Taxes May Mean Less-Frequent Fliers
Though House and Senate proposals on air-travel taxes differ, both could hit wallets hard
By the end of next week, airline ticket prices could hit an updraft.
Today Congress will begin work on reconciling the House and Senate tax bills. One of the largest, and most controversial, items is finding ways to fund airport improvements and security. Both the House and Senate solutions involve new airline-ticket taxes - almost certain to be passed on to the flying public this fall.
It's not clear how much airline tickets will go up because of the big differences between the two tax proposals. For example, only the Senate version of the bill would begin taxing the domestic leg of international flights. Thus, a United Airlines $1,800 flight from New York to Australia via Los Angeles would suddenly have a 10 percent tax added for the domestic leg.
Both versions of the bill have a higher departure tax and a new arrival tax. These two taxes could add anywhere from $10 to $25 to the price of a ticket. The total new taxes are expected to yield $34 billion over the next five years.
The flying public has yet to really focus on the impact on their wallets. The airline industry has been trying to rally travelers to protest: "Ax the airline tax."
In New York, mayor Rudolph Giuliani complains, "this is just the wrong time to be creating what would be under these two proposals, the highest level of travel tax in the world. We sort of tax ourselves out of the market and out of competitiveness."
The mayor claims the new taxes would cut the number of visitors to the US by 500,000 to 1 million.
Major carriers have flown in employees to demonstrate on the steps of Capitol Hill, run newspaper ads, and even asked frequent fliers to contact representatives in Congress.
Big time lobbyists, such as former Carter press secretary Jody Powell are arguing their cases. The White House is caught in the middle, asking that Congress not do anything.
The tax proposals are coming at a time when a record number of people are flying. Last year, there were 585 million fliers in the US.
For the last two years, the airline industry has shown fatter profits as the full flights have allowed airlines to raise prices. "We are very close to having our first $1,000 excursion fare from Boston to San Francisco," says Tom Parsons, editor of Best Fares Discount Travel Magazine. He says the industry has tried to raise fares four times in the last four weekends.
Normally, it would be difficult to tag one industry with the bulk of the new taxes, which this year come to $50 billion. It was easier this time because the airline industry is divided.
"Anytime you have a divided industry, there is an opportunity to raise revenues," says Peter Merrill, a principal in the firm of Price Waterhouse and a former economist for the joint tax committee.
How big of a hike?
Under the Senate proposal, the current 10 percent ticket tax, which expires Oct. 1, would be renewed. However, the Senate also wants to tax the domestic legs of international travel. The major carriers are complaining this would make it hard to compete with foreign carriers who fly direct. The Senate would add an additional fee of $8 for international departures and arrivals. It would also tax the sales of frequent-flier miles.
The House plan reduces the current 10 percent ticket tax to 7.5 percent but adds a $2 fee for each leg of a flight. This has such airlines as Southwest complaining that it raises their costs, because they often make several layover stops between major hubs. Major airlines fly nonstop more often.
A tax would also be levied on marketing programs offered by credit-card firms and frequent-flyer programs. In addition, the House would increase the international departure and arrival tax to $15.50 each way. Currently, travelers pay only a $6 departure tax.
Some fliers have just become aware of the new tax. While waiting to buy a ticket at American Airlines, a young woman who said her name was Victoria said she had heard about the tax proposal from the airline's reservation system and was likely to write to her congressman about it. James Van Blarcom, a Charlotte, N.C., businessman who flies a lot, calls the proposals a surcharge on business. "We're the easy target," he complains. "I'm mad enough to write someone about this."