In times of government austerity budgets, aviation is a tempting target for politicians. A passenger tax is relatively efficient to administer, and many of the people who pay aren’t citizens who can vote against it. The airline industry therefore faces a challenge to dissuade governments of the dangerous impact of air taxes on national economies.
“It’s an easy win for governments, a quick money grab. The number of taxes levied on airlines and their customers is still growing and many states fail to see the negative impact that these taxes will have on their economy in the long term,” explains Charlotte Fantoli, Assistant Director, Industry Taxation at IATA.
The industry contributes over $100 billion a year through, for example, corporation taxes and social security taxes. But, the industry strongly opposes taxes that single out aviation simply to raise revenue for non-aviation purposes. Such taxes, the industry believes, have a negative effect by damaging economic growth and employment. Fortunately, airlines can draw on a strong body of evidence, both in terms of classic economic theory and real-world examples, to press their arguments.
In terms of successfully argued examples, two that stand out are in the Netherlands and Ireland. The Netherlands scrapped its aviation tax in 2009. This was after it was demonstrated that the tax had a negative impact on the national economy. It had hoped to raise $395 million for the government, but in reality it was costing the Dutch economy $1.7 billion. “Passengers were driving across the border to neighboring airports in Belgium or Germany to avoid the tax,” says Fantoli.
In Ireland the departure tax of three euros disappeared from April 2014. Since then the country has seen an economic boom partly helped by the cancellation, among other incentives to boost economic competitiveness.
Nonetheless, proposals for new taxes continue to proliferate. There is some relief in the Chicago Convention which contains provisions that, for example, prevent the taxation of aviation fuel on international flights. But that does not exclude passenger taxes.
The Norwegian government planned to introduce an air transportation tax equivalent to 80 Norwegian Krona (NOK) ($9.70) on departing passengers on both domestic and international flights from 1 April this year. Such a move would have brought in one billion NOK for the government, and, according to the administration, help in the country’s battle for a cleaner and greener environment.
However, an intervention from the European Free Trade Association Surveillance Authority (ESA), which monitors compliance with European Economic Area Rules in Norway, has postponed the tax’s introduction until 1 June. That will give ESA time to review the case and judge whether it is breaching rules over state aid.
“This tax came out of the blue,” says Torbjorn Lothe, Director of the Federation of Norwegian Aviation Industries, which is leading a coalition to fight the proposal. “The government says it is a new climate tax but that it is political rhetoric. It emerges from the government’s need to find a new tax to balance the budget for this year. It will mean a 10% increase in ticket prices for domestic flights and will, given the tough competition in the sector, make many routes economically unviable. We will have a 5% drop in passenger numbers.”
Another example of singling out aviation is Italy’s recent 38% increase in its council tax levied on air passengers. This amounts to an extra 2.50 euros for every person and came without any warning or consultation.
In Ecuador, the International Tourism Fee was increased by 150% to $50 in mid-March. This is in addition to the Infrastructure Tax, also for tourism, of $10 per arriving passenger introduced earlier in the year. In New Zealand, a new Border Clearance Levy for each person arriving and departing the country on international flights has been in effect since 1 January.
All of these new taxes are in addition to existing structures in a wide range of countries including, Germany, Colombia, Costa Rica, the United States, and the U.K., where Air Passenger Duty raises £3 billion ($4.2 billion) a year in government revenue.
Fantoli says these taxes have a hugely negative effect on economies. “They increase the cost of travel and therefore impact demand and ultimately connectivity and the global economy,” she states.
IATA stresses the danger of reduced air connectivity limiting business opportunities. It also highlights the problem of tax revenue losses arising from avoidance measures such as passengers using airports in neighboring countries (see side bar).
In the UK, a 2014 PwC report said that abolishing the Air Passenger Duty (APD) would make the UK economy, on net, about £16 billion larger in the first three years following abolition.
There has been some progress with the APD on economy flights for children under 12 being abolished from May 2015. APD for under-16s was abolished from March 2016.
If APD devolution occurs, the U.K.’s Scottish regional government may go much further. It has launched a consultation into plans to cut the amount charged by 50% between April 2018 and 2021. By reducing, and eventually abolishing the tax, the Scottish government wants to attract more flights to airports in Glasgow and Edinburgh.
Last year, Edinburgh Airport claimed a 50% reduction would lead to 3,800 new jobs by 2020 and a £200 million economic boost to the country each year.
Fantoli says the Scottish consultation is a, “step in the right direction,” and one IATA can, “leverage,” to take its case against air passenger taxation to other governments around the world.
In this respect, the commitment in the European Commission’s recent aviation strategy that it would create an inventory of European taxes and examine their impact was welcome. Taxes are levied by its member states, but it is a clear sign that the Commission understands the importance of air connectivity and the detrimental impact of taxation.
How many examples of increases in wealth do there need to be after a passenger tax has been dropped, for governments like Norway to end such tax plans? Only time will tell.
Fantoli believes IATA is making progress in its efforts to convince governments to think twice. “We constantly tell them to consider the long-term impact. Once we do that then they start thinking again.”