by Tom Yamachika, President, Tax Foundation of Hawaii
Recently, the airline industry was in the spotlight because Transportation Security Administration (TSA) fees rose on July 21 from $2.50 for nonstop flights and $5.60 for connecting flights to $5.60 for all flights. Very few travelers look forward to the security line at the airport and what that entails, and fewer look forward to paying for that service.
This fee is just one of a number of federal excise taxes and fees on airline transportation, ranging from Passenger Facility Charges at each airport to a tax for each flight segment, and a 7.5% excise tax on the ticket price. The nonprofit group Airlines for America estimated that out of a $300 domestic round trip ticket, $62.98, or 21%, of the ticket price would go toward federal government taxes. Ouch!
Why so high? Airline passengers are considered an easy group to tax, as they are perceived as a narrow constituency and a wealthy one. The most recent Presidential budget proposal, for example, would increase numerous aviation-related taxes and fees, raising $17 billion over ten years from airlines and their customers. The current fee increase is due to a budget deal arising in December 2013, with higher airline taxes there to make the deal work without raising taxes generally.
What about state taxes? No state can impose additional taxes on the cost of transporting passengers or cargo by air. Congress passed the Airport Development Acceleration Act of 1973, in part, because it was concerned about the proliferation of local taxes that burdened interstate air transportation. That act prohibits direct taxes on air transportation. Our state, however, thought it was a little smarter than everyone else, saying that our Public Service Company Tax, which at the time behaved like our General Excise Tax but was imposed at a higher rate, wasn’t a tax on the sale of air transportation; instead, it was a property tax that just happened to use the airlines’ gross receipts to calculate the value of the property that was being taxed. The matter eventually went to the Supreme Court of the United States, which in a unanimous opinion ruled that they didn’t care what we said our tax was. It looked like a gross receipts tax and quacked like a gross receipts tax, so, for purposes of the federal law, it was one and was prohibited.
That, however, doesn’t stop the State of Hawaii from getting its licks in. True, it can’t tax the ticket but it can tax some of the things that airlines have to buy in order to fly such as fuel. According to the National Tax Foundation, as of June 1, 2014, Hawaii imposed 16.1 cents in taxes and fees per gallon of fuel, the ninth highest in the nation. (The top three taxing states are Illinois, California, and Connecticut, with taxes per gallon in excess of a quarter; and on the other end, Ohio, Delaware, and Texas impose no taxes or fees.) What kind of impact does that have? Suppose a commercial Boeing 757 burns three gallons of fuel per mile. On a flight from Honolulu to Las Vegas, which is roughly 2,750 miles, 8,250 gallons of fuel are consumed. At 16.1 cents a gallon, that one flight gives our state a little over $1,300 in taxes and fees. Because airlines typically have narrow profit margins, they are quick to pass on to the flying public all taxes and fees in their ticket prices and shipping charges.
Air transportation is very important to Hawaii, especially, as there is lots of water between our shores and any other shores and not only the wealthy have reason to fly. The next time federal and state lawmakers want to ramp up taxes or fees on transportation, we need to have them realize it’s not just a problem for the wealthy; it’s a problem for the rest of us as well.