Do Airline Baggage Fees Squeeze U.S. Taxpayers?

The Washington Post reports that the federal air-travel tax intake has fallen below projections, largely due to the fact that airlines are getting more of their revenue from optional fees—like baggage charges—which aren’t subject to the same taxes as airfares.

According to the story, “There’s a 7.5 percent federal tax on every airline ticket. The money goes into a fund that pays for the air transportation system.” That system includes the Federal Aviation Administration (FAA). With airfare revenue staying low while revenue from optional fees rises, there’s reportedly less money going into that fund.

So the implication is that taxpayers are now picking up the tab to support the activities of the FAA. To me, that’s a bit of a stretch.

The story notes, correctly, that the 7.5 percent tax does help fund the FAA. But it ignores the fact that the 7.5 percent tax is only part of the take; the other part is a flat $3.70 per-person assessment for each segment flown. This isn’t affected by the split between fares and fees.

Moreover, the Post argues that the ticket tax funds go to support airports, capital improvements, and the operation of the FAA. But it fails to note that a large share of airport funding comes from separate passenger facility charges (PFCs) of up to—and usually set at—$4.50 per departure.

And, presumably, splitting out fees separately probably increased the overall demand for air travel due to price elasticity.

Would the total tax take be higher under the old pricing regime? Hard to say. And if lost tax revenue is really a problem, baggage, seat selection, early boarding, and other such fees could easily be added to the taxable base.

What’s your take?

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