Each year the Government Accountability Office (GAO) identifies the top management challenges facing the U.S. Department of Transportation. Readers of this blog will not be surprised that GAO has enumerated a series of financial challenges for surface transportation, including the mismatch between infrastructure needs and available resources. Less publicized, but equally problematic in the long-term, are aviation's funding issues. Here is what the GAO has said about the Airport and Airway Trust Fund:

" ... continued declines in Trust Fund revenues may require Congress to reduce spending on FAA operations and capital projects, increase revenues for the trust fund by introducing new fees or increasing taxes, or increase FAA's funding provided by the General Fund" (GAO 09-435T).

The AATF, together with taxpayer dollars, pays for the capital and operating costs of the air traffic control system, a portion of airport infrastructure (a large percentage at smaller airports, a small percentage at larger airports) and a modest amount for research.

Spending: Over the last decade, the FAA's budget has grown approximately 40%. With government and industry pushing for NextGen, the modernization of the nation's air traffic control system (a series of initiatives projected to cost somewhere in excess of $20 billion), it is hard to conceive of any proposal that is going to reduce the growth of the FAA budget in a way that would address GAO's concerns. The best prediction is that the FAA's budget will have to grow by at least as much as it has the previous decade.

Tax Issues: The air carriers unbundling and tax avoidance strategies are likely to accelerate given the IRS decision and given that it is the one area where they have been able to effectively generate new revenue. For all of the illogical and perverse ways that air travel is taxed (see Bob Poole's post), to this point members of Congress have demonstrated a consistent and short-sighted unwillingness at addressing the ways in which that travel is taxed and the sufficiency of the monies generated by taxes. I have no doubt that Jim May and his members still feel burned from the effort of the previous administration to reform the tax structure.

Taxpayer Support: Taxpayers pick up anywhere between 15% and 30% of overall FAA costs. It is really determined by the amount of money required to bridge the gap between the overall FAA budget and the amount of AATF taxes available during any one year. This "process" is inadequate for multiyear planning, especially as the FAA will be embarking on a series of new infrastructure investments that form the backbone of NextGen. In this restrictive budget environment--where new spending must be offset with tax increases or spending reductions--it is unrealistic to expect that taxpayers will make up for the structural AATF shortages and pay the costs of NextGen. Advocates should remember that aviation dollars come from the same appropriations allocation as highways, transit and rail, which if anything are experiencing an even greater mismatch between identified needs and available resources. In this hyper-competitive environment, aviation interests will be fortunate just to keep the taxpayer assistance they have, let alone increase it dramatically.

The Future: With costs increasing dramatically, the portion of air fares subject to taxation dropping, and taxpayer dollars insufficient to fill the funding gap, aviation finds itself with an uncertain future, one where government and industry's top priority--NextGen--is largely unfunded . For the next couple of years the FAA can continue to muddle through, but eventually industry and government policymakers will have to tackle the difficult tax issues.

As with so many of the issues identified in this blog, the real issue is leadership. Will industry and policymakers step forward, set common purpose, and enact reforms to fund our aviation system? Or will we muddle through, suboptimize and again fail to deliver on our promises? All of us have a responsibility and each of us should act like it.

Airlines, in a deregulated system, certainly have wide latitude in how they charge their passengers. They have the right to charge fees till kingdom come ($120 per person round trip to check two bags along with $60 roundtrip per person in “peak air travel surcharges” to fly during the summer certainly gets one at least part way to kingdom come). The IRS has ruled that the majority of these fees are not subject to the ticket tax that funds the aviation trust fund, and I certainly figure that the folks in the airline executive suites calculated this when the fees were developed. It is not a shock that it all goes to the bottom line. Fine. But moving away from a fare-based system and toward a fee-based one raises at least a few policy questions.

First of course is the impact on the Airport and Airways Trust Fund. Airline executives profess interest in air traffic control modernization and decry inadequate infrastructure when it suits their needs. But this development will ensure the bankruptcy of the trust fund, and soon. Something must be done.

The second issue one can observe first hand at airports where Southwest, which does not charge a bag fee, has a large presence. Throughput at the checkpoint leading to Southwest gates is far higher than at other checkpoints. This stands to reason as more bags are carried on other airlines and they are packed much more tightly. This slower throughput puts a strain on TSA resources, and on airport infrastructure. Something must be done.

Third, if it is ok for airlines to charge whatever fees they want, including for a blanket or pillow, why is it not ok (in the airlines’ minds) for the airport to be able to charge a fee to pay for infrastructure? This one really boggles the mind. Airlines like to say that they (the airlines) can‘t stand any further burden from taxes and fees. But ATA itself, in its post to this very blog, admits that it is passengers who pay these fees, not the airlines. PFC’s are USER fees.

Is there anyone out there who seriously doubts that people would rather pay an extra $2.50 for a more passenger-friendly terminal or for additional runways or taxiways that reduce delays, rather than $25 or $35 to bring some clean clothes on a trip, a “privilege” most travelers figure they should have anyway?

Greg Principato

President

Airports Council International-North America

The question asked in the first sentence of the blog post, “Should airlines be taxed on all those fees they charge passengers?” contains a common misconception about the taxes applicable to airline tickets. The law provides that the taxes “shall be paid by the person making the payment subject to the tax.” In other words, if Congress wants to impose a tax – they will be raising taxes on the passenger, not the airline – so it is the flying public who will bear the burden of higher taxes and fees. Given the belt-tightening and financial strain that families and businesses already are under, a tax on passengers would be unwise. The industry and our passengers already pay more than $16 billion annually in U.S. taxes and fees. We see no need to increase that burden.

The controversy over whether airline ancillary charges should be included in the “fare” subject to the airline ticket tax illustrates the irrational nature of the current system of paying for aviation infrastructure.

The federal airline ticket tax (and segment fee) is the principal source of funding for the Aviation Trust Fund. That fund was created by Congress to pay for the costs of the U.S. air traffic control (ATC) system and to provide funding for the federal Airport Improvement Program (AIP), which provides grants for airport capital improvement projects. ATC is the primary user of these monies.

The ticket tax is a percentage of the ticket price, however defined. Even before the ancillary-charge controversy, this so-called user-tax bore little relationship to use of either airport or ATC infrastructure. In terms of the ATC system, a large airliner like a Boeing 777 uses the identical ATC services as a small regional jet. Yet the ticket tax revenue generated by a 777 flight is many times that of the RJ.

The issue of ancillary charges makes this bizarre user tax even more ridiculous. Consider only a single type of airliner, say the Airbus A320, used by high-fare legacy carriers and low-cost carriers, alike. If United charges a bundled $300 fare that includes carry-on bags, a minimal snack, pillows and blankets, etc., it will pay $22.50 per passenger via the 7.5% ticket tax. But if Spirit charges $150 for a flight of the same length but includes $70 in ancillary fees, Spirit will pay just $11.25 per passenger. But Spirit will receive exactly the same ATC services for that flight.

No other developed country pays for ATC services in this way. All but a handful of banana republics and island mini-states charge ATC user fees, which are almost always based on the length of the flight and the aircraft’s weight. So an A320 pays the same amount for ATC services, regardless of what kind of pricing structure its airline uses.

Given the irrational ticket tax system now in place, it would make sense to broaden the definition of “air fare” for ticket tax purposes, so that all carriers are charged on the same basis. But longer-term, the United States is long overdue to shift to the global system of paying for ATC based on usage of that system, rather than on the basis of ticket prices.