Excise Tax Structure of the U.S. Airline Industry: Evolving Rationale and Economic Considerations

Abstract

New and increased excise taxes on U.S. airlines and travelers have been levied without a thorough examination of the aviation tax structure. The evolution of the tax structure and its rationale is traced, the current tax situation is described, and some implications of aviation taxes from the perspective of commercial airlines and air travelers are explored. Once considered a luxury, air travel first faced taxation to discourage its use during World War II. Rerationalized as user fees in the early 1970s, the taxes became a source of maintaining and improving the airport and airway infrastructure. In the 1990s increased aviation excise taxes have been used to reduce the federal deficit, with secondary arguments for environmental protection. Within each period, the level and scope of taxes fluctuated amidst the industry’s transformation into the dominant public mode of intercity travel. Economic uncertainty, rising congestion, and the prevalence of concentration in many markets should make airlines and travelers more attentive than ever to the tax impact on fares, the dedication of revenues to FAA operations and infrastructure enhancement, and the implications for new entry on unserved or underserved domestic routes. Along with these factors, recent depletion of the Airport and Airway Trust Fund has highlighted the urgency of a comprehensive review of aviation tax policy. Such a review could ensure that the rationale for aviation taxation is consistent with the industry’s current role and that competition does not suffer.