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  • COMMENTARY: The Government’s Tax Policy Is Hiking Airline Fees

    The government is very good at two things – doing nothing and overreaching. Right now they have set up a tax system that is causing you to pay massive fees to the airlines to check a bag.

    Congress is preparing work on a bill to reauthorize the Federal Aviation Administration and they have a chance to fix this problem and the problem that our dilapidated airports are in need of a makeover.

    The economics of the tax treatment of bag fees is incentivizing the airlines to hike those fees through the roof so they can make some more tax free cash.

    At its core, economics is the study of incentives. It is the examination of choices and, most often, those choices can be explained in stark economic terms. When government interferes in the marketplace, it often creates perverse incentives enticing individuals and companies to make decisions that would not ordinarily be efficient. The airline industry’s shift to nickel and diming consumers with fees is a classic example of incentives gone array.

    At the core of the airlines pricing model is a litany of fees that hidden the real price of the ticket which a consumer purchases. Ticket pricing has become a shell game of add-ons many of which have become encouraged by the government, albeit not necessarily intentionally.

    When gas prices skyrocketed to $145 a barrel in 2008 (it is about $45 today), airlines said that to remain profitable, they would need to begin charging consumers baggage fees. The promised the fees would be temporary measure. The Internal Revenue Service (IRS) ruled that “transportation of baggage” was not taxable. In short, the ruling allowed the airlines to pocket billions of dollars without having to give a penny to the government.

    A Bureau of Transportation Statistics study found that domestic airlines collect $3.35 billion in baggage fees last year representing an astounding 26% of the industry’s total profits — all tax free! Delta Airlines gouges consumers the most with over $800 million in bag fee revenue. Since 2008, the industry has managed to collect $20 billion in baggage fees. With a steady stream of untaxable income, baggage fees have become a permanent fixture of flying with no end in sight.

    Thanks in part to the government; the industry has become the king of nickel and diming consumers to death. Airlines have adopted surcharges from everything to your seat choices to changing the times of your ticket.

    Rather than charge consumers an addition fee on top of the half dozen already in place, some members of Congress believe that some of the tax-free funds that are being collected should be used for airport modernization. Such an effort would fund increased airport capacity, allowing more flights and hopefully more competition, reduced congestion and noise abatement.

    Airport modernization is not a partisan issue. Donald Trump recently referred to LaGuardia Airport as a third world dump. Politicians on both sides of the aisle recognize the need for some modernization. The Donald is right and these airports need to be upgraded.


    Cloakroom Confidential

    Cloakroom Confidential

    Cloakroom Confidential was a longtime Capitol Hill staffer and insider who has contacts in the House and Senate at the highest levels.

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