No FAA Authorization Means No Airline Taxes. Predictably, Flyers Still Get Screwed.

Since the members of Congress are busy freaking about at the debt ceiling and light bulbs and some other stuff, they haven't managed to extend authorization to keep the Federal Aviation Administration (FAA) running. Which means there's no one behind the till to collect the taxes that inflate the price of an airline ticket—including the 7.5% excise tax on domestic airfare, the $3.70 federal charge per flight segment and the $16.30 tax on international arrivals and departure. That's $25 million a day in federal revenue forgone as of Friday.

Gizmodo calculates that passengers should be saving $25 to $50 on their tickets. You knew there was going to be a but, right?

As of Saturday, the FAA and federal government is losing out on $25 million a day in tax revenue,…which should technically result in consumer savings but instead is fattening the pockets of airlines. In anticipation of these airfare taxes expiring, airlines shrewdly bumped up their fares "by the same amount as the federal taxes". That means even though there are no taxes for consumers to pay, consumers all still paying the same price as before (with the airlines taking all the 'tax' money).

Bonus: Airlines are refusing to say that they will lower fares again when the taxes kick back in!

Actual bonus: Greg Mankiw explains the economics of who pays airline taxes here. 

Comments

[Truth Will Out]

That's your free market in action, libs. Screwing over the common man in the middle of summer travel season, instead of being custodians of the money until such time as the government is able to restore funding to this crucial component of its duties.

[Old Mexican]

Re: Truth Will Out,

That's your free market in action, libs.

Exactly. Whanna make something out of it?

Screwing over the common man in the middle of summer travel[...]

Yes, yes... Supply and Demand, Scarcity... Humbug! Laws of economics don't mean a thing to a lib! Just like the law of gravity means nothing to a glue sniffer!

instead of being custodians of the money [!!!!] until such time as the government is able to restore funding to this crucial component of its duties.

Ha ha ha! Oh, that was funny!

Oh. My. God. You're being serious!

HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA !!!!!

By the way, airplanes fly because of thrust and lift, you idiot - not because of government.

[Colin]

By the way, airplanes fly because of thrust and lift, you idiot - not because of government.

Obama will change this in his second term.

[Bergman]

I bet he'll command the tide not to come in as well.

[Zeke Hyle]

Tide ebbs, tide flows. You can't explain that.

[Old Mexican]

(By the way, my last witty rejoinder above is similar to one originally created by Episiarch. I use it here as tribute to him and also because I do not believe that IP is real property. So there. Thanks!)

[MikeP]

No, it's supply and demand in action.

Have you been on many empty planes lately? I haven't either. Which means the airlines essentially can't pass the savings to the consumer.

In the long run the consumer would share in the windfall, but this situation could be very temporary indeed. Not worth it for the airlines to increase seats (and costs!) if the tax returns next week.

[Gibby]

Even more so, It's an example of business increasing their profit in tandum with removing government taxes.

It increases their profit, which benefits employees, shareholders and the people who benefit when airlines are in a position to increase their investment capital.

As of Saturday, the FAA and federal government is losing out on $25 million a day in tax revenue

Just think about it, that's $25 millon a day that isn't going down a black hole (e.g., Anthony Weiner's pension and benefits). It works ot to $9 billion/year.

[Mo]

If the plane if empty, they just cancel the flight. I've been on plenty of flights with empty seats.

[Appalachian Australian]

Load factors are above 80% lately.

The only empty flights you'll find are in EAS markets where the government pays to fly empty planes to towns in the middle of nowhere that have an influential congressman.

[MikeP]

Ah, yes. I meant planes with empty seats.

And, indeed, I am aware that "I'm always on full planes" is a supreme example of selection bias. Nonetheless, airlines are getting better and better at discriminatory pricing and consequently filling more and more of their seats.

If airlines drop their prices to match the temporary tax windfall, they will have a lot of unhappy customers who couldn't get seats.

[Brett L]

I'll bet the airlines still can't turn a profit.

[Old Mexican]

In anticipation of these airfare taxes expiring, airlines shrewdly bumped up their fares "by the same amount as the federal taxes".

"Shrewdly"? And here I thought that the purchase of an airline ticket was a voluntary thing.

I for one choose not to fly - unless, of course, the company pays.

[Tonio]

the members of Congress is busy

Grammar fail, KM-W.

[sloopyinca]

Passengers. Double fail.

And I will still try to buy all of my airline tix for the rest of this year during the shutdown. I would much rather the extra coin go into the pockets of a business than into the pockets of the FedGov.

If they keep their fares high after the taxes kick back in, I will not buy tix unless absolutely necessary until fares drop.

[Joe M]

It's the royal "is", man, the editorial.

[Ebo]

Raaacist!

[Ken Shultz]

I read that as tongue in cheek.

Like "teh gay".

Whenever you refer the governments, failing teh grammars on purposes is a tongue in cheek jab at said guvernmints--who be smart.

"the members of Congress is busy"? Of course they is!

[35N4P2BYY]

I read it as "The Congressman's member is busy." Maybe I am just a perv.

[David Wu]

I'm sorry... that I got caught.

[Paul]

I guess I'm a little confused here. But off the cuff, why wouldn't the Airlines keep their fares to the level of the taxes they'd normally pay?

We have dozens of examples where government had some technical hitch in their ability to collect taxes but always came back after the fact and retroactively demanded all the taxes the government failed to collect, with interest and penalties.

[sloopyinca]

IIRC, they have no regulation in place that calls for a tax to be collected. It's not just that their ability to collect has stopped, the legislation or regulation that allows the collection of the tax has expired.

The only way for them to go back and collect a tax would be for them to retroactively pass a law, and I can't see that happening.

My question is: why aren't the Tea party republicans screaming about this as what happens when a part of government is shut down? I've yet to see a single plane fall from the sky and have not heard of a single problem in an airport's operations that deems the FAA necessary during this shutdown. Fuck em. Send them all permanent pink slips.

[Paul]

IIRC, they have no regulation in place that calls for a tax to be collected. It's not just that their ability to collect has stopped, the legislation or regulation that allows the collection of the tax has expired.

If you've spent any time on Reason, I think we could probably find at least several examples of retroactive legislation.

[sloopyinca]

I can't remember any type of retroactive legislation that allowed for a tax to be collected from a previous time where there was no law or regulation in place.

I sure hope I'm right on this. Anyone?

[Paul]

Congress was attempting to make the estate tax retroactive in 2010, I don't think it passed. Lots of states have enacted retroactive taxes, I'm still searching on Feds.

Hmm, here's Bill Clinton's deficit reduction act which retroactively raised the estate tax.

http://articles.chicagotribune.....o-executor

[Imp of the Perverse]

While we're at it, let's lay off all the air traffic controllers too! Let the free market decide when and where each plane should land!

[sloopyinca]

If you want to lay off a bunch of dumbasses that sleep, fuck, watch movies and play nintendo on the job, why just stop at the air traffic controllers?

[yonemoto]

we'd have to go after the Reason commentariat!

[sloopyinca]

Totally uncalled for. I have never played nintendo while on the job, I'm a PS3 guy.

[tarran]

Hmm, you know, if the FAA ATC goes MIA, I'm sure the airlines could work out the complicated task of kicking in some money to start their own ATC system to prevent their planes from crashing into each other.

[Old Mexican]

Re: Imp of the Perverse,

While we're at it, let's lay off all the air traffic controllers too! Let the free market decide when and where each plane should land!

Yes, the free market can already do this - it's called computers, invented way back when.

Only GOVERNMENT would keep fattened, sleepy assholes in front of clumsy and obsolete machinery just to do a job a computer can do. Or a pilot.

[wylie]

The only way for them to go back and collect a tax would be for them to retroactively pass a law, and I can't see that happening.

Is there something wrong with your eyes?

[Old Mexican]

Re: Paul,

I guess I'm a little confused here. But off the cuff, why wouldn't the Airlines keep their fares to the level of the taxes they'd normally pay?

Indeed, and people who accuse the airlines of gouging do not understand economics at all or are incapable of understanding, case in point: Mr. Truth Will Out above.

First, the price is whatever the CONSUMER pays. It is NOT set by the producer, but by the market.

Second, the taxes do NOT change the truism above. If the consumer is willing to pay $100 for an airline ticket, and the taxes make up $10.00 of that ticket, the airline cannot simply raise the price to $110.00 to cover the added taxes as he has to compete with others. That means the producer is made to absorb the tax himself.

So the airlines are NOT REALLY RAISING THE PRICE FOR THE TICKET. There are no savings! There never were. They are simply charging the price THE CONSUMER WAS WILLING TO PAY in the beginning!

[CraterMaker]

Not trying to throw a monkey wrench into this, but how does OM's second point above square with the "Corperations pay no taxes, they pass them on to the consumers" meme?

[Old Mexican]

Re: CraterMaker,

Not trying to throw a monkey wrench into this, but how does OM's second point above square with the "Corperations pay no taxes, they pass them on to the consumers" meme?

Only if and when they can get away with it, Crater. The consumer is sovereign; it is the consumer that sets the price, not the producer. This is why many companies actually drop some products or go out of business (or are driven out of the state) when government imposes new taxes.

While that meme is many times used by conservatives that pay lip service to "smaller government" and such, the fact is that not all taxes can be passed to the consumer, as that thinking presupposes consumers do not change their habits at all, which you and I know is not true.

[Tncm]

This depends on the relativity elasticity of the supply curves and demand curves in the market.

If the demand curve is generally inelastic then an increase in taxes can be safely passed along to consumers via higher prices without firms losing too large of their customers base.

If the supply curve is generally inelastic then the producers will "eat" the tax increase by either maintaining current output at a reduced profit or slightly decreasing the output of the good being taxed.

More often then not consumers and producers share the pain.

[Ken Shultz]

"We have dozens of examples where government had some technical hitch in their ability to collect taxes but always came back after the fact and retroactively demanded all the taxes the government failed to collect, with interest and penalties."

Excellent point.

Just because the taxes weren't collected doesn't mean they weren't due.

And there's no reason to think the FAA won't come back and collect them in the future. Just because the County Clerk got furloughed doesn't mean you don't have to pay your property taxes.

[Ken Shultz]

"Airlines are refusing to say that they will lower fares again when the taxes kick back in!"

I don't get why airlines (or any other industry) exercising their pricing power is something we need to worry about.

Profitable companies are a good thing for the economy. Squandering what would be company profits on ineffective government through taxation is a bad thing.

I prefer sales taxes to any other form of taxation, but generally speaking I'd prefer my money went to the airline industry rather than the federal government.

[Colin]

The free market will correct this soon enough.

All it takes is for one enterprising airline to see an opportunity to grab market share, and lower its price.

[Almanian]

What is this "free market" of which you speak? The idea intrigues me.

[PersonalJustice]

If only he had a newsletter you could subscribe to.... MARKET FAILURE!

[ClubMedSux]

I'm actually surprised Southwest hasn't jumped on that yet. Seems like their M.O. is using opportunities like these to grab market shares (see, e.g., their refusal to charge for bags when everybody else jumped on that bandwagon).

[Imp of the Perverse]

It turns out corporations don't pass the savings onto consumers when they don't have to pay a tax.

Who could've known!?

[Old Mexican]

Re: Imp of the Perverse,

It turns out corporations don't pass the savings onto consumers when they don't have to pay a tax.

There were no savings to give, the tax was hiding the fact that the airlines were eating that cost. You're being just another economics ignoramus like your good friend Truth Will Out above.

[Almanian]

Da Troof will have us all on Burrett Tlains soon enough, OM. Just you wait - HIGH SPEED RAIL WILL SUPPLANT THE AEROPLANES, AS SURE AS THE SUN RISES!

[cynical]

People who understand economics? Consumers have already indicated that they accept the post-tax price, so why wouldn't an airline offer that? If one of them sees an opportunity to undercut their competitors, they have more room to do so now, but it won't happen overnight.

[omg]

Perhaps someone more "in the know" will correct me, but technically the price should go down (in the long run) based on the slope of the demand curve of airline tickets. If the price of airline tickets is elastic the tickets should go down quite a bit, if the price is inelastic than the price will not change as much. This would only happen in the long run, though, so the change might not be immediate.

[Devil Inchoate]

Why would the price go down? Has the lack of a tax made demand fall? Have more airplane seats magically appeared?

[ClubMedSux]

Well, the lack of a tax means more money for the airlines. One possibility is that they pocket the cash. The other is that they reinvest it in more flights at a slightly lower cost, thereby increasing demand and making a larger net profit even if the per-ticket profit is down.

[Almanian]

Is this why we can't have nice things?

[R C Dean]

Given the disconnect between when tickets are purchased and when they are used, and my (and others) total lack of knowledge about when the tax is imposed (on sale? on use? quarterly, on the airlines ticket revenues for that quarter), I'm not even sure that tickets sold as of today aren't subject to the tax, either entirely or to some degree.

But this has never been the place to let facts (or the lack of same) get in the way of a good snark.

[J_L_B]

If people were willing to pay this price WITH the tax, why would they change their behavior without it.

Stupid tax incidence and inelastic demand, how do they work?!

[Bar Student]

I'm more concerned with how worthless my dollars will be when I arrive in Europe in two weeks. I suppose its worth it for the legal pot before that too is taken away.

[ClubMedSux]

A question for everybody out there who smokes pot (since I don't): what is the attraction to legal pot in Amsterdam? Is it better? Is there a novelty factor to smoking in public? I only ask because it seems to me that anybody who wants pot can readily obtain it here in the U.S.

[Kristen]

For me, it would be filling out my security clearance paperwork. I could honestly say I have not used any illegal drugs in the last 6 years.

But I wouldn't fly to Amsertdam just for a toke.

[l0b0t]

The price of weed in The Netherlands is roughly on par with the price in NYC $10-$30 per gram depending on the quality. However, in NYC a nice fellow on a bicycle brings it right to your doorstep while in A-dam, you must visit a coffee shop. The appeal, for me anyway as I have family there so we visit A-dam regularly anyway, is the ability to walk around holding and/or smoking without fear of a truncheon clubbing from the thugs of the NYPD. Yes, yes, I know technically it is still illegal to smoke outside the confines of the coffeeshops but I have NEVER, NEVER been hassled for smoking in public by Dutch politie (They tend to save their aggression for the British, I have seen some brutal beatings handed out to football hooligans.)

[Ol' Liberal]

-- so, the moral of this story is that, no matter what, libertarian economics don't actually make anything better for anyone? Good to know.

[Old Mexican]

Re: Ol' Liberal,

so, the moral of this story is that, no matter what, libertarian economics don't actually make anything better for anyone?

Uh? What did you read?

The moral of the story is that goverment has NO BUSINESS taxing tickets. NONE.

[yonemoto]

the moral of the story is that liberals don't understand elasticity

http://en.wikipedia.org/wiki/P....._of_demand

[Shannon Love]

The at moment free-market cost of a ticket is the airline's cost, profit AND the taxes. Just because the government suddenly lowers taxes doesn't mean the price of the tickets will suddenly drop.

Why? Because that is what number of people currently flying will pay, right now to fly. Where that money ends up, in the airline's pocket, the governments pocket or embezzled by accountants and spent on booze and hookers, is irrelevant to the market short-term.

It takes time for market signals to adjust prices. The market isn't some platonic idea in which change happens instantly. The price signals take time to disseminate throughout the system. Eventually, the loss of the tax will either cause a drop in ticket price or some other change in airline use but it won't happen instantly.

As a practical matter, I doubt the airlines computer systems can handle a sudden, overnight change in taxes. They will just keep collecting the tax and putting it in the same account until the government comes around to collect it or some judge says they can keep it. You wouldn't believe what a massive IT problem something like this can turn out to be.

[Mo]

The at moment free-market cost of a ticket is the airline's cost, profit AND the taxes. Just because the government suddenly lowers taxes doesn't mean the price of the tickets will suddenly drop.

Price elasticity, how does it fucking work?

If you flip this statement around and say, "The at moment free-market cost of a ticket is the airline's cost, profit AND the taxes. Just because the government suddenly raises taxes doesn't mean the price of the tickets will suddenly rise," it becomes apparent that this statement is nonsense.

Airlines aren't running at full capacity and demand isn't perfectly inelastic. The hypothesis that makes the most sense to me is that they're saving the money just in case the FAA decides to collect back taxes.

[Shannon Love]

I was just making the point that as a real-world system, there is a time lag between a change and its affect on prices or utilization. There would be a time lag if the government raised the tax suddenly as well.

I was also arguing against the concept of "fair" price that many people hold. In this fallacious idea, the fair price is the produce's cost plus some vaguely defined "fair" profit. Taxes are seen as just addition on top of the "fair" price and if the tax goes away, then the producers has the moral responsibility to instantly lower the price back to the non-tax "fair" price. (Of course, in this view taxes do not affect either consumption or productive capacity.)

In reality, prices are set by consumers and the "fair" price is whatever the consumer will pay once all consumer has factored in all his competing needs at any one time. The consumer has no information about how the product came to be nor how the money exchanged for the good will be apportioned. A change in tax has no more immediate effect on the price that would a change in profit sharing between partners in the company that provide the service.

[Amakudari]

"[If you say] just because the government suddenly raises taxes doesn't mean the price of the tickets will suddenly rise," it becomes apparent that this statement is nonsense.

Why? People's desire to travel hasn't changed, and in the very short run the supply of air travel hasn't changed. Airlines don't set prices based on expenses plus a markup, they set prices at what the market will bear. The regular tax acted by restricting the supply of air travel. Now it's temporarily gone, but the supply remains equally restricted. Over a longer period, new entrants would eventually drive those costs down, but these effects are all temporary so they act as a small windfall to airlines.

This is just one of those instances where a tax break is both temporary and unpredictable. It's a similar principle to Friedman's permanent income hypothesis, that transitory, short-term events -- beneficial or negative -- have little effect on behavior.

If this were anticipated (like an annual sales tax holiday) or longer term, it would obviously have an effect. But in the short run these somewhat accidental windfalls shouldn't change price points much.

[Tulpa]

As a practical matter, I doubt the airlines computer systems can handle a sudden, overnight change in taxes.

Are you a computer programmer, Shannon? Because that would be a ridiculously easy feature to program. They have to deal with airports changing their fees constantly, too.

[Night Elf Mohawk]

As a practical matter, I doubt the airlines computer systems can handle a sudden, overnight change in taxes. ... You wouldn't believe what a massive IT problem something like this can turn out to be.

UPDATE TAX_TABLE SET THIS_FAA_TAX_RATE = 0 WHERE APPROPRIATE_CRITERIA = TRUE

[wylie]

"Hey guys, the values for before the tax-change have all become 0...that's not how it was supposed to work, was it?"

Tulpa and NelfMo, do YOU guys actually work with production software? Or just fun lil shit to help with your math assignments? Because they're totally different challenges.

Oh, but it's shannon love, so nevermind, RABLE RABLE RABLE, SHANON IS DUMB, RABLE RABLE RABLE!!11oneoneone

[sam harvey]

Spirt Airlines is advertising that they haven't raised fares, and encourging people (of course) to buy tickets now.

[Old Mexican]

Ol' liberal, Truth Will Out, Imp of the Perverse and others like them will simply ignore this.

[A Secret Band of Robbers]

That's because the fuckers make all their money on the fees. Raising prices is too honest for them.

[sloopyinca]

Obviously you've never flown Spirit. Their whole marketing plan is based on how other airlines fuck consumers with fees and charges.

[Devil Inchoate]

Spirit charges for checked bags AND carry-ons. They charge for everything, but make up for it by having low fares.

[Appalachian Australian]

What's wrong with charging a customer a fee for a service?

[Tulpa]

The fees in the ticket price itself go to the FAA and the airport. If you're bitching about baggage fees, go fuck yourself. I'm glad not to be paying for your overpacking anymore.

[Appalachian Australian]

I, for one, prefer to pay money to someone actually providing me with goods and services (the airline) than sending it into the black hole of the FAA. They've been working on NextGen since, what, 1981?

Airfares are a competitive market and prices will adjust downward once an airline (like Spirit) wants to gain market share.

I must repeat myself: I will pay $3.70 per enplanement plus a 7.5% increase in fare to a private airline instead of the federal government anyday.

[Amakudari]

Ugh. I didn't read the Mankiw link and presume it's probably as much as I'm saying, but has no one pointed out how this works?

Taxes are borne by both parties. Generally, taxes and subsidies affect prices by altering supply and demand. However, in this case airlines realize that there will soon be another FAA reauthorization, as do passengers. It makes no sense to change the supply of air travel, and consumers aren't changing their demand for air travel. The price stays roughly the same.

This isn't about "libertarian economics." Tax incidence is a universally accepted principle in economics.

[A Secret Band of Robbers]

That could drop their prices to increase demand, but it would be crazy to do that. There's no way this windfall is going to last long enough to alter their long-term plans.

[Amakudari]

They could, but they could do that with the taxes in place also. Airlines don't set prices such that they make a certain percentage profit; they're forced to take whatever price the market offers and manage their expenses. In other words, if it's a good idea to lower prices with the short-term tax respite, it's a good idea with the tax in place, too. (With the exception of being able to say they're not nickel-and-diming you, like Spirit.)

There's currently a market price set by a fixed number of passengers for a fixed number of seats. The tax break was unanticipated and very temporary, so nothing changes and the surplus goes to the airlines.

[Eric Cartman]

Courts approve ex post facto laws from time to time. They use the NEEDS OF SOCIETY CLAUSE as justification.

[Brandybuck]

Customers willing to fill up the plane at price X. Your cost goes down. Customers are STILL willing to fill up the plane at price X. What price do you charge?

[Brandybuck]

Bueller? Bueller?

[Old Mexican]

Um, he's sick. My best friend's sister's boyfriend's brother's girlfriend heard from this guy who knows this kid who's going with the girl who saw Ferris pass out at 31 Flavors last night. I guess it's pretty serious.

[Chaz]

The article didn't mention that several airlines (Alaska, Spirit, Frontier) announced that instead of pocketing the money they're passing on the savings to the consumer.