BrianGarst.com

Political hand-wringing about the state of infrastructure in America is common, with chatter recently spiking thanks to the Amtrak derailing in Philadelphia. The complaints are typically without merit, and more often than not are simply arguments of convenience to justify higher taxes and increased government spending. That doesn’t mean improvements can’t be made, however. A simple market-oriented change to how airports are funded would go a long way toward improving an essential mode of transportation.

Air travel is understandably popular within a country so large as the United States, yet the state of American airports doesn’t always reflect that reality. Donald Trump once likened New York’s LaGuardia to a “Third World airport,” and it’s only going to get worse. The FAA expects a record-high 775.8 million passenger trips in fiscal 2015. As traffic continues to grow, so too must the capacity to handle that traffic. The question is how best to fund needed improvements. Market-oriented reforms would improve the current outdated and inefficient approach.

In a proper market services are paid for by the users who benefit from them. This contrasts with political mechanisms where costs are borne by taxpayers who may or may not receive any direct benefit from expenditures.

Several taxes are currently levied on airline passengers, including a domestic passenger ticket tax, a domestic flights segment tax, and an international arrival and departure tax, among others. These taxes go through the IRS and into the Airport and Airway Trust Fund, some of which then goes into the Airport Improvement Program to fund federal grants to individual airports.

Shuffling funds through multiple agencies and programs before returning them back to airports creates unnecessary bureaucratic waste. In addition, airports that produce the vast majority of the revenue receive a much smaller fraction of the funds, leading to market inefficiencies as improvements are not concentrated where they would provide the most benefit to consumers.

There is a better alternative. A recent paper from the Tax Foundation makes the case that funding granted by the federal government would be better spent directly by airports through greater use of the Passenger Facility Charge (PFC). The PFC is a user fee, which economists prefer over taxes because they more closely resemble the functioning of a market system.

The PFC is a fee on each passenger used to fund airport infrastructure improvements. Rather than going through the federal treasury, the PFC stays with the airport that collects it. This reduces bureaucratic waste while ensuring that funds are spent where consumers derive the greatest benefit.

Airlines objected to the first PFCs – like the government, they would prefer the full costs of air travel be obscured from passengers – but were defeated in their legal challenge in 1972. They had better luck lobbying Congress, however, which outlawed the fees. In 1990 Congress finally allowed PFCs, though highly restricted and capped at three dollars per passenger (airports can charge less, or nothing, if they choose). In 2000 the cap was raised to $4.50, where it stands today.

The current cap, which due to inflation is worth less in real dollars than when it was last raised, leaves airports dependent on taxpayer funded grants, and all their downsides, to fund improvements. The Tax Foundation report argues that raising the cap to $8.50 and indexing it for inflation would better accommodate the needs of airports. Even better would be granting local authorities power to set the cap themselves.

Coupled with reductions in excise taxes on air travel, these reforms would also reduce waste without increasing the overall burden on travelers. A similar approach has helped revitalize the Canadian airline industry while reducing central government control.

Politicians like to pretend that services are free, and they use taxes to hide the true costs to consumers. As we have seen in health care, this can significantly distort the market and reduce the overall quality of service despite increasing total costs. User fees are more transparent for consumers and provide a better alternative than taxes and central control. Allowing the PFC to cover a larger share of airport improvement costs will go a long way toward reducing the government footprint in air travel.