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Published on : Thursday, December 17, 2015
U.S. tax law permits corporations, even those that have discharged their debts and wiped out losses through Chapter 11 bankruptcy, to carry-forward net operating losses (NOL) to offset future earnings and thereby eliminate or reduce tax liability. Based on earlier years of unprofitable operations, U.S. major network carriers have used huge NOL carry-forwards to eliminate tax liability on the record profits that they have earned more recently.
Now that NOL carry-forwards are nearly exhausted, and record profits continue to roll in, news accounts indicate that Delta Air Lines will soon announce some form of tax avoidance plan such as the creation of an offshore holding company for its international operations and joint venture assets. The purpose would be to funnel income to countries with lower or no corporate taxes, thereby paying taxes to a foreign government, not the U.S. Treasury. Of course, Delta gladly accepts taxpayer monies from the U.S. Treasury that flow into the Airport and Airway Trust Fund – a direct government subsidy to airlines – to cover Federal Aviation Administration (FAA) shortfalls.
Delta will likely insist it is being forced to seek a foreign tax haven in part due to the “excessive and discriminatory” sin-tax burden U.S. government unfairly imposes on airlines. Indeed, according to a November 9, 2015 Airways News analysis: “…there are a series of aviation specific taxes and fees that combine to elevate the tax burden on US airlines to almost a “sin tax” like those faced by tobacco or gambling/casino companies. These range from taxes on jet fuel, to excise taxes on airline tickets (7.5%), to various fees imposed by the Department of Homeland Security (DHS) to help fund the Transportation Security Administration (TSA). What this all works out to is that an average to 20-25% of what passengers pay for a plane ticket is taxes or fees paid to the government, while airlines pay an effective tax rate (taxes net of any deductions or credits) of roughly 38%.”
The problem is that airlines are plying a self-serving storyline based on invented data.
– Airlines fight hammer and tongs an increase in passenger facility charges with grossly misleading claims while the competitive gap between U.S. airports and modern foreign airports widens and U.S. airlines offer no coherent alternative with respect to financing FAA operations and investment programs.
– Airlines state that taxes and fees on a “typical” round-trip domestic U.S. airfare of $300 in 2014 amounted to $63 dollars, or 21%. This example inflates taxes on “typical” fares by selectively constructing multi-segment itineraries to maximize segment fees, security fees and PFCs and deflates the top airfare-revenue number by choosing a substantially lower-than-average round-trip airfare and, importantly, by ignoring ancillary fees and airline surcharges.
– The average domestic U.S. round trip airfare through the 3rd quarter of 2014 was $391. Using airlines’ $63 taxes-and-fees number with the average DOT airfare drops the tax percentage to 16%. A Philadelphia-to-Miami non-stop itinerary, priced near the DOT 2014 average airfare level, drops the taxes and fees on a $388 round-trip ticket amount to $47.54, or 12%.
– U.S. cigarette taxes as a percentage of the average retail price is 44.2%. Taxes accounted for 54% of the average price for a 750ml bottle of 80 proof distilled spirits in the U.S. in 2012.
– Referenced “sin taxes” flow into general government tax revenue accounts while taxes and fees in the airline industry typically pay for government aviation services used and aviation infrastructure investment that benefit airline shareholders.
– The three biggest charges – excise, flight segment and passenger facility charges (PFCs) – are not airline burdens at all; passengers pay them directly.
– U.S. aviation system participants have chosen to pay for federally provided air traffic management (ATM) services through a series of ticket surcharges, unlike what almost every other industrialized country has chosen – specific fees for specific ATM services paid out of airlines’ operating budgets.
Since the U.S. major network carriers secured their antitrust-immunized alliances and joint ventures, and consolidated the domestic-U.S. industry, they have been shamelessly leveraging new found market and political power to (1) reduce airfare and fee transparency, (2) undermine the U.S. DOT’s consumer protection authority and (3) block foreign carrier competitive entry. We can now add to the list misleading the press, public and government on airline tax burdens.