We teach our children words matter—both in their intent and their actual use. Unfortunately, many grow up to become politicians or bureaucrats adept at manufacturing euphemisms that hint at what they really mean but don’t want to admit. Can you count the times you’ve heard “investment” stand in for government spending? Today it’s no different when both Republicans and Democrats impose new taxes and call them “fees.”
Yet, there is a genuine difference, and it goes beyond nomenclature.
When we use a government service and pay for it, we pay a user fee. Ideally, the amount paid covers the cost of the service received. If we don’t get what we paid for, or the fee is unavoidable or redirected elsewhere, then that “fee” is really a tax.
Transparency is an integral part of the price system in a genuinely free market (witness the havoc caused in the U.S. health care system from true costs being hidden from consumers). Government, unfortunately, prefers taxation because it obscures costs and targets benefits to favored constituencies. Thus, user fees are an option in only in a few public sector areas.
Genuine user fees convey to the citizenry that nothing from government is truly “free.” So, the more government finances itself through user fees instead of taxes, the more it begins to resemble private firms operating in free markets.
But why would it want to do that!?
Instinctively, there is certain fairness about true user fees. You get what you pay for, and you pay for what you get. User fees for toll roads, bridges, harbors and waterways, parks and recreational facilities, and, yes, even airports make intuitive sense. If we understand that private enterprise would do a better job with these things, we understand that a user fee approach for government services allows us to make rational economic choices: Buy it if it’s worth the price, patronize an alternative, or do without.
At the moment, Congress is considering a change in what may be one of the few remaining user fees out there, the passenger facility charge (PFC), which has been around for the last two decades—an era marked by more accessible and more affordable air travel.
The concept of PFCs was first tried more than 40 years ago, when an Indiana airport authority decided to raise revenue for improvements by charging one dollar for each passenger leaving its airport. Delta Air Lines and other carriers sued, alleging the fee violated the Constitution’s Commerce Clause. In 1972, the U.S. Supreme Court ruled in favor of the Evansville airport authority, but the airlines appealed to Congress, which passed a law explicitly outlawing passenger user fees.
In 1990, Congress authorized PFCs, subject to myriad conditions and Federal Aviation Administration–approved uses. It permitted airports to charge up to three dollars per passenger. In 2000, this cap was increased to $4.50, where it remains today.
Since the PFC cap was raised to $4.50, inflation has eroded its buying power by 50 percent. To remedy this, airports and those in related businesses are calling for increasing the PFC cap to $8.50 and indexing it to inflation. Congress will debate this during the upcoming FAA reauthorization bill. The Obama administration supports increasing the PFC cap to $8.
Airlines understandably do not want to face additional charges, but travelers should welcome transparent and direct user charges. Airports collect the fee and use the proceeds to improve the airport. The federal government, apart from its regulations on approved uses and maximum charges, is largely removed from PFC administration. There is no complex tax collection and funding apportionment sausage works in Washington, D.C., doling out PFC funds. What the airport charges the airport keeps.
The PFC also offers an important investment signal. Charges and the resulting revenues are based on user volume, so popular airports benefit the most. Expansion and improvement plans based on PFC revenue projections can help airports get a handle on needed future investments.
One day, Congress may be able to distinguish between a fee and taxes—one provides a specific service used by those paying the fee; the other is, quite frankly, nothing more than legal theft.
And that’s not nomenclature. It’s exactly what I meant to say.