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Travel Insider

Tax Man Will Take Bigger Bite of Spending for Flights

Airlines: LAX wants a new departing passenger fee, and foreign air travel will cost more too. Frequent fliers, beware!

September 07, 1997|CHRISTOPHER REYNOLDS | TIMES TRAVEL WRITER

Warning, air travelers. The tax man cometh, from at least three directions, with designs on facilities, flight segments, foreign lands and, yes, certain kinds of frequent-flier miles.

Facilities: In the city of Los Angeles, airport commissioners are asking for the Federal Aviation Administration's blessing on a plan to add a new fee of $3 per departing passenger at the city's LAX and Ontario airports. The "passenger facility fees," expected to reach about $75 million a year, would be earmarked for soundproofing homes in airport-adjacent neighborhoods.

Passenger facility fees are not a new idea to LAX veterans. Until early 1996, the airport imposed a similar $3 passenger fee, originally intended to pay for new passenger transport facilities within LAX but later redirected to the Ontario facility. Other airports commonly employ facility fees as well. LAX officials say they expect to receive FAA approval for the fees by the end of this year, and that the fees will remain in place for 2 1/2 years.

While they were planning to raise direct taxes on travelers, the airport commissioners last month slightly reduced the landing fees the airport charges airlines, from $1.97 per 1,000 pounds to $1.83. The airlines will decide for themselves whether to pass along the estimated $12 million per year savings to their customers.

An LAX spokeswoman says the landing fees have been cut because the airport is near completion of several airfield maintenance, lighting and gate projects, and for the first time in at least four years, officials anticipate a decrease in overall airfield costs in the 1997-1998 fiscal year. Federal spending laws, the spokeswoman said, make it impossible for the city to apply landing-fee revenue to the cost of the off-airport soundproofing work.

Segments: Meanwhile in Congress, legislators have used the Taxpayers Relief Act of 1997 to change the way the federal government taxes airline tickets. Instead of sticking with the current built-in 10% tax (under which $25 of your $275 ticket goes to the IRS), the government gradually will reduce that rate to 7.5% by the year 2002. At the same time, it will add new fees that will begin at $1 per domestic flight segment on Oct. 1, but steadily grow to $3 per segment Jan. 1, 2002.

The result may be pleasing if you usually fly long distances on nonstop flights. But if you more often use connecting flights, or fly shorter routes--from Los Angeles to San Francisco or Phoenix or Las Vegas, for instance--this is bad news. For instance, one day in 2002 when you buy a $500 nonstop round-trip pretax fare, the taxes will be $43.50, down from the current $50. If you buy a nonstop round-trip ticket with a pretax fare of $100, however, the federal taxes will jump to $13.50 from the current $10. In other words, the highest tax rates generally will be paid by travelers on the shortest, cheapest flights. (Budget carriers such as Southwest Airlines opposed this, but the larger carriers prevailed.)

Keep in mind, too, that if a carrier wants to boost profits a little, it could hold onto some or all of the new tax savings (in effect raising base prices to keep the tax savings "invisible" to the consumer) on these high-priced nonstop flights. It could do this--at least until competitive pressures force "sticker" prices downward. That, consumer advocates note, is what happened in January, the last time Congress allowed the old 10% ticket tax to expire.

Foreign lands: In any event, it won't pay for you to fly too far on that theoretically tax-saving nonstop flight. As part of the same set of changes, international departure taxes will double, from $6 per passenger to $12, starting with departures on Oct. 1. And international arrivals, previously untaxed, will be assessed $12 per passenger. So if you fly LAX-Cancun and back for a vacation this December, your international taxes will effectively quadruple, from $6 to $24. (If you bought tickets before Aug. 13 for international travel after Oct. 1, congratulations: You've avoided the new tax bite. If you bought those tickets on or after Aug. 13, you've already been bitten.)

Frequent-flier miles: In the same congressional horse-trading that yielded the shift in airline ticket taxes, federal officials tucked in a new provision that gives the Internal Revenue Service a chance to get in on the ever-burgeoning business of frequent-flier miles.

The move does not directly affect miles earned by consumers in flight. (Although many analysts maintain that by the letter of the law, mileage benefits earned on business travel have always been fair game for taxation, the IRS hasn't taken that policy step.)

Instead, the legislation adds a 7.5% levy to the price that credit-card companies, hotels and various other businesses pay when they buy mileage credits and use them to stage their own promotions. The going price for such airline frequent-flier mileage credits is 1.6 to 2 cents per mile. (Airlines generally don't sell mileage credits to individuals.)

By the estimate of Frequent Flyer magazine publisher Randy Petersen, about a third of all frequent-flier miles these days are awarded through such secondhand mileage programs--about $1.5 billion's worth a year. At least up to now. Like the other federal changes, the new tax takes effect Oct. 1. Of course, it is always possible that the affected companies will absorb the added expense themselves, rather than reducing their offerings to compensate for their higher purchase costs. But who wants to bet on that?

Reynolds travels anonymously at the newspaper's expense, accepting no special discounts or subsidized trips. He welcomes comments and suggestions, but cannot respond individually to letters and calls. Write Travel Insider, Los Angeles Times, Times Mirror Square, Los Angeles 90053 or e-mail chris.reynolds@latimes.com.

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