The proposed bipartisan budget deal is getting positive press, as a long-awaited respite from Washington gridlock. Unfortunately, a central part of the deal is yet another tax increase on Congress’s go-to “punching bag” – namely, our national airline industry.
Higher taxes on airlines are passed on to consumers and ripple through the economy, affecting many sectors (think hotels, restaurants, rental cars, retail, entertainment and myriad small businesses) that depend heavily on an affordable system of air travel. The airline industry employs nearly 600,000 nationally, but it directly enables and supports millions of other jobs. Commercial aviation accounts for about 5% of US GDP.
I care about people who can’t afford to fly as often as they would like – to visit their friends and relatives, to support their small business or simply to have some fun on a trip and save cash for when they get to their destination. Spirit Airlines and other low-cost carriers provide a valuable low-fare option for these kinds of consumers. Indeed, while airline fares have generally risen sharply in the last two to three years, Spirit has held fares in check.
The proposed budget deal would more than double the so-called 9/11 security fee from $5.00 for most round-trip flights to $11.20. That is a huge price increase to hit consumers when your average base fare is less than $80, as it is on Spirit. Moreover, the fee is grossly regressive: a customer paying $59 for a short-haul domestic flight pays the same tax as an expense-account traveler flying to Dubai on a $15,000 first-class ticket.
The airline industry is taxed brutally as it is, and our economy suffers for it. Right off the top, there’s a 7.5% federal excise tax applied directly against ticket revenue, then over 3% more in excise taxes on fuel, our biggest cost line. For a low-fare carrier like Spirit, the increased government-imposed fees and charges passed directly onto the customer will represent a tax rate of about 15% to over 150% on top of what we charge for a domestic base fare (even worse for international travel).
By now, you may be wondering how any airline can stay in business. Well, many don’t, as the cycle of bankruptcies over the past decade has shown. Over the years, airline operating margins have remained pathetically low, averaging in the low- to mid-single digits. Other industries, many enjoying substantial tax breaks and credits, produce margins many times that, but are contributing nothing to this budget deal. If Congress really wanted to stimulate economic activity, a viable idea would be to reduce the tax burden on air travel, which would bring lower prices to consumers, while stimulating travel, employment and dollars circulating in the economy.
The government recently issued a new regulation called the “full fare” rule, making it mandatory for airlines to advertise their fares with government taxes and fees included. (Before, airlines advertised base fares – i.e., what they actually received – and displayed government taxes and fees separately, all of course totaled up prior to the time of purchase.) Officials claimed that, at last, consumers would know the full price of a trip, conveniently forgetting that fliers now routinely decide to add on additional amounts for optional items like bags, seat assignments, pets, onboard products, etc. At that time, Spirit argued – unsuccessfully – that the “full-fare” rule was a Trojan Horse, allowing the government to hide taxes in the quoted fare and then subsequently raise them, knowing full well that strapped consumers would blame the airlines for the apparent increase in fares. I guess that’s what just happened this past week.
We can all applaud a thaw of the impasse in Washington, if that is in fact happening. But unfortunately, a key part of this budget “deal” is a self-defeating measure that will constrain economic growth and impose a greater burden on those least able to afford it.