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U.S. Airlines Making Moves to Protect Fee Revenue from Taxes

Jan 03, 2014 9:40 am

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Airlines removed services they once provided for free, then they lowered ticket prices. Then they added those services back but began charging for them. And now revenues from those charges aren’t taxed. That’s convenient.

— Jason Clampet

Report: The Rise of the Silent Traveler

The airline industry and one of its prominent allies are gearing up to fight a possible push in the U.S. Congress to tax baggage fees and other air-travel charges as a way to generate additional federal revenue.

Airlines in recent years have relied on the so-called ancillary fees, such as those paid by passengers for checked baggage and reservation changes, to help bolster their bottom line. In the past seven years, the air carriers collected $31.5 billion from the charges.

A month ago, lawmakers as part of the bipartisan budget deal included an increase in the fee that goes to the U.S. Transportation Security Administration. That fee, which helps pay for security procedures at airports, is one of many added to the cost of airline tickets.

“We can’t tax our passengers to death,” Representative Bill Shuster, a Pennsylvania Republican and chairman of the House Transportation and Infrastructure Committee, said in a Dec. 11 speech to the International Aviation Club. “It will just continue to hurt the industry.”

Some lawmakers are raising the prospect of taxing these fees to help reduce the budget deficit, and that has caused opposition to mobilize, Bloomberg BNA reported.

Airlines for America, the trade group representing the nation’s largest carriers, maintains that without the ancillary fees, airlines’ slim profit margins would be nonexistent. A tax that leads to increases in the charges will make tickets more expensive and could discourage air travel, the group said.

Another ‘Business’

“In terms of taxing ancillary fees, we oppose it,” Nicholas Calio, the group’s president and chief executive officer, said at a congressional hearing last month. “Too often, airlines are treated like they are some other kind of business.”

Still, some lawmakers have suggested applying federal excise taxes to the fees as a way to contribute to the Airport and Airway Trust Fund.

“As they continue to grow as a revenue source for airlines, a majority of those fees are not taxed,” Representative Rick Larsen, a Washington Democrat, said at the hearing. “I imagine it might be something we end up debating in the next year and a half.”

The Airport and Airway Trust Fund is the major funding source for federal aviation programs. The fund is supported by revenue from a variety of passenger, cargo and fuel taxes.

Passengers are subject to 17 taxes related to airline travel with about half dedicated to the aviation trust fund. Revenue from the other fees go to support TSA in the Department of Homeland Security and grants for local airport projects.

Alternative Revenue

The Government Accountability Office has said future trust fund revenues probably will be lower because of the current tax structure. To maintain funding levels, Congress would have to increase general fund contributions — a hard sell amid the focus on deficit reduction — or seek alternative revenue sources, such as taxing baggage fees.

U.S. airlines have raised $31.5 billion since 2007 from the fees related to baggage and reservation changes, according to the Bureau of Transportation Statistics.

Charging for bags has garnered airlines about $17.1 billion over the past seven years. A 2010 GAO report said if bag fees had been subject to a 7.5 percent excise tax in fiscal 2009, the aviation trust fund would have received an additional $186 million that year.

While that would have amounted to less than 2 percent of the $11 billion in revenue the trust fund received in fiscal 2009, the GAO said revenue from baggage fees could be expected to continue to increase.

IRS Rule

Revenue from ancillary fees, including the baggage and flight-change charges, that aren’t related to the “transportation of a person” aren’t subject to the 7.5 percent excise tax, according to the Internal Revenue Service. Airlines earn revenue from other ancillary fees, including charging for meals and early boarding. They aren’t required to separately report that data.

Jean Medina, a spokeswoman for Airlines for America, said in an interview that optional services offered by airlines don’t add to the operating costs of the aviation system and shouldn’t be subject to the same excise tax.

“A typical $300 domestic round-trip ticket includes more than $60 in federal taxes,” Medina said. “That is simply too high already, and doesn’t even contemplate the increase in the budget agreement.”

Trip Fees

The budget deal that Obama signed into law last week increases the TSA fee to $5.60 per one-way trip, up from current charges of $2.50 per flight segment or a maximum of $5 each way. The increase, expected to generate $12.6 billion in savings over 10 years, takes effect in July.

Shuster, who opposed the fee increase, said lawmakers shouldn’t keep targeting the aviation industry for revenue.

Airline passengers “are paying more than our fair share to decrease the deficit in this country, which is vitally important, but it shouldn’t be just based on one group of people or one industry,” he said.

The budget also repealed the fee paid by the airlines for aviation security each year, which totaled $380.2 million in fiscal 2012 and reached $572.8 million in 2007. The aviation security infrastructure fee will end on Oct. 1, according to a summary released by the House Rules Committee last month.

Editors: Don Frederick, Jodi Schneider. To contact the reporter on this story: Heather Caygle in Washington at hcaygle@bna.com. To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net.

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