FAA Shutdown Over, Government to Start Taxing Airfare and Mileage Sales Again

The Senate has passed the House version of the FAA funding extension, by ‘unanimous consent’ in a nearly empty Senate chamber. (With the House in recess, the only way to fund the FAA this month was for the Senate to accept the House’s already-passed legislation.)

The Republican House bill becomes law, which extended the FAA but said that the most heavily subsidized airports (over $1000 per passenger) would lose their Essential Air Service program funding. I had previously said it was political posturing, there weren’t going to be real reforms to the program, just cuts to a handful of airports in states represented by powerful Democrats like Harry Reid and Jay Rockefeller.

My point that this dispute was all ‘fake’ was bolstered in recent weeks with the claim by Senate Democrats that the Republicans were holding the FAA hostage — first because Democrats were claiming the Republicans were forcing changes to unionization rules, when those provisions had already been dropped from re-authorization legislation, second because the Senate itself had never passed a competing proposal, and third because in the end — with the Senate passing the House’s legislation — there won’t actually be any cuts to Essential Air Service program subsidies. The Secretary of Transportation will grant waivers to the affected airports so that nothing gets cut.

As Tyler Cowen alluded to, the Republicans are more interested in voting for spending cuts than in actually cutting spending and Democrats are more interested in making Republicans vote for tax increases than in actually increasing taxes. Remember, all politics is fake.

The President will shortly sign the legislation which extends funding for the FAA and puts aviation taxes back in place. Some observations, advice, and open questions:

  1. Those taxes will start being collected right away once that happens.

  2. Airlines have raised fares to offset price reductions that would have occurred from lower taxes. <any of those fares can be expected to fall, but not immediately if only for technical reasons, new fares load several times a day rather than instantaneously. Taxes will be collected for a time before airlines are even able to lower fares to compensate. So best to either buy tickets within the hour from this post or avoid ticket purchases until airlines have been able to adjust their fares, otherwise you’ll wind up paying (about 7.5%) more than necessary.

  3. It’s still an open question what method will be used to refund taxes for flights booked prior to the suspension of taxes for travel while those taxes were suspended. Some airlines have said they’ll assist in refunds rather than directing passengers to the IRS, but procedures for this are not yet in place. For the most part I actually expect taxes not to be refunded (because most won’t jump through the hoops) and the government will net out better than most articles predict.

Update: The legislation applies the aviation taxes retroactively, so there won’t be any refunds for tickets purchased prior to the lapse in taxing authority but for travel while the tax was not in effect. The IRS, however, will not seek to collect unpaid taxes from airlines or travelers, so if you’ve purchased a ticket when the tax wasn’t in effect, the government isn’t going to come after you to collect. Taxes must be charged Monday August 8th at 12:01am onward, though since the tax is retroactive it will not be inappropriate for airlines and booking engines to implement the taxes before that time.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. A few things wrong here. The Senate couldn’t pass a “competing proposal” because bills containing revenue provisions (like excise taxes on airfare) have to originate in the House. They could have amended the House version (which they tried to do) but they couldn’t just pass a version of their own.

    Secondly, BOTH chambers are actually not technically out for the August recess. They are in every Tuesday and Friday through September in a bid by the House to block recess appoints by the president.

    So, the same way the Senate was in session today (for all of two minutes) the House was, too. So there was nothing stopping the Senate from amending the House versions, sending it back to the House, and the House agreeing to it.

    But, like you said, it’s all politics. Most people don’t know the ins and outs of this well enough and the media were looking for a “fight” to report on after the debt ceiling debate was over.

    What might be interesting from the airline’s perspective is if after they add the taxes back in, they don’t reduce their fares for a few days to see how customer’s react to the higher ticket prices. It might be an excuse to raise fares in a somewhat backhanded way.

  2. @Dan on (1) it’s a distnction without a difference for purposes of the post, and (2) the House is staying in pro forma session in order to prevent the Senate from adjourning, which is what prevents recess appointments, but the House pro forma session does not afford for the conference committee necessary to reconcile House and Senate versions of legislation, thus Senate passage of the House bill really was the only method to restore FAA authorization, and remember that doing so didn’t actually change policy in any meaningful way.

  3. @Gary This bill would never have gone to conference. The Senate could have passed their version and the House could have easily accepted it by UC or voice vote, the way the Senate did today. There’s no requirement that a formal conference meet.

    For the full FAA bill, the House hasn’t even appointed conferees yet and they’re still negotiating a conference report right now.

  4. Re your response to @Ty. It was about as sophisticated as your original statement, I am a afraid…

  5. @Brian you haven’t exactly offered an argument against the statement, which I stand by (with perhaps the modifier ‘most’ replacing ‘all’). This story was merely an example of the broader point.

  6. @Dan while I am decidedly NOT a House parliamentary rules expert, I believe that House quorum rules would prevent the current pro forma sessiosn from acting as the Senate did. E.g. even the relaxed quorum rules for a Committee of the Whole requires 100 members. You may well have a better understanding here than I do, but my impression is that the House pro forma sessions cannot act in the same manner as the current Senate ones. Great and interesting discussion, by the way!

  7. @Gary Very interesting discussion. A quorum is presumed present unless a member suggests it isn’t, so presumably, if they got a deal to pass it in the House no one would request that the Chair count for a quorum. My only point in all this was that the only way out of it wasn’t for the Senate to simply pass the House version, that there was easily a way for a “clean” extension to be passed in both chambers.

  8. I’d say there’s a >50% change that airlines just add back the taxes but keep base fares where they are not — effectively a 7.5% fare increase. So, I’m not sure the advice to wait for fares to fall again is necessarily the right move…obviously we’ll know shortly

  9. @Dan of course they effectively ‘got’ a clean extension, the House version included cuts to the Essential Air Service program, the Senate agreed to those cuts on the condition that the administration wouldn’t actually implement the cuts (the waiver from the Secretary of Transportation). All theatratrics.

  10. I agree with the sentiments that the airlines will try to float the current fares as an attempt at a back-door hike. I also think that some watchdog (Elliot?) will call them out on it, and if the story gains enough traction, you may see fares come down. Plus, we are headed into the traditionally slower business travel season, so market conditions may dictate that fares come down.

    As for the legislation, I am convinced that no elected official is interested in actually making decisions that most effectively govern the country. They are simply interested in beating “the other guy” – whoever the “other guy” happens to be.

    It makes me sick – and my gut tells me to vote out every single sitting politician in the next election(s), but I can’t imagine any different group would have acted differently. Sad, really.

  11. It would be difficult for the airlines to raise fares 7.5% plus $3.70 segment (boy, the Fed cut seems high, doesn’t it?) in one swoop. Difficult, but perhaps not impossible. There is one media report out there which indicates that AA is already trying a smaller fare increase than 7.5%.

    Technically, does anyone know the last possible time the airlines can “switch on” the tax collection to meet the Monday 12:01 am deadline? Obviously, the profit maximizing strategy is to not give the gov’t their cut until you absolutely have to!

  12. People should buy tickets on Alaska Airline or the markets they fly before Monday as Alaska is the only major carrier who didn’t raise the fares. Next week, with the tax comeing back, those markets are for sure to be more expensive than now.

  13. All the airlines (including WN) seem to have raised their airfares this morning to pay for the reimposed taxes. This means that Congress has engineered an approximately 10% permanent fare hike for the airlines.

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