In some of my coverage of the suspension of airline excise taxes I explained why no one should have been surprised that most airlines raised their fares to offset tax savings during the time that the FAA lacked re-authorization (and thus the authority to collect these taxes).
I tried to give a simple explanation of ‘tax incidence’ which some commenters found useful, but the majority of writing on the topic was filled with outrage that the airlines would pocket the money rather than passing on the savings to consumers.
I wasn’t outraged because I wasn’t surprised, and because this is exactly what the economics would have predicted would happen.
Matt Mitchell from the Mercatus Center put together a short video illustrating the economics, that when supply is inelastic, producers bear the primary burden of a tax.
Certainly in the short-run, supply of seats is inelastic (due to landing constraints, gate constraints, limited number of planes or at least time that it takes to pull more out of the desert, etc). Thus airlines were the ones paying the tax in the first place, with the tax removed they stopped doing so. And since consumers were already paying a price they were willing to pay at a certain supply of air travel, there’s no reason why we’d have expected price to fall.
In the end, Congress said that the tax was actually retroactive, so there are no tax refunds for folks who bought their tickets before taxing authority expired and who traveled during the time the FAA lacked re-authorization. The government gets that money, not the airlines as many suspected. But the airlines certainly did benefit from a week of ticket sales in which they weren’t paying the 7.5% excise tax (though of course they still pay income taxes, payroll taxes, etc).