Tuesday, August 24th, 2010

Although many travelers hate baggage fees and the myriad of other fees the airlines have started charging, ironically these fees have had an unintended effect of keeping cheap airplane tickets and cheap vacation packages available. The reason such fees keep total airfares lower is that federal taxes are only currently calculated based on the base fare of each ticket and are not added to the fees that airlines charge.

This is becoming a problem according to the GAO (Government Accountability Office) because airlines are not paying taxes that the FAA (Federal Aviation Administration) needs to fund airports and other services.

In order to encourage people to fly, airlines kept fares artificially low as a result of the recession and though base airline tickets have been rising recently, airlines have largely depended on revenue from fees to return them to profitability. U.S. airlines are forecasted this year to earn profits in the range of $2 billion. Their revenues from fees last year approached $6 billion. Clearly base ticket prices do not reflect the true costs airlines face in transporting passengers.

Checked baggage fees, as well as other fees that airlines have come up with, are not taxable according to the Internal Revenue Service because these fees aren’t related to the “transportation of a person” which is the terminology of current tax law. Ticket prices are subject to a 7.5 percent federal excise tax.

The GAO has recommended more transparency in allowing passengers to calculate potential fees prior to purchasing tickets. However the GAO noted “airlines are not likely to disclose them unless compelled to do so.”
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