For the last half-century, NTU has fought—and successfully resisted—efforts to increase government-imposed burdens on job creators, taxpayers, and consumers. NTU takes particular pride in defending consumers, especially travelling taxpayers who continue to be burdened with expensive taxes and fees. It’s estimated that for air travel, government-mandated taxes and fees can account for more than one-fifth of the average ticket price. Considering many are paying a higher effective tax rate than they would on their federal tax return, it’s easy to see why we would be firmly opposed to more burdens.
So it is with the Passenger Facility Charge (PFC), which NTU has criticized as a less-than-ideal substitute for user-based airport financing when alternatives are evolving. Unfortunately, a recent hearing of the House Transportation and Infrastructure Committee—with the customarily grave title The Cost of Doing Nothing: Why Investment in our Nation’s Airports Matters—did not adequately explore all perspectives on this important issue.
The Passenger Facility Charge is just one of more than a dozen taxes, fees, and mandatory charges that burden passenger tickets. Although it is federally administered, the PFC is collected by airlines and funneled into local airport projects aimed at building safety and capacity. The federal cap on the PFC limits airports from charging more than $4.50 per enplanement, or $18 per round trip ticket. For an average family of four, they could be hit with an almost $80 PFC, a significant expense when consumers are already doling out a lot of money just to fly. If proponents get their way and increase the PFC by a staggering $4, that family of four would be paying $136 on the PFC alone. Lawmakers should be doing everything in their power to limit consumer burdens, not be looking to squeeze travelling taxpayers even more.
Yet, since its implementation in 1991, airport funding advocates have sought increases in the amount permitted to be levied. The recent hearing saw a full-court press for such increases, given the fact that five of the six witnesses, in some way or another, supported raising or even eliminating the current federal PFC cap of $4.50 to $8.50 or more. (So lopsided was the hearing that opponents of the PFC hike held their own parallel event off-Capitol Hill that same day.) NTU has been criticized for standing up to these heavier burdens as well, but our position has not always been represented accurately. That’s why a little more analysis of what was discussed at the hearing is in order.
For one, PFC revenues are not sagging. According to recently released financial reports from the FAA, consumers paid more than $3.5 billion solely in PFCs, more than double what they paid in 2000, and nearly 50 percent faster than inflation. Even with the recent onset of carrier-imposed fees for things like baggage, the inflation-adjusted per-mile cost of flying is significantly lower today than it was in 2000. Meanwhile, PFC revenue has climbed each year since 2000, save the two years during the great recession.
None of these statistics should be surprising. For example, supporters of higher road funding contend that the federal gasoline tax rate should be raised because factors such as more fuel-efficient automobiles have eroded collections. While there may be better ways than the gas tax to underwrite roads in the future (such as DeFazio’s proposal to expand testing of Vehicle Miles Traveled fees), comparing the erosion of the gas tax to the PFC would be a mistake. Certainly, $4.50 in 2000 is not worth the same as in 2019. On the other hand, because the PFC is levied per passenger, its revenues can, in part, provide a “catch-up” effect as passenger volume increases. This makes sense because PFC projects are aimed primarily at adding capacity and infrastructure at airports.
Despite this tendency to partially adjust to passenger volume, supporters of uncapping the PFC believe airports are in desperate need of more revenue to fund critical improvements to airport infrastructure. A deeper look into the financial statements of nationwide airports indicate a more complex financial picture. US airports have $14.5 billion in unrestricted cash on hand, according to FAA Form 127 filings. Additionally, the Aviation Trust Fund is at its highest level since 2001, with an uncommitted balance of nearly $7 billion. Airports counter that the definition of “unrestricted” does not mean completely unencumbered cash that could be put into whatever need may arise. Furthermore, AIP funds are generally restricted to “airside” improvements such as runways, while PFCs have a wider range of uses that include debt financing for terminals and other upgrades.
It’s impossible to deny, however, that overall, airport revenues are substantial and have grown steadily. Total operating receipts (which exclude PFCs and AIP grants) in 2017 amounted to $21.9 billion, along with $12.7 billion in “capital expenditures and construction in progress.” This amounts to a rate of operating revenue increase of 27 percent, and a capital project spending increase of 14 percent. Compared to the rise of enplanements over that same period -- just under 20 percent -- it would appear that airport cash as well as construction is not massively lagging passenger loads.
Like any sector of the economy, airports will have their ups and downs, but over the long term, the outlook is hardly grim. The Tax Cuts and Jobs Act, for example, wisely avoided cutting off an important source of airport financing, in the form of Private Activity Bonds (PABs). Although the final version of TCJA steered away from some House lawmakers’ attempt to kill PABs, as widely expected the bill did end the exemption of interest on advance refunding bonds after the end of 2017. TCJA likewise ended the corporate Alternative Minimum Tax permanently, thereby benefiting existing PABs invested in airports.
Moreover, authorized spending for AIP grants is about $1 billion more than it was in 2000 ($3.35 billion versus $2.47 billion). At its peak in 2009, to offset a drop in PFC revenue collections, AIP funding totaled nearly $4 billion before a gradual decrease to the current $3.35 billion, where it has remained since 2012.
This only tells part of the story. Currently, airports that opt to charge more than a $3 PFC must agree to forego 75 percent of their AIP funding. But such a rule has not led to a drop in overall outlays for the PFC (see above). That’s because returned AIP funds may be (and regularly are) reprogrammed. As a Congressional Research Service report noted:
Large and medium hub airports that collect a passenger facility charge of $3 or less have their AIP formula entitlements reduced by an amount equal to 50% of their projected PFC revenue for the fiscal year until they forgo or give back 50% of their AIP formula grants. In the case of PFC above the $3 level the percentage forgone is 75%. A special small airport fund, which provides grants on a discretionary basis to airports smaller than medium hub, gets 87.5% of these foregone funds. The discretionary fund gets the remaining 12.5%.
This is but one reason why taxpayer groups should be cautious of any deal that seeks to raise or eliminate the PFC cap in exchange for a reduction to the Airport Improvement Program (AIP). H.R. 1265, introduced in the last Congress by Transportation Committee Chair Peter DeFazio, called for a 100 percent turnback of AIP funds for large hub airports that opt to impose a PFC above $4.50. While the legislation would commendably close off the transfer of those turnback funds to other programs, even this bill assumed continuation of the AIP program for airports not falling under the large hub category—at a price tag of nearly $3 billion annually. In exchange any airport—large or small—could in theory charge any level of PFC it wished.
Such a proposal may have limited bipartisan support and may save taxpayer dollars in the short term, but how long would it be before lawmakers decide to simply appropriate more funding for AIP? This is not idle speculation. The 2018 Omnibus Appropriations Bill included $1 billion in “supplemental” AIP grants, over and above the annual authorized amount of $3.35 billion. Late last month, a subcommittee of the House Transportation and Infrastructure Committee added $650 million to that annual authorization, effective through 2023 on a bill originally intended to keep FAA fully operational during future shutdowns. If this bill is signed into law amid other schemes like H.R. 1265, consumers and taxpayers would be played; they would have to pay a significantly higher PFC while also footing the bill for bigger AIP funding. It’s a classic political move that could have serious consequences. It’s also no fantasy: at last month’s hearing Spokane’s airport chief, for instance, advocated both lifting the PFC cap and increasing AIP grants.
Worse yet, under a scenario where the PFC cap is removed or raised, consumers would be seriously worse off. Some estimates indicate that doubling the PFC to $9 would bring in about $7 billion annually to airports. While some would like you to think it’s the big airlines that are paying this fee, in reality it is just tacked onto the price consumers pay. For a family of four on a roundtrip ticket with a layover in each direction, they would be liable for $144 just in PFCs, not including the other laundry list of taxes and fees, and the airline ticket itself. According to a new analysis from our friends at the American Consumer Institute, a PFC hike such as the one contemplated by many witnesses at last month’s hearing would reduce the number of air passengers in the U.S. by 7.5 million in 2019 and cause consumer welfare to drop by $3.1 billion per year — nearly $25 for the average American household.
Another contention raised at the hearing is that PFCs enhance airport efficiency because their funds can be used to expand gate capacity, thereby allowing greater competition from budget carriers. What do the budget carriers themselves make of this argument? According to the President and CEO of one of them, the trade-offs of PFCs mean the equation is not so simple. As Ted Christie, who heads Spirit Airlines, testified before the committee:
Our mostly discretionary travelers have a very high demand elasticity in reaction to even modest changes in price. In other words, if travel prices rise, they will travel less, and all those new airport facilities won’t be quite so full anymore… Value airlines like us typically use limited airport facilities more intensively and efficiently than larger legacy airlines. We have to, in order to keep prices low, because we focus on the most price-conscious consumers. We run more passengers per day through each airport gate, and we occupy less terminal square footage for a given volume of passengers. (By the way, airports and local communities appreciate that we can deliver more passengers through limited facilities.) Yet each of our customers subsidizes the entire airport facility at the same per-person PFC rate. By comparison, the airport rates and charges that airlines pay directly – for landings, gates and terminal space – do vary according to an airline’s efficiency of use, which in our case are passed on to our customers through lower prices.
Still others would point out, helpfully, that unlike AIP grants, PFC-connected projects are not subject to oppressive Davis-Bacon rules that artificially inflate labor costs. Unfortunately, 27 states plus the District of Columbia have prevailing wage laws of their own that could in many instances apply to ventures underwritten with the help of PFC revenues. This is certainly not a design flaw of the PFC. Rather, it’s an acknowledgment of reality: government mandates that drive up the taxpayer costs of infrastructure are pervasive at every level, and PFC-funded projects are not necessarily the exception. In any case, projects where PFC and AIP funds are combined would fall under Davis-Bacon.
But if so many hearing participants on both sides of the witness table are calling for such a massive increase in the PFC -- doubling or more -- then why not consider a broader range of reforms to aviation finance that will balance local needs with oversight, and funding certainty with taxpayer protection? Making sure that federal AIP and PFC grant rules are properly positioned to reflect evolving investment needs should be a prerequisite, as should examining the permitting, federal state and labor laws, and other regulations that add to the cost of airport upgrades. Revisiting the 1970s-era Anti-Head Tax Act, which has stood in the way of truly locally-determined airport use taxes, would be another step in the right direction. As the Heritage Foundation’s Michael Sargent suggests, this taxing authority could still be overseen by the Secretary of Transportation, who could regulate in cases where the airport exercises local monopoly and threatens to impede interstate commerce. And of course, airports must be prevented from exercising tax policies that discriminate against travelers based on their origin or destination. In the interim, NTU has suggested other alternatives to the current PFC collection method could make this fee more transparent to travelers.
Ultimately, last month’s hearing should have been part of a much wider discussion over how to make airport finance less reliant on public funds, more responsive to market forces, and more accountable to users. Taxpaying travelers’ voices can and should be heard.