Airline Ticket Taxes: The Ticket Tax Project

MIT| MIT Global Airline Industry Program | DWC

The Ticket Tax Project

MIT/Daniel Webster College

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Introduction

The Ticket Tax Project is run jointly by the MIT Global Airline Industry Program and Daniel Webster College. Our aim is to measure both the amount and characteristics of taxes and fees added directly to airline tickets. We do this by analyzing actual ticket records. The project is studying both the U.S. and the European Union (EU).

Summary of ticket taxes for U.S. domestic flights

The table below summarizes average ticket taxes on U.S. flights within the 48 contiguous states. This is based on our analysis of the USDOT Origin and Destination Data Bank 1A Ticket Dollar Value Survey (DB1A). For an exact description of our methodology, please refer to our paper The impact of infrastructure-related taxes and fees on domestic airline fares in the US, published in the July 2004 issue of the Journal of Air Transport Management.

U.S. Domestic Ticket Taxes
Date	Category	Tickets in sample	Base fare	Taxes & fees	Total fare	Tax rate	FTT	FST	PFC	FSSF	Seg.
2Q93	Overall	3,335,064				10.9%
	Round-trip	2,164,162	$340.32	$37.02	$377.34	10.9%	$34.03		$2.99		2.7
	One-way	1,170,902	$105.79	$11.63	$117.41	11.0%	$10.58		$1.05		1.2
2Q02	Overall	4,280,892				15.5%
	Round-trip	3,559,912	$277.84	$44.06	$321.90	15.9%	$20.84	$7.95	$8.64	$6.63	2.7
	One-way	720,980	$204.81	$26.53	$231.34	13.0%	$15.36	$3.85	$4.12	$3.20	1.3
2Q04	Overall	4,852,779				16.1%
	Round-trip	3,893,783	$268.29	$44.25	$312.54	16.5%	$20.12	$8.06	$9.58	$6.50	2.6
	One-way	958,996	$182.97	$25.60	$208.58	14.0%	$13.72	$3.96	$4.72	$3.20	1.3

The next table shows the same results, but here the values for 1993 and 2002 have been inflation adjusted to 2004 dollars using the consumer price index (CPI). This makes for a better comparison of fare and tax levels (but has no impact on the effective tax rate). The gradual increase of the effective tax rate from 10.9% to 16.1% is largely due to the drastic reduction in the base fare (a 40% decrease since 1993). Total taxes and fees have remained relatively constant in real terms (and even dropped from $48.40 to $44.25 for round-trip tickets). A simple analysis shows that, had the base fare remained the same as in 1993, the effective tax rate in 2004 would have been 12.9%, everything else being equal.

U.S. Domestic Ticket Taxes – Inflation Adjusted to 2004 Dollars
Date	Category	Tickets in sample	Base fare	Taxes & fees	Total fare	Tax rate	FTT	FST	PFC	FSSF	Seg.	CPI
2Q93	Overall	3,335,064				10.9%						144.5
	Round-trip	2,164,162	$444.89	$48.40	$493.29	10.9%	$44.49		$3.91		2.7
	One-way	1,170,902	$138.29	$15.20	$153.49	11.0%	$13.83		$1.37		1.2
2Q02	Overall	4,280,892				15.5%						179.9
	Round-trip	3,559,912	$291.74	$46.26	$338.00	15.9%	$21.88	$8.35	$9.07	$6.96	2.7
	One-way	720,980	$215.05	$27.86	$242.91	13.0%	$16.13	$4.04	$4.33	$3.36	1.3
2Q04	Overall	4,852,779				16.1%						188.9
	Round-trip	3,893,783	$268.29	$44.25	$312.54	16.5%	$20.12	$8.06	$9.58	$6.50	2.6
	One-way	958,996	$182.97	$25.60	$208.58	14.0%	$13.72	$3.96	$4.72	$3.20	1.3

We have also completed a simple analysis of how the recently proposed $3 increase of the federal security fee would impact the effective tax rate. The impact depends on how much of the tax is absorbed by the air carriers and how much by the passengers. Consequently, we have looked at two cases: One where the passengers absorb the entire increase and another where the airlines absorb all of it. We believe that these represent reasonable lower and upper limits on the resulting tax rate. This analysis is shown in the table below (note that it disregards any effects of the tax hike on demand or supply).

U.S. Ticket Taxes – Analysis of Proposed Security Fee Increase
Case	Category	Tickets in sample	Base fare	Taxes & fees	Total fare	Tax rate	FTT	FST	PFC	FSSF	Seg.
Original 2Q04 results	Overall	4,852,779				16.1%
	Round-trip	3,893,783	$268.29	$44.25	$312.54	16.5%	$20.12	$8.06	$9.58	$6.50	2.6
	One-way	958,996	$182.97	$25.60	$208.58	14.0%	$13.72	$3.96	$4.72	$3.20	1.3
Pax absorb FSSF increase	Overall	4,852,779				18.3%
	Round-trip	3,893,783	$268.29	$50.25	$318.54	18.7%	$20.12	$14.06	$9.58	$6.50	2.6
	One-way	958,996	$182.97	$28.60	$211.58	15.6%	$13.72	$6.96	$4.72	$3.20	1.3
Airlines absorb FSSF increase	Overall	4,852,779				18.7%
	Round-trip	3,893,783	$262.29	$50.25	$312.54	19.2%	$20.12	$14.06	$9.58	$6.50	2.6
	One-way	958,996	$179.97	$28.60	$208.58	15.9%	$13.72	$6.96	$4.72	$3.20	1.3

Our results do not take into account what the equilibrium fare would have been in the absence of taxes. However, given that total taxes and fees have remained relatively constant in real terms, it is almost certain that the taxes themselves do not account for the drop in fare levels.

Terminology

Base fare	BF	Airline fare without any taxes applied
Federal ticket tax	FTT	U.S. value added tax (currently 7.5% of base fare), used to fund FAA operations and the Airport Improvement Program
Federal segment tax	FST	U.S. tax applied per segment (currently $3.30), used to fund FAA operations and the Airport Improvement Program
Passenger facility charge	PFC	U.S. "head tax" collected and used by specific airports (currently $0, $3, or $4.50), used for airport improvement projects
Federal security service fee	FSSF	U.S. security tax (currently $2.50), used for passenger and baggage screening
Total taxes and fees	TTF	U.S.: The sum of FTT, FST, PFC, and FSSF EU: The sum of all applicable national ticket taxes
Total fare	BF+TTF	The sum of the base fare and the total taxes and fees; this is what the passenger actually pays, except that most travel agents also charge a service fee
Effective tax rate	ETR	Total taxes and fees expressed as a percentage of base fare (= TTF / BF x 100%)
Notes: Special tax rules exist for Alaska, Hawaii, and rural airports in the U.S. Additional taxes apply for international travel to and from the U.S. PFC and FSSF are collected each time a passenger boards, except that no more than two collections are made for each direction of travel. There is no limit on the collection of the FST.

01/30/2006