facility charge has grown much faster than inflation since its establishment, courtesy of the steady increase in travelers over the last two decades.

What’s more, the PFC is far from the only source of revenue for airports. These days, airports--especially in large communities--generate substantial revenue through rents from restaurants, hotels, parking and other retail establishments on the property. In fact, in the rest of the world, airports receive few government subsidies. Instead, governments often lease airports to a concessionaire on a long-term contract and actually end up making money on the venture.

Total airport revenue--from governments and other sources--increased from $10.75 billion in 2000 to $27.4 billion in 2018. And that, in turn, has left U.S. airports with $16 billion (and growing) of available funds that can be invested without any restrictions. Furthermore, most airports have strong credit ratings, allowing them access capital markets relatively easier and at lower rates.

In a measure of financial fortunes that airports are enjoying, multi-billion-dollar renovations and expansions are currently underway in Los Angeles, San Francisco, Washington D.C., Chicago, and each of the airports in the New York region.

While smaller airports have not seen robust revenue increases from more passengers and concessionaires like airports in bigger communities, they can tap the Federal Airport Improvement Program, which comes from the Airport and Airway Trust Fund. By 2026, the Fund is expected to have an uncommitted balance of $17 billion. Airport sponsors and state grants also contribute to the developments of airports.

In fact, smaller airports stand to lose if the PFC were to increase. If the cost of flying--especially to smaller airports--goes up substantially, people will simply fly less, taking fewer trips altogether or driving to their destination instead of flying. Such an outcome would result in a decline in the number of flights in such locales, possibly threatening the entire economic viability of some of them.

While advocates of increasing the PFC insist that demand for flying would scarcely be affected by a fee increase, my academic research contradicts that assertion. I found that consumers tend to react more strongly to tax changes than to price-equivalent changes. In other words, the reduction in quantity demanded as a result of tax or fee increases could be stronger than the reduction in quantity demanded resulting from price-equivalent changes. Ultimately, a PFC cap increase would certainly dampen air travel and lead to undesired consequences.

The bottom line is that airports are in stronger financial shape than airport executives would have Americans believe. Congress should resist calls for imposing any new fees on air travel, for the sake of American passengers and in the interest of maintaining an economically strong commercial aviation industry.