Travelers Won’t Benefit From Airline Tax Lapse

For a second consecutive New Year’s Day, the 10% federal tax on commercial airline tickets is lapsing. Unlike last year, though, travelers won’t benefit.

The carriers, led by Continental Airlines, already have announced fare increases equal to the anticipated tax cut on 14- and 21-day advanced-purchase tickets.

“It’s pretty clear they’re going to keep the selling price the same and pocket what used to be the tax,” said Ed Perkins, editor of the San Francisco-based Consumer Reports Travel Letter.

“The airlines are pretty well convinced that business is strong . . . and they figure, ‘If we can’t raise fares in this climate, we’ll never be able to raise fares,’ ” he said.

Analysts expect the industry to post a record $4 billion profit in 1996. Continental spokesman David Messing rejected the notion that airlines should automatically pass on the savings from the tax lapsing.

“Fares are ultimately set by the marketplace based on supply and demand for seats. They aren’t based on adding up all the cost components,” he said. “So a fare that’s $179 on Dec. 31 and $179 on Jan. 1 makes sense from an economic perspective.”

The ticket tax and other aviation levies first lapsed at the start of 1996, the victim of the protracted budget battle in 1995 between President Clinton and the then-new Republican majority in Congress.

Also expiring were a $6 per ticket levy on international departures, a 6.25% tax on domestic air cargo and excise charges on noncommercial aviation fuel. They weren’t reinstated until August. The delay cost the government roughly $500 million a month.

When the taxes died the first time, airlines initially passed the savings to customers but within three to four months most had raised fares to match.

This time they didn’t hesitate to increase fares. And because airlines advertise their prices with the ticket tax included, travelers probably won’t notice a thing.

Passengers won’t realize fares have been raised, Perkins predicted, until Congress gets around to reinstating the tax. The airlines will be loathe to give up the revenue and will tack it onto their previously raised prices, he said.

That probably won’t be for several months, even though Senate Majority Leader Trent Lott (R-Miss.) and Minority Leader Tom Daschle (D-S.D.) have endorsed quick reinstatement.

Rep. Bill Archer (R-Texas), chairman of the House Ways and Means Committee, appointed an eight-member bipartisan task force to examine federal taxes on all forms of transportation. A separate 21-member commission is studying how best to finance the Federal Aviation Administration.

Archer’s move was motivated in part by a dispute among a group of seven large airlines and small and discount carriers. The large airlines advocated a fee system based on the number of passengers, seats per aircraft and passenger-miles flown. The other carriers say that would unfairly shift costs to them.

Another motivator was the brief but intense flurry of interest among Republicans last spring in temporarily suspending part of the gasoline excise tax. GOP presidential candidate Bob Dole had made it a campaign issue but the movement bogged down when lawmakers began debating the fairness of reducing one fuel tax but not others.

“There’s been a patchwork of taxation and fees built over an extended period of time, and [Archer] just wanted us to take each fee and each tax and do a complete analysis of them, one by one, for each mode of transportation,” said task force chairman Rep. Mac Collins (R-Ga.).

That means the ticket tax probably won’t be reinstated before fall, when Congress completes work on the 1998 budget.

And under Congress’ arcane tax laws, the stop-and-go pattern means lawmakers can use the revenue to offset tax cuts in other areas. On the down side, it means lean times for the Airport and Airway Trust Fund, which finances airport modernization.

The General Accounting Office projects the trust fund balance will hit zero in July if aviation taxes aren’t reinstated before them.

“That fund will suffer severely,” said Geoff Collins of the Dallas-based International Airline Passengers Assn. “They shouldn’t let it go. . . . Ultimately, it will affect consumers.”

As it did in the last budget, Congress could compensate for the shortfall by earmarking additional general tax revenue for transportation spending.