CEI is a strong supporter of transportation user fees. We prefer tolls over fuel taxes, and local airport user fees over tax-funded federal grants. While there is broad agreement among free market transportation researchers on these points (see Reason Foundation, Cato Institute, and Heritage Foundation on why airport user charges are preferable to broad taxation), some conservatives fail to see the virtues of replacing federal transportation taxes with local user fees. One such group is Americans for Tax Reform (ATR).
CEI and ATR agree on most economic policy issues. However, on the question of the U.S.’s local airport user fee, known as the passenger facility charge (PFC), we are opposed. In the past, ATR has incorrectly claimed raising the federal cap on the PFC, currently set at $4.50 per enplanement, would constitute a tax increase and that the passenger facility charge is an “airport tax.”
Yesterday, ATR sent another letter to members of the Senate Commerce Committee, urging them to reject a possible $2 increase in the PFC cap. This letter is very similar to the one sent to all members of Congress opposing a PFC cap increase in March 2015, with one notable difference: ATR is no longer attempting to spin raising the PFC cap as a tax increase.
As I’ve explained in the past, the passenger facility charge is obviously not a tax:
Unlike taxes—such as those that support the PFC’s primary alternative, the federal Airport Improvement Program—user fees can only be imposed on the service beneficiaries. Taxes, in contrast, do not target the provision of specific services. The primary beneficiaries of airports are the passengers who use them. The PFC funds collected by airports may only be used for a very narrow set of airport improvement projects. Charging passengers a facility user fee that will be used solely for specific, statutorily-defined airport improvements cannot constitute anyone’s definition of a tax. Now, if the PFC revenues pooled by individual airports were suddenly diverted to things that don’t benefit the users who paid them—e.g., paying for food stamps—ATR would have a case.
In the latest letter, ATR continues to claim that airports are flush with cash and that they can borrow more money to finance needed facility enhancements because of their sterling credit ratings. Both of these claims are wrong.
First, the cash reserves ATR claims that airports can spend down are often required by bond rating agencies to maintain those sterling credit ratings. These are emergency rainy day funds, as anyone who runs a business knows should not be used to fund normal and predictable business activities.
Second, the sterling credit ratings can only go so far, as many airports have reached their maximum debt limits and are unable to go to the bond market to finance additional capacity enhancements. These bonds are often backed by PFC revenues, so allowing airports to raise their PFCs will allow them to re-access the debt market and be less reliant on federal tax-supported grants and their airline customers.
But one virtue of the passenger facility charge has repeatedly escaped ATR: PFCs help promote airline competition and lower airfares. Indeed, when the Reagan administration was first developing this proposal in the 1980s, this aspect is what convinced many of their free market economists to support the PFC. The passenger facility charge was first formally proposed in the George H.W. Bush administration’s 1990 National Transportation Policy, known as Moving America.
Dr. Fred Singer, who was chief scientist at the Department of Transportation during the Reagan administration, explained this dynamic in a 1990 Cato Institute publication:
To increase revenue for airports, Moving America proposes legalizing the right for airports to collect passenger facility charges. Under this recommendation airports could charge a head tax for passengers who either depart from or arrive at an airport. The funds generated would then be used to expand the airport, increase landing capacity, or improve the airport's amenities. This revenue would also make airports less financially dependent on their tenant carriers and would encourage them to provide more facilities for new carriers, a significant benefit that the document ignored. Competition at airports that are dominated by one or two carriers could thus be enhanced.
This point cannot be overstated. Due to the federal government’s stranglehold on local airport financing, airports must often turn to their airline customers to complete needed facility expansions and other enhancements. In return for their financial support, airlines demand that airports grant them long-term exclusive-use gate leases. These leases are then used to prevent competing airlines from obtaining necessary gate access and this lack of competition results in higher airfares. Brookings Institution transportation economist Cliff Winston and Steve Morrison, chair of Northeastern University’s economics department, found limited gate availability at airports results in airfares being $4.4 billion higher annually (2005 dollars). That figure dwarfs ATR’s past claim that a near-doubling of the PFC “represents a $2.8 billion annual tax increase (sic) on air passengers.”
So, while ATR is still misguided when it comes to the passenger facility charge, at least they appear to now reject their previous incorrect claims that raising the PFC cap constitutes a tax increase. We hope they continue to evolve toward the free market position on this issue.