What the Airline Tax Holiday and the Tax Reinstatement Mean for Your Wallet

The short answer: probably nothing.

On July 22, 2011, Congress failed to extend the Federal Aviation Administration’s (FAA) budget and, along with it, airlines’ authority to collect taxes to fund the FAA, leading to a lot of questions and concerns about air travel in the US. Among these were whether this would bring furloughs for employees in the FAA (yes); if this would affect traffic control (supposedly no); and what would happen to ticket prices and who would be responsible for the uncollected taxes.

The third question was answered by each airline: most airlines raised fares by the amount of the taxes, so that consumers faced the same prices as before the tax expiration. Notable exceptions included Alaska Airlines, Hawaiian, and Spirit, which maintained their fares and passed the tax savings onto consumers. There were serious concerns, however, that once Congress reinstated the airlines’ authority to collect taxes, customers who didn’t pay taxes may be required to pay them anyway – perhaps the airlines that increased their fares to compensate for the tax expiration were doing customers a favor by effectively collecting the taxes preemptively?

Photo credit: Alaskan Dude (Creative Commons)

This confusion was finally solved last week, when Congress passed a retroactive reinstatement of the FAA’s budget from July 23rd.

The bad news: By making the reinstatement retroactive, Congress stated that taxes were technically applicable to the suspension period, July 23-Aug 8. Before the reinstatement, there had been talk that passengers who paid taxes on their tickets (because they purchased them before July 23rd) but flew during the suspension period might be due a refund on the taxes collected. The retroactivity has dismissed this possibility. No matter when you purchased your tickets or flew, you cannot get an airline tax refund.

The good news: The IRS is giving a relief for passengers who did not pay and airlines that did not collect taxes during the FAA budget lapse. This news may be better for airlines than for you, but is good nonetheless.  Since airlines collect about $200 million in taxes per week for the FAA, this two-week suspension generated almost $400 million in cumulative profits for the airlines that raised their tickets to match the expired FAA taxes – which they now get to keep.

For you, the relief means that if you managed to snag a ticket during that the suspension, at least you don’t owe any taxes on the ticket either. That would have been a savings of 7.5% on the base fare plus $3.70 if flying domestically, $8.20 if flying internationally to/from Alaska or Hawaii, or $16.30 for international flights to/from anywhere else, but since most airlines increased fares accordingly, you likely did not feel any difference in your wallet. On the plus side, with the reinstatement of taxes, at least airlines are lowering ticket prices back to pre-July 23rd levels.

So, unless you are one of the lucky few who scored tickets with an airline that did not raise prices during the suspension, this FAA budget story should not affect your wallet: ticket prices have stayed the same throughout since most airlines raised ticket prices (earning several millions along the way) when taxes expired and lowered them now that the taxes are back.