If you travel by air, I'm sure you've been there: At a kiosk in the airport, fuming about the astronomical fees that airlines are charging. They started by charging for checked baggage, but now there are $25 carry-on baggage fees (Frontier Airlines), $200 ticket change fees (Delta, American, United), and a recent new low: the $10 pillow fee (Virgin America).
What you may not know is there's a simple explanation why airlines embraced their inner meter maid in the last 10 years: The money they make from fees isn't taxable.
(Photo by Andrew Theodorakis/Getty Images)
In January 2010 the Internal Revenue Service ruled that baggage fees (and priority seating fees, headset fees, premium airport lounge fees and many others from the creative minds at the airline companies) aren't considered under the umbrella of “transportation of persons by air.”
“Airline baggage fees are not taxable, the Internal Revenue Service said, a victory for carriers trying to protect a growing revenue stream,” the New York Times reported then, later quoting an analyst who said the ruling meant airlines will no longer “have to share with the government.”
The untaxed bag and change fees are obscenely high because the federal government has made those fees not subject to taxation. The airlines are not the only ones to blame for the high fees. Federal politicians are to blame because they allow IRS rules that provide an economic incentive for the airlines to shift profits to change and bag fees.
Polls show consumers hate these fees, especially how they must shop for tickets without knowing exactly how much extra will be tacked on the airport. You might think the airlines would be working to fix this.
But now that they've grown accustomed to a tax-free revenue stream, though, don't expect them to give it up without a fight.
When Congress considered taxing the billions of dollars in fees, Airlines for America's big-time lobbyist, Nick Calio (compensated over $3.6 million in 2014, according to tax filings), went up to Capitol Hill to disabuse lawmakers of the notion.
“In terms of taxing ancillary fees, we oppose it,” Calio said, “Too often, airlines are treated like they are some other kind of business.”
For instance, some other businesses have to pay taxes on all the ways they make money. Airlines aren't like that kind of business.
In recent filings with the Securities and Exchange Commission, several airlines brazenly admitted the fees were simply a way to increase profits by moving a portion of their ticket price away from the tax man.
“We have recently implemented several measures designed to increase revenue and offset costs,” American Airlines told investors deep into a recent filing.
“These measures include charging separately for services that had previously been included within the price of a ticket and increasing other pre-existing fees,” the airline continued.
In another SEC filing, United Airlines boasted about increased revenue from ticket change fees.
Airline lobbyists note that the government imposes significant fees and taxes on air travel, with one chart from A4A putting the cost at over 20 percent of the full price.
So, here's my proposal:Congress should eliminate the baggage fees tax loophole. It's creating a perverse incentive for airlines to hide their price behind a labyrinthine fee schedule, which single-handedly created a carry-on deluge. Consumers hate it.
Then, once there's no tax reason for the airlines to shield their income behind the world's most annoying price mechanism, they can put their considerable lobbying prowess behind lowering those fees and taxes across the board, actually benefiting consumers for once.
In the short term, we put an end to the galling bag, pillow, and change fees. In the long term, we make Calio earn his $3.6 million. Sounds like a win-win to me.
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