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Tax Foundation Proposes US Air Travel Tax Overhaul

by Mike Godfrey,, Washington

13 May 2015

A new paper from the Tax Foundation (TF) has recommended that funding for US airport improvements should be rebased on the passenger facility charge (PFC) as the most market-based solution, thereby reducing the present reliance on federal taxes.

The TF notes that several federal taxes on passenger air travel are collected by airlines and passed on to the Internal Revenue Service. They raise revenue (USD12.05bn in 2013) for the Airport and Airway Trust Fund, a fund administered by the Federal Aviation Administration (FAA) to finance infrastructure through the Airport Improvement Program.

Those taxes are the domestic passenger ticket tax (7.5 percent of on the purchase price of passenger tickets), the domestic flight segment tax (USD4 per passenger per domestic flight segment), the international arrival and departure tax (USD17.70 per international flight, or USD8.90 per flight between the United States and Alaska or Hawaii), and the excise tax on commercial aviation kerosene use (USD0.044/gallon).

However, the TF points out that subsequent federal grant spending on airport projects by the FAA does not match the distribution of tax revenue collected, with the larger airports missing out. In any case, "because those tax dollars have gone to the Federal Government, the airport essentially has to wait for a ponderous political process to have its own tax dollars returned."

The PFC, currently capped at up to USD4.50 per airport, is a fee paid directly by each passenger to fund airport infrastructure projects. "It is important to note that this charge is not a tax at all, in any sense of the word," the TF adds. "The charge is neither remitted to nor spent by the Federal Government, and it is not deposited into the US Treasury. It is a payment made directly to the airports and tied to paying for a specific airport project."

While "reliance on Airport Improvement Program spending is cumbersome and inefficient for airports," the paper looks on the PFC as "a more efficient means of financing airport infrastructure; revenue generated by passengers at an airport remains with the airport, dedicated to financing it."

Projects funded by the PFC are still reviewed by the FAA, and the application process includes mandatory consultation with the airlines and the public. However, "passengers fund the airports they are using. It makes the cost-benefit calculus a local decision, rather than one subject to centralized authorities and political processes... In other words, let airports finance their improvements just like any other productive venture would."

The TF concludes that the PFC "is clearly the best means to meet airport capital needs and a far better option than raising taxes or other fees on passengers." However, as it has been capped at a maximum value of USD4.50 per passenger trip since 2000, the fee "should be raised and indexed to inflation. Alternatively, the upper limit on user fees could be set entirely at the local level."

TAGS: tax | air passenger duty (APD) | aviation | fees | excise duty | United States | tax reform | inflation | Tax

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