Some conservatives object to the federally authorized local airport user fee known as the passenger facility charge (PFC) on the grounds that it is a tax. It isn’t. The revenue collected never touches the federal treasury and will be dedicated to statutorily defined airport improvements. Sen. Susan Collins (R-ME) recently secured a provision in the Senate’s transportation appropriations bill, which would increase the first segment PFC maximum to $8.50, up from the current $4.50.
The PFC stands in stark contrast to the federal Airport Improvement Program (AIP), the primary federal airport grant program that is funded by aviation taxes flowing into the federal Airport and Airway Trust Fund. Unlike PFCs, where approximately three-quarters of total revenue is used to service debt, AIP funds cannot be used to back revenue bonds, forcing airports to rely more on the whims of Congress and Federal Aviation Administration bureaucrats and less on their own local investment priorities.
AIP-backed projects also require incumbent airline approval, while PFC-backed projects only require airport consultation with carriers, reducing the ability of largest airlines to game airport investment decisions for their benefit. The vast majority of AIP funding goes to smaller, lower-volume airports and the roles of the PFC and AIP in airport investments are very different: most AIP revenue is used for airside improvements (e.g., runways) while most PFC revenue is used for landside improvements (e.g., passenger terminals).
Most PFC revenue is collected by major airports. Under the law, large and medium hubs imposing the maximum PFC must give up 75 percent of their AIP funding. Airports can impose PFCs of a maximum of $4.50 per enplanement for a maximum of two enplanements per one-way trip. This means that, at most, passengers will be charged $18 per roundtrip. The Collins provision, which would increase the first-segment PFC to $8.50, would allow airports to charge passengers at most $26 per roundtrip.
According to the Bureau of Transportation Statistics, the average airfare charged through the 2017 Q2 was $354, excluding ancillary fees for optional services such as checked baggage. PFCs account for just 5 percent of average airfares and the maximum charge is less than the more than $20 in airline ancillary fees charged to the average passenger.
Unfortunately, the PFC cap was last raised in 2000. Since then, inflation has eroded its buying power by nearly half. Free market organizations including CEI, Reason Foundation, Heritage Foundation, and FreedomWorks have all supported increasing this cap to promote greater airport self-reliance. Airlines oppose increasing the PFC cap, as it reduces their influence over airport modernization and promotes airline competition that reduces airfares. Some conservative groups, such as Americans for Tax Reform (ATR) and National Taxpayers Union (NTU), have opposed raising the PFC cap and reducing federal micromanagement of local airport investments.
In December 2017, in response to an op-ed from NTU’s Pete Sepp, I authored a response highlighting NTU’s mistaken views on the PFC. The Reason Foundation’s Bob Poole, the libertarian movement’s venerable transportation policy guru, also authored a rebuttal to ATR and NTU, which, he said, “continue to sing from the airlines’ hymnal.”
Two weeks ago, NTU’s Thomas Aiello responded to my earlier op-ed. The crux of his defense of NTU’s opposition to the PFC is that it is collected by airlines at the point of sale, rather than by airports. This is true. Airlines collect PFCs and impound estimated PFC revenues, minus collection costs, they must transfer to charging airports every month. Aiello believes the fact that airlines collect PFCs, rather than airports stopping every passenger before they board to swipe their credit cards at a kiosk, somehow makes the PFC less desirable than alternatives, even though such a system would greatly inconvenience travelers. Because of this, argues Aiello, the PFC does not represent a user fee truly free of federal influence.
This is true, but it doesn’t lend itself to NTU’s opposition. The PFC only exists because the airlines convinced Congress to outlaw true local airport user fees in the early 1970s. The PFC was first authorized in 1990 as a narrow exemption to the 1973 Anti-Head Tax Act because Congress and the White House, beginning under President Reagan, became concerned about the federal government’s growing share of airport funding and reduced competition under the status quo. It would have been better to repeal the Anti-Head Tax Act and eliminate federal micromanagement of airport financing altogether, but the PFC served as a middle-ground improvement.
Aiello also objects to the recycling of AIP revenue forgone by airports which impose PFCs. When large and medium hubs charge a PFC of greater than three dollars, 75 percent of their allocated AIP revenue must be returned to the Airport and Airway Trust Fund, which is then used to subsidize smaller airports through AIP’s state apportionment and discretionary funds. Aiello thinks there should be a corresponding reduction in total AIP spending. On that, we agree. But this has nothing to do with the PFC-charging airports and everything to do with AIP and the federal welfare given to small airports.
A bill introduced in 2017 authored by Reps. Thomas Massie (R-KY) and Peter DeFazio (D-OR) would have uncapped the PFC for large hubs, but required airports charging more than $4.50 to return 100 percent of their AIP funds. Most importantly for those concerned about AIP recycling, the bill would have proportionately reduced AIP spending, saving taxpayers hundreds of millions of dollars every year. NTU did not support this bill.
In another recent op-ed, Cato Institute Visiting Fellow Ike Brannon argued against Sen. Collins’ proposed modest increase in the federal PFC cap, where he claims:
Not only are airport revenues growing strongly but airports have found it quite easy to borrow against its future revenues to finance new projects, and lenders have been quite eager to make such investments. There is no constraint keeping most airports from making necessary investments. If anything, we should encourage airports to do more to develop ancillary revenue sources.
Brannon misses the mark when he claims that future airport financing is unconstrained. In fact, the large airports that are currently maxing out on their PFCs are already highly leveraged, as airport debt in recent years has increased more rapidly than passenger volumes. This means without an additional revenue stream from a higher allowable PFC, they cannot issue more bonds while maintaining their investment-grade credit ratings from bond-rating agencies.
Brannon also believes airports should increase their reliance on food and retail concessions revenue, although at less than $2 billion in total annual revenue and thus dwarfed by the PFC and other revenue mechanisms, Brannon doesn’t say how this will provide airports adequate revenue streams to finance improvements. Brannon’s argument is especially problematic given that non-aviation revenue from airports is mostly composed of parking, ground transportation, and rental car revenue, areas that have been hit hard with the rise of ridesourcing companies like Uber and Lyft, according to recent research published by the Transportation Research Board of the National Academies.
Brannon also stands opposed to his colleague Chris Edwards, Cato’s director of tax policy studies, who wrote in a recent Cato study coauthored by Reason’s Poole that “inefficient AIP funding would not be much of a problem except that Congress puts airports in a financial bind by imposing the PFC cap. The cap limits the ability of airports to fund their own improvements, and thus tackle their own growth and congestion challenges independently from Washington” and that Congress:
…should also eliminate the cap on PFCs to allow airports to fund operations through user charges on their own passengers. PFCs are a more direct and transparent revenue source than the AIP program. PFCs and other airport-generated revenues can enhance airline competition by providing funding to build new gates and other facilities to attract additional flights and carriers.
The conservative aversion to aviation taxes is entirely warranted. Unfortunately, several conservatives have lumped the anti-tax PFC together with taxes and opposed increases to the PFC cap, which ironically increases pressure on Congress to increase the very taxes they oppose.