Ticket Tax May Not Fairly Allocate the System’s Costs Among Its Users

FAA is responsible for a wide range of functions, which range from certifying new aircraft; to inspecting the existing fleet; to providing air traffic services, such as controlling takeoffs and landings and managing the flow of aircraft between airports. Similarly, we have reported our view that the various commercial users of the nation’s airspace and airports should pay their fair share of the costs that they impose on the system. However, because the ticket tax is based on the fares paid, the airline that charges the lower fares in this example will pay less for the system’s use, even though both airlines had the same number of takeoffs and landings and flew the same number of passengers, the same type of aircraft, and the same distance. Proposal by Larger Airlines Would Increase the Share Paid by Other Airlines and Have Substantial Competitive Impacts

Motivated by their belief that the current system unfairly subsidizes their low-fare competitors, the nation’s seven largest airlines have proposed that the ticket tax be replaced by user fees on domestic operations. As a result, by charging commuter carriers less per seat, the proposal would provide the coalition airlines with an additional benefit. Implementing a proposal that would shift nearly $600 million in costs from one segment of the industry to another could have substantial competitive impacts and needs to be studied first. A more precise fee system, however, would account for those costs incurred by FAA in managing the airport and airway system, which vary greatly by the amount, type, and timing of various airline operations. Further Study With Broader Input Needed to Determine How Best to Finance FAA

Determining how best to finance FAA involves complex issues, requiring careful examination. Specifically, the Federal Aviation Reauthorization Act (P.L. This assessment, which the contractor is required to complete by February 1997, will be a critical piece in designing a new fee system if the Congress ultimately decides to replace the ticket tax. Status of the Airport and Airway Trust Fund and the Potential Effect on FAA’s Budget of the Trust Fund’s Taxes Lapsing

During fiscal years 1990 through 1996, the Airport and Airway Trust Fund financed 100 percent of three FAA accounts—Grants-in-Aid for Airports (the Airport Improvement Program); Facilities and Equipment; and Research, Engineering, and Development. FAA officials estimate that in order for the Trust Fund to finance $5.31 billion of FAA’s fiscal year 1997 budget, the taxes would need to be reinstated by July 1997.
Why GAO Did This Study

Pursuant to a congressional request, GAO examined the proposal by a coalition of the seven largest U.S. airlines to replace the ticket tax with user fees, focusing on: (1) whether the ticket tax should be replaced by a different fee system; (2) what the potential competitive impacts of the fees proposed by the coalition airlines would be; (3) what factors need to be considered if a new fee system were to be developed; and (4) the implications on the Federal Aviation Administration's (FAA) budget of reinstating or not reinstating the taxes that finance the Airport and Airway Trust Fund.

What GAO Found

GAO found that: (1) because the ticket tax is based on the fares paid by travelers and not an allocation of actual FAA costs, it may not fairly allocate the system's costs among the users; (2) the coalition airlines' proposal to replace the ticket tax with user fees only incorporates factors that would substantially increase the fees paid by low-fare and small airlines and decrease the fees paid by the seven coalition airlines; (3) the proposal would dramatically redistribute the cost burden among airlines and could have substantial implications for domestic competition; (4) any replacement system for the ticket tax would need to account for the wide range of costs incurred by FAA in managing the airport and airway system; (5) the views of all affected parties, not just any particular group of airlines, would need to be included in assessing the mechanisms for financing the airport and airway system; and (6) Congress established a commission to study how best to meet FAA financing needs which will help ensure that, in the long term, FAA has a secure funding source, commercial users of the system pay their fair share, and a strong, competitive airline industry continues to exist.