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Airline Fees Could Be Target for Additional Taxes, but Move Unlikely to Be Successful

Thursday, December 26, 2013
By Heather Caygle

Dec. 23 --Major air carriers lost a battle in the bipartisan December budget deal over a mandated increase in a federal government user fee and may face an even bigger fight in 2014 as some in Congress
push proposals to tax ancillary fees.

As revenue from those fees continues to increase and remains exempt from federal excise taxes, some lawmakers have suggested looking at taxing those ancillary fees in a way that contributes to the Airport and Airway Trust Fund.

Still, industry analysts say the move to tax fees, while a good talking point, is unlikely to be successful given airlines' protests about additional federal fees and significant opposition from House Transportation and Infrastructure Committee Chairman Bill Shuster (R-Pa.).

The budget deal (H.J. Res. 59) included a provision protested by major air carriers--an increase in the Transportation Security Administration fee, one of the many user fees airline passengers pay the federal government every time they purchase a ticket. The fee increase to $5.60 per one-way trip is expected to generate $12.6 billion in savings over 10 years and has been criticized by aviation groups. It is effective July 1, 2014.

Airlines claim the fee increase will make tickets more expensive and could discourage air travel. Supporters of the budget agreement say the change will provide billions of dollars in savings over the next decade. 

FAA Reauthorization.

In the last several years, airlines have relied on ancillary fees, such as those charged for checked baggage and reservation changes, to earn what the leading industry group categorizes as “razor thin” profit margins. Some in the industry are beginning to raise the idea of taxing these fees in order to help reduce the federal deficit.

Although the current aviation law doesn't expire until September 2015 (Pub. L. No. 112-95), lawmakers including Shuster have begun staking out positions on airline taxes.

Following the announcement that the Transportation Security Administration fee would be increased in the budget deal, Shuster criticized the move, saying the entire aviation tax structure needs to be reexamined when work begins in earnest on the reauthorization.

“We can't tax our passengers to death. It will just continue to hurt the industry,” Shuster said Dec. 11 (3718 Transportation Watch, 12/12/13).

The budget deal increases the TSA fee to $5.60 per flight whereas passengers currently pay between $2.50-$5 per one-way trip. The fee increase, which is expected to generate $12.6 billion in savings over 10 years, goes into effect in July 2014.

The government already relies too heavily on taxing airlines, Shuster said, and shouldn't depend on just the aviation industry to reduce the deficit on top of that.

“[T]hose of us that fly 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.”


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

Jean Medina, spokeswoman Airlines for America


Even with Shuster's opposition to additional taxing, House Transportation and Infrastructure Aviation Subcommittee ranking member Rick Larsen (D-Wash.) said revenues from ancillary fees is something lawmakers would have to look at when they begin the reauthorization process.

“As they continue to grow as a revenue source for airlines, a majority of those fees are not taxed,” Larsen said at a Dec. 12 hearing. “I imagine it might be something we end up debating in the next year and a half.” 

Fee Revenue.

U.S. airlines have earned $31.5 billion since 2007 from 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 last seven years. A 2010 Government Accountability Office report found that if bag fees had been subject to a 7.5 percent excise tax in fiscal year 2009, an additional $186 million would have been credited to the aviation trust fund that year.

That amounts to less than 2 percent of the $11 billion in revenue the trust fund received in fiscal 2009, but GAO predicted revenue from baggage fees will only continue to grow.

In addition to the baggage revenue, airlines have earned $14.3 billion since 2007 by charging fees for reservation cancellations and changes. A spokeswoman for Airlines for America said the fee to make a change is not subject to tax but if the change requires additional fare, that extra fare would be subject to tax.

Revenue from ancillary fees, including baggage and change fees, that are not related to the “transportation of a person” are not subject to the 7.5 percent excise tax, according to the Internal Revenue Service. Airlines earn revenue from some other ancillary fees, including charging for meals and early boarding, but are not required to separately report that data. 

Aviation Trust Fund.

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.

In fiscal 2012, the trust fund provided roughly 71 percent of funding for the FAA with the remaining amount coming from the general fund.

Passengers are subject to 17 taxes related to airline travel with roughly half of those 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.

The trust fund provides federal dollars for airport improvements, research and modernizing the air traffic control system. The fund also generally covers about half of FAA operations.

A 2012 GAO report found that actual trust fund revenues fell short of FAA forecasts for nine out of the last 11 years. The shortfall was mostly attributable to incorrectly forecasting the amount of revenue from domestic passenger tickets due to unexpected events including the Sept. 11, 2001, terrorists attacks and the 2009 recession.

Total FAA expenditures have increased significantly over several years, from $9.5 billion in fiscal 2000 to $15.9 billion in fiscal 2012. General fund contributions, while varied each year, have also increased from $0.52 billion in fiscal 2000 to $4.6 billion in fiscal 2012. 

Decline in Revenues.

The GAO has warned about the likelihood that future trust fund revenues will be lower due to the current tax structure.

“Given the decline in expected future revenues, appropriations from the Trust Fund under current law will be lower in future years than previously projected unless new revenue sources are found,” Gerald Dillingham, GAO infrastructure director, told members of the Senate Finance Committee in 2011 (3003 Transportation Watch, 2/4/11).

To maintain current funding levels, Congress would have to increase general fund contributions or look for alternative revenue sources, like taxing baggage fees.

“[W]e suggested that if Congress determines that the benefit of added revenue to the Trust Fund warrants taxation of optional airline service fees, such as baggage fees, then it should consider amending the Internal Revenue Code to make mandatory the taxation of certain or all airline-imposed fees and require that the revenue be deposited in the Trust Fund,” Dillingham said.

Between 8 percent and 32 percent of FAA expenditures for fiscal years 2013 through 2021 could come from the general fund instead of the trust fund, according to a 2012 GAO report.

Additional revenue through taxes earned from baggage and other fees could be used to decrease the annual General Fund contribution or provide additional dollars for the trust fund's uncommitted balance, which the FAA relies on to incur new obligations while still covering expenditures on existing obligations, according to the GAO.

The FAA's uncommitted balance declined to $770 million in fiscal 2010 from $7.35 billion in fiscal 2001 due to revenue forecasts exceeding actual revenues over most of the last 11 years. 

A4A Position.

Airlines for America, the leading group representing the nation's largest carriers, maintains that without the ancillary fees, airlines' already slim profit margins would be nonexistent.

“In terms of taxing ancillary fees, we oppose it. Too often airlines are treated like they are some other kind of business,” A4A President and Chief Executive Officer Nicholas Calio said at the Dec. 12 hearing, noting that revenue from those fees is subject to income tax.

In 2012, airlines earned 37 cents per paying passenger because of the revenue from optional service fees. Without those fees, carriers would have lost $8.12 per passenger, according to Calio.

“When it comes to being bold and innovative, I hope that the bold and innovative vision for the future of the airline industry is not figuring out ways to further increase the tax and regulatory burden,” Calio said.

A4A spokeswoman Jean Medina told Bloomberg BNA optional services that airlines offer do not add to the operating costs of the aviation system and should therefore not be subject to the same excise tax.

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

Move Not Likely.

Stakeholders told Bloomberg BNA that while talking about taxing ancillary fees may be fun for some lawmakers and easy for the public to grasp, it isn't likely to happen any time soon.

“There's a lot of charges on airlines anyway. And really are they going to kill a goose that already lays a golden egg? It already brings in taxation money,” said Kenneth Button, director of the Center for Transportation, Policy, Operations and Logistics at George Mason University.

In addition to staunch opposition from airlines and top transportation lawmaker Shuster, taxing revenue from baggage and reservation change fees would bring in a small amount of additional revenue to the aviation trust fund.

“I don't think the chances of it actually becoming law are very high because the amount of revenue we're talking about isn't very high. It's the kind of thing that works well for talking points,” said Eno Center for Transportation President Joshua Schank.

“It's a great talking point. It resonates with people. Political feasibility isn't necessarily their goal, their aim,” he said. 

System Analysis.

Button said instead of focusing on ancillary fees, lawmakers should look at the entire aviation fee structure that currently supports the trust fund.

“What they need to do with aviation taxation is take a look at the whole system. Rather than these little bits and pieces, they need to set up a committee and look at how they can improve this. There's ways the air transportation system could be improved and more viable and stable,” he said.

During the FAA reauthorization process, Button said Congress should consider changing the fee structure. Instead of charging a bevy of taxes for fuel, passenger tickets and security, the government could charge for direct services, like the cost of employing air traffic control services.

“There's a reason for taxing things but for many things in aviation, they could be charged for directly. The FAA could charge directly for using air traffic control. They're just providing a service; they could charge the users of that service for providing a safe airspace,” he said.

“Doing it through things like baggage charges and taxes on reservation fees strikes me as being extraordinarily strange.”

To contact the reporter on this story: Heather Caygle in Washington at hcaygle@bna.com

To contact the editor responsible for this story: Heather Rothman at hrothman@bna.com

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