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It's a taxing time for air travelers, researchers discover

Airline passengers are giving an ever-increasing portion of their travel dollars to Uncle Sam, according to data released by MIT's Global Airline Industry Program and Daniel Webster College.

Airline ticket prices overall have actually dropped over the past several years, the researchers emphasize. However, many of the taxes and fees passengers pay, which fund a significant portion of the costs of U.S. air-traffic control and airport systems, are not linked to the base price of the tickets and have remained about the same.

As a result, the effective tax rate on airline tickets is steadily increasing, and will increase more under the Bush administration's recently released federal budget proposal, researchers report.

Which raises the question: Who should pay for the increases? The airlines or U.S. taxpayers?

"The Bush administration's proposed increase in the security fee added after September 11, 2001, has generated strong reactions from the airline industry," said MIT Professor Amedeo Odoni, the project's director. "The increased fees will place further strain on the airlines at a time when several of them are struggling. On the other hand, it is difficult to argue that taxpayers-at-large should subsidize the security costs of airline customers."

Odoni believes that his team's 2004 study and its recent update can add a more factual note to the ticket tax debate. "This study provides an objective basis for Congress to examine the issue and make informed decisions on airfare taxes."

The study team's initial results were published in the July 2004 Journal of Air Transport Management. The U.S. General Accounting Office cited the study in U.S. Senate briefings and in a report submitted to Congress.

After the administration's proposed hike in security fees, passengers would, on average, pay 19 percent in taxes and fees on top of the ticket price, the researchers found in their update of last year's study. In 2004, passengers paid 16.1 percent in taxes on top of the price of a domestic ticket. This is up from 15.5 percent in 2002 and 10.9 percent in 1993.

Professor Joakim Karlsson of Daniel Webster College explains the significance of the study's results: "The airlines have lost the ability to raise airfares, even to just keep pace with inflation. The average round-trip ticket has dropped 40 percent in real terms since 1993. Meanwhile, average ticket taxes and fees have stayed relatively constant at $45 per ticket."

Karlsson adds: "With the total cost of taxes changing only slightly, the relative share of each ticket that goes to taxes and fees has been steadily increasing."

The federal government and airports currently add four types of taxes and fees to the basic cost of each domestic airline ticket. The administration's new proposal increases the security fee associated with passenger and baggage screening by up to $6.

The MIT/Daniel Webster College ticket tax project estimates taxes and fees by analyzing a representative sample of actual tickets sold. "The airline industry usually computes taxes by picking a single 'typical' ticket. That choice usually results in a much higher estimate of the tax impact, and we usually see the airline industry report the tax as 26 percent," Karlsson said.

Shiro Yamanaka, an MIT graduate student in Transportation and Operations Research, is the third member of the study team. MIT's Global Airline Industry Program is funded primarily through a grant from the Alfred P. Sloan Foundation. Partial support for this study was also provided by a gift to the program from Amadeus, S.A.S.

A version of this article appeared in MIT Tech Talk on March 16, 2005 (download PDF).

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