On Friday I wrote a long post explaining the reasons for the logjam in Congress over re-authorizing the FAA, and what it would mean for airline ticket taxes.

At the time, I suggested that any tax savings would be very short-lived for consumers.

Besides, an elementary understanding of tax incidence theory suggests that people are paying roughly what they’re willing to pay in airfare now. One would expect prices to rise much of the way to compensate for removal of taxes. Contra Rick Seaney, I would expect any savings – were taxes to go uncollected — to quickly fall, prices rise, and the difference in price would be far less than his projected 13%.

I did flag, however, that

[N]ew fares aren’t filed in real-time, so even if airfares do adjust that will happen over the coming airfare feeds, so no doubt there will be an opportunity to book tickets with those systems and carriers not charging tax and at prevailing airfares (ie without a corresponding airfare increase).

And indeed that’s exactly what happened. There was a period of time on Saturday, basically the morning, when you could buy tickets at the old fares and without taxes. And then most airlines raised their fares to offset the reduction in taxes.

Notably, JetBlue, Alaska, and Frontier have maintained that they haven’t raised their fares. Which is more or less a publicity stuny, truth is that fares change all day long across various routes and change every day, the longer Congress goes without re-authorizing these taxes the less meaningful these claims become. Since fares certainly won’t be across the board what they were before the taxes lapsed.

Of course fares went up. A passenger paying $500 for a ticket inclusive of taxes was willing to pay $500 for the trip. They weren’t willing to pay an amount less than that, plus taxes to the government. The market price prevails here, and what that suggests is that the airlines were really the ones paying the taxes all along and not the consumer, the consumer was paying the amount they were willing to pay for the service and out of that came a tax bite.

Presently airlines are charging the same price for their service as before, and not being taxed. (Of course they are still going to be paying income taxes on any profits, and taxes on the fuel they purchase, and all other taxes — just not the 7.5% excise tax and the per-segment taxes, or the 6.25% cargo tax.)

Whether or not that’s ‘fair’ is a normative question, it’s not obviously unfair, considering how heavily taxes airlines are and despite relatively healthy past year, just how unprofitable the industry has been the past two decades overall.

Me, I was just happy to make some ticket purchases on Saturday. If you want to ‘understand’ the issue of who really pays a tax, consider reading up on tax incidence over at Wikipedia.

The Points Guy wants airlines to pass the tax savings on to consumers.

He quotes West Virginia Senator Jay Rockefeller as being “deeply perplexed” that most airlines have decided to keep the money. Which is especially ironic, because as I explained last week, Rockefeller is one of three Senators obstructing re-authorization from the upper chamber of Congress. House Republicans want to pare back subsidies for the three most costly (per-passenger) rural airports, one of which is in West Virginia. Laughably, Rockefeller is urging airlines to voluntarily hold onto the funds that would have been collected in taxes had Congress re-authorized the FAA, and give the money to the government later.

Kathleen Pender has a piece in the San Francisco Chronicle rounding up how airlines are handling taxes collected with ticket purchases prior to expiration of the tax, but for travel while the tax is not in place. If you paid taxes on tickets you bought prior to Saturday, but are traveling today, you’ve paid a tax you theoretically don’t owe.

When I spoke to the reporter, one of the outrages was supposedly that the airlines were pocketing that tax money. I pointed out that the taxes collected were going to the US Treasury. The IRS has asked airlines to refund those taxes, and report having done so with future tax filings. Although the IRS also points out that the airlines are under no obligation to do so. Overall, airlines have said (1) the funds are held by the government, so go get your money from them, and (2) it’s cumbersome and expensive to set up this process which is hardly our fault, so go direct your outrage to the government and get your money back from them. (The exception is JetBlue which is apparently processing tax refunds.)

Apparently, the IRS plans to develop some procedures to handle refunds.

[P]assengers who are unable to obtain a refund from the airline may obtain a refund by submitting a claim to the IRS.” It adds that travelers will have to submit proof of taxes paid and travel dates to the IRS under procedures that are under development.

But as Pender has me pointing out in the article, don’t go looking for refunds on most award tickets,

Most airlines do not collect these taxes from passengers using frequent flyer miles to get a free domestic ticket, says Gary Leff, co-founder of milepoint.com.

In my post on Friday, I foresaw another issue that the IRS is now warning about. We don’t actually know what will happen to tickets sold now for future travel when the taxes are put back in place. Congress could write the law requiring payment of those taxes. As I noted,

it’ll be relatively simple for a legislative fix to simply retroactively authorize the taxes. And the authorization issue would seem to apply to when travel is consumed, rather than purchased… If they stopped collecting taxes, they might be facing either (1) eating the cost of the taxes themselves or (2) passing on an add-collect to the passenger.

I don’t actually expect this, because it would be hugely unpopular and this isn’t a Congress given towards doing utterly unpopular things especially as the next Presidential election season approaches.

So bottom-line is that the government isn’t currently taxing the airlines on ticket sales, beyond the taxes paid by most businesses. That’s great for the airlines for now. Whether that’s fair, when the government imposes tremendous costs as well as provides benefits to this heavily regulated industry, is probably a pretty complicated question.

For consumers, there may be some tax refunds in the offing for those willing to jump through hoops to get them.

But overall, sanctimonious members of Congress railing against airlines in all of this probably deserve a ::rolleyes:: at best.

  1. AK said,

    Great explanation. I, too, thought of the issue of “tax incidence” and tried to explain it to other’s like this -

    In many places, the incidence falls on the consumer — I go to a store to buy a DVD. The price says $20, which is an agreeable price for me. However, with a 5% sales tax, I will pay $21. Still, the store priced the DVD at $20 because that is a price I can agree with and passed the tax to me. I end up paying the $1, meaning the incidence falls on me (I pay the tax).

    However, with airline tickets, you don’t decide to buy a ticket until you’ve seen the entire fare. I will often price out tickets to see the full fare. That full fare, which includes taxes, is what I am willing to pay. For example, I am willing to pay $330 for a transcontinental roundtrip if I buy a certain time in advance. The incidence falls on the airline, because they have to set a base fare that will end up with a full fare I can agree with. Therefore, the incidence falls on them (at least partially). Now, without taxes, the airlines are trying to recoup some of those revenues.

    Now, it could get kind of complicated with full surcharges and whatnot (why debundle fuel from the base fare? it’s not like that’s an option, like preferred seating and baggage).

  2. Robert B said,

    Note that AA is selling miles with a 25% bonus until the end of the month. Normally there is a $30 fee plus the 7.5% tax but there is no tax now.
    So 50,000 miles (40k + 10K bonus) costs $1,030 instead of $1,103.

  3. Matthew said,

    Excellent analysis–a very insightful post.

  4. iahphx said,

    I think there is little doubt that it is the final price (including tax) that determines what most travellers will pay for air travel.

    Foreign travel is, of course, the classic example. Some countries (the UK being the worst offender) have such high taxes that the airlines’ own fares can be somewhat irrelevant for stimulating traffic.

  5. nsx at FlyerTalk said,

    Greg Mankiw’s blog had a post about this a few days ago. In the short run the supply of seats is fixed so the airline bears the tax or relief from the tax. In the long run the supply of seats could change, but by then the tax will be back.

    Apparently Congress intends to jack the segment fee way up. In the short run this will force fares down, so as to maintain the same total ticket price. In the long run, the supply of seats will decrease slightly, especially in short-haul markets. Southwest has just announced its departure from several short-haul markets early next year. Coincidence?

  6. Sapan said,

    A great article on what is holding up Congress

    http://online.wsj.com/article/SB10001424053111904800304576472472698042018.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsThird

  7. NB said,

    This 7.50% tax puts the UK’s taxes into perspective. On a $10,000 first class fare, you will find the UK tax to be lower. As the UK tax is not based on fare paid, but on class and distance travelled, its incidence varies from that in the US. However, as tax incidence theory dictates, passengers look only at the post tax price and consider purchases accordingly. Prior to the introduction of the UK’s tax, and prior to its recent increase, travel from the UK to the US was significantly cheaper than travel from other European countries to the US. After the tax, that remains the case. It’s a more competitive market and it’s the competition that drives the business, not the tax.

    Having said that, if the UK government were to raise the tax indiscriminately, there would come a point when the price would have to rise beyond a point where sufficient people would be willing to travel. Then the competition would disappear from the market and fares would rise astronomically.

  8. When Will US Aviation Taxes Come Back? - View from the Wing said,

    [...] aviation taxes suspended, last week I explained who wins and who loses, and most importantly how you can still benefit: taxes aren’t being charged on the purchase [...]

  9. Judy said,

    I’m buying AA 2 tickets for Caracas Venezuela on Friday August 5th. Should AA charge me taxes?????

  10. Post-mortem on Airline Ticket Taxes and Why Airlines Raised Price to Compensate - View from the Wing said,

    [...] some of my coverage of the suspension of airline excise taxes I explained why no one should have been surprised that most airlines raised their fares to offset [...]

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