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Taxation - Duty Bound

Governments must realize that aviation taxes cause long-term damage to national economies, says Charles Tyler

Income, property, fuel, even equipment: aviation taxes know no bounds in the eyes of government. More recently, taxes for social and economic purposes such as development aid, climate change, and tourism expansion have made the headlines.

Taxing the sale of air tickets is, from a government perspective, an ‘easy grab’. The collection mechanism is already in place at no cost to the government and the airline simply passes on the money to the treasury.

But this is a simplistic viewpoint because, while taxes provide a tangible short-term revenue boost to the government’s coffers, increased taxes in the long term can be outweighed by the cost to the underlying economy.

German Inefficiency

Two European countries have implemented new aviation taxes this year. On 1 January, the German Government imposed a new air ticket tax on all flights departing from German airports. Under pressure from their neighbor, Austria followed suit by imposing an aviation tax starting in April. The German tax rates are dependent on the sector length and have been set at $11.60 (EUR8) for short-haul, $36.20 (EUR25) for mid-haul and $65.20 (EUR45) for long-haul flights. The Austrian mid and long-haul rates are slightly lower. The governments are determined to keep these taxes until the end of 2014, when a review may be considered.

While detailed feedback from airlines on the impact of the tax has yet to be collated, Dr Michael Engel, Managing Director of Bundesverband der Deutschen Fluggesellschaften (the German Airline Association), has clear views on the matter. “The German air ticket tax has a negative impact on air traffic demand in Germany,” he insists. “We estimate that it will lead to a decline in demand of about five million passengers per year—which is around 2-3% of the total market. In the end, this ticket tax will result in a zero sum game for the national budget. While the federal Finance Minister will earn up to $1.45 billion (EUR1 billion) per year from the tax, local and regional governments will suffer from lower corporate tax income and higher social charges—for example due to job losses in the industry.”

Some airlines have already reduced their capacity in Germany, while others are considering moving operations to airports in neighboring countries. Germany may have persuaded Austria to join its short-sightedness but other bordering states have either abandoned their aviation taxes, or have much lower ones. For a family living in western Germany it could be worth crossing the border to France, where the tax for economy class passengers is only $1.45 (EUR1) for flights within the EU and $5.79 (EUR4) for flights outside the EU. Or passengers from Hamburg might consider traveling to Denmark, which abolished its aviation taxes following the adverse effects on its economy.

The Netherlands provides a clear example of an ill-conceived aviation tariff. The Dutch Government imposed an air ticket tax in July 2008, but abolished it less than a year later as Dutch passengers voted with their feet—or at least their cars—and made much greater use of Belgian and German airports. The tax was designed to raise about $455 million but a recent ACI Europe report estimates it cost the economy $1.75 billion and lost Amsterdam Schiphol 1.4 million customers in the second half of 2008 alone.

Pushing the Limits

The United Kingdom has yet to learn this lesson. It currently has the highest aviation ticket taxes in the world. First introduced in 1994, its Air Passenger Duty (APD) has been steadily increased (by a total of 2,600% to date) and now stands at $18.01 (GBP11) for short-haul flights and, depending on the destination, can be as much as $139.23 (GBP85). Business/first class passengers pay double. UK passengers do not, of course, have a cost-effective means of crossing the border to a neighboring country where taxes are lower.

In the 2011 March budget, the UK Government decided not to increase the APD any further at the moment. It also rejected a proposal to replace the existing ‘per-passenger’ tax with a ‘per-plane’ tax. “We are pleased the government has listened to the industry and traveling public’s concerns, and not introduced further increases in aviation tax this year,” says Julie Southern, Chief Commercial Officer at Virgin Atlantic. “It is also unsurprising that they decided not to replace APD with a per-plane tax, which would have damaged UK connectivity. Its environmental credentials were unsound, and it could have been subject to international legal challenge.”

However, Southern goes on to point out that “although this move by the Chancellor is a welcome first step, Britain still has the highest air taxation of all European and G20 countries, and APD receipts are forecast to increase by more than $1.64 (GBP1 billion) in the next four years.”
Other governments understand that lowering aviation taxes can boost the economy. In March, the cash-strapped Irish Government implemented a 70% cut in aviation tax in an effort to support tourism, cutting the levy to only $4.35 (EUR3). “There have been calls for the abolition of the tax, which is blamed for the reduction in our visitor numbers,” notes Ireland’s Finance Minister Brian Lenihan. “Having examined the issue in detail, I have decided to introduce a single revised rate.”

Campaigning for Lower Charges

IATA campaigns against unjustified increases in aviation charges and taxes throughout the world. While there has been considerable success in reducing airport charges and air navigation charges, these savings can pale into insignificance if a government decides to impose a new aviation tax.

Jeff Poole, IATA’s Director, Government and Industry Affairs, says the main problem is that in many cases finance ministries, which levy the taxes, do not look at the big picture. “We are working closely with Oxford Economics to demonstrate the enormous benefits that aviation generates,” he says. “The only way we can get the message through to finance ministries is if we provide hard numbers showing that taxes may raise revenues, but will also impact on other areas of the economy.

“Taxing aviation produces short-term cash benefits, but destroys one of the most beneficial economic catalysts that an economy can have,” he continues. “It is slowly killing the goose that lays the golden egg.”

Brian Pearce, IATA’s Chief Economist, also points out that there is a mistaken belief in some circles that because there is generally no VAT or sales tax on international ticket sales, and no excise duty on aviation fuel for international flights, the aviation industry is under-taxed. “But aviation pays for its infrastructure,” counters Pearce. “That must be compared to the huge government subsidies that are often handed out to road, rail and shipping. Aviation already pays its fair share.”

The Impact on Tourism

While business travelers may be able to write off additional or increased aviation taxes as costs associated with business, leisure travelers cannot. It is this sector that is most likely to change its behavior based on increased taxes.

A number of nations—including the Seychelles, several of the Caribbean islands, South Africa, Kenya, Australia and New Zealand—are deeply concerned about the discriminatory basis of long-haul aviation tax increases. Having had tourism receipts knocked during the recent recession, there is the fear that rising taxes on long-haul flights from Europe, for example, will temper the recovery of inbound tourism.

“These taxes will favor short flights over long-haul travel and, more specifically, some taxes discriminate against long-haul destinations through so-called distance banding,” says South Africa’s Tourism Minister, Marthinus van Schalkwyk. “The order of magnitude of these taxes on long-haul destinations is excessive,” he says, quoting IATA estimates that flight costs on these routes could increase by 3-5%. “This will have a negative impact on passenger numbers, tourist volumes, and downstream tourist receipts in long-haul destinations.”

The nations of the Caribbean have a particular axe to grind with respect to the UK’s APD banding, which places Caribbean destinations in the highest tax category. So a nine-hour flight to the Caribbean is taxed at the same rate as a 20-hour flight to New Zealand—and more than a 12-hour flight to Los Angeles.

The UK Government is consulting on reforming some of these anomalies. “We look forward to working with the government on this consultation,” says Virgin Atlantic’s Southern. “However, we are concerned to see that the proposed reforms will not provide any relief to the Caribbean. Under the Treasury’s suggestions it will still fall into the same tax category as the most distant destinations such as Hawaii and Sydney.”

But it is not just the developed nations of Europe that have increased taxes on aviation. India has been increasing its sales taxes on air tickets, which is negatively affecting the Indian civil aviation industry. Despite campaigns that stated the tax contravenes International Civil Aviation Organization (ICAO) policies, the Indian Finance Ministry extended airline sales taxes to all classes of domestic and international airline tickets. Previously, the sales tax was only levied on international premium class tickets. These taxes were capped, but the Indian Finance Ministry is seeking to remove these upper limits, thus increasing the taxes further.

Greenwashing Taxes

Germany, India and Austria are not claiming their taxes are environmental. They are simply a financial grab on behalf of the respective governments. But aviation has long been regarded as a soft target for environmentalists and, in the past, some of these aviation taxes have been “greenwashed.” The UK’s APD was initially presented as an environmental tax—though in fact the payment just went into central government funds. The UK Government still maintains that the increased APD for longer‑haul flights is an important contributor to public finances and helps the government to achieve its green goals.

“The $4.45 billion (GBP2.7 billion) generated by the APD is enough to offset all of the UK’s aviation emissions four times over,” stresses Giovanni Bisignani, IATA’s Director General and CEO.“Environment policy should not be designed around paying the bills for the government’s failure to effectively regulate the financial sector.”

The next big question is what will happen in 2012 when aviation is included in the European Union’s Emissions Trading Scheme (ETS). “The UK APD must disappear by the time any ETS is imposed,” says Bisignani. “And that should not be the ETS that the EU is proposing, which is illegal. Europe agreed to develop a global framework through ICAO and that must be the way forward. Aviation climate change commitments are the most ambitious of any industry. The United Nations Secretary General recognized us as a role model for others to follow. Instead of killing us with taxes, the UK Government should support our efforts.”

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