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.