New Jersey is considering raising aviation fuel taxes — but only on United Airlines. Currently New Jersey taxes fuel burned during taxi and takeoff. A bill under consideration would extend that to all fuel that United burns (since it applies only to airlines carrying over 8 million passengers per year out of the state).
United’s position “the tax is enacted, she said United might have to consider transferring the bulk of its operations to one of the other hubs.” The extra cost to United is expected to be $20 million. United will not abandon its Newark hub over $20 million.
- United hinted that they would move flights to Washington Dulles. They’ve talked about shifting connecting traffic to Dulles already. Newark has more premium non-stop traffic and limited space.
- A State legislator opposed to the bill thinks four cents a gallon on fuel purchased in New Jersey will shift traffic to Philadelphia. Philadelphia already has more low cost service and significant flights, even an extra $1 per passenger in costs isn’t going to make a further drive worth it and certainly won’t pull lucrative Manhattan traffic.
United has been after PATH train service to Newark for years. They even flew to Atlantic City in exchange for Governor Chris Christie’s support for the project. They just don’t want to be the ones to pay for it. And they oppose use of fuel taxes to fund it.
Federal prosecutors investigated this along with United’s Newark terminal C lease. United ultimately entered into a non-prosecution agreement over influence peddling with the Port Authority of New York New Jersey and its Chairman.
United Newark Terminal C
The ability of people and businesses to move to escape regulations or taxes is a constraint in many cases on just how high taxes can go or how burdensome regulations can get. States and localities are forced to compete.
However once big investments are made which are difficult to move – large capital investments, like airports – there’s a much higher threshold for how much taxation, regulation, and other costs can be imposed. Since you can’t just leave a major airport, $15 minimum wages work there.
Miami airport has lost a lot of flights from low cost carriers moving to Fort Lauderdale. There’s competition across the region’s airports. (American has actually benefited from high airport costs, even though they’re largely the one paying those costs, since it’s meant less direct competition.)
But the Port Authority of New York New Jersey manages the other major airports in the area as well, there’s no real competition – other than Amtrak for short haul, buses, and private jets – for the airports they control.
Airports that are looking to attract flights away from others in the region need low costs. Airports where service is marginal need low costs. Washington Dulles has perennially been on the chopping block as a United hub, costs there matter. And if you want the airport to grow costs matter a great deal too, marginal flights quickly move from being something an airline might try and could potentially make or lose money to one that models suggest are more likely to be money losing and won’t get launched.
The major New York airports are full. They don’t have enough gates. There is more airline demand for flying in and out of New York than there is capacity to support that flying. So they’re in a position where they can grow costs and still be full even if the composition of airlines and flights were to change. That’s largely true at at Washington National and at LAX.
Capital investment isn’t the only lock-in of course. Sometimes it’s clusters of talent, network effects, like in Silicon Valley. Tech companies don’t leave Silicon Valley because of California taxes or business regulations. The money is there, workers are there, and peer companies are there — and it’s far higher cost for everyone to move together and in tandem. Southern California weather and the state’s coastline are similar benefits in this regard.
It’s never clear in advance exactly how far a government can push extracting resources from businesses in its jurisdiction. But Silicon Valley tech companies aren’t fleeing, and United isn’t going to pull out of Newark either.
New Jersey gets all of this — they are targeting the tax increase at United, who will not leave, and exempting smaller carriers with fewer flights that haven’t made a big investment in a Newark hub. That’s problematic on many levels as well as being smart.
United protects its government-granted privileges and seeks to avoid government-granted advantages other airlines might gain against it.
It’s reasonable for them to be unhappy with a proposal to tax their operation but not competitors’ — just like it’s reasonable for businesses to be unhappy with tax credits given to large companies and new firms entering a state giving them advantages over existing business. That’s the sort of cronyism endemic in the system and United would be wise to fight it more broadly and more consistently.
(HT: Live and Let’s Fly)