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Abu Dhabi, UAETuesday 19 June 2018

Sports teams and CEOs sidestep aviation taxes with private jets

Operators of private jets pay far less in taxes than airline passengers and other commercial flyers, study finds

New England Patriots owner Robert Kraft, front left, and his son Jonathan Kraft come off the plane as the team arrives at George Bush Intercontinental Airport for the NFL Super Bowl 51 football game against the Atlanta Falcons on Monday, January 30, 2017, in Houston. Charlie Riedel / AP Photo
New England Patriots owner Robert Kraft, front left, and his son Jonathan Kraft come off the plane as the team arrives at George Bush Intercontinental Airport for the NFL Super Bowl 51 football game against the Atlanta Falcons on Monday, January 30, 2017, in Houston. Charlie Riedel / AP Photo

When the Super Bowl champions New England Patriots take their first road trip this month, players such as quarterback Tom Brady will be setting the standard for comfort and legroom on the team’s new private wide-body jet.

Moreover, by simply changing from a commercial charter to their own private plane, the NFL franchise also will be skirting a significant portion of the taxes and fees that pay for the US aviation system.

It is not just sports teams. Operators of the gleaming private jets that have become a symbol of wealth and success pay far less in taxes than airline passengers and other commercial flyers, according to a Bloomberg News analysis and government reports.

On a per flight basis, a private jet could generate as little as 2 per cent of the taxes and fees paid by airline passengers on an identical route, Bloomberg found in its review. High-performance private planes make up about 10 per cent of US flights under air-traffic control, yet pay less than 1 per cent into a trust fund that finances air-traffic control and other Federal Aviation Administration (FAA) operations, an agency study found this year.

"By and large, a private aircraft costs the same for the FAA to process as a large aircraft," says Michael Ball, senior associate dean at the University of Maryland’s Robert H Smith School of business and co-director of an aviation research consortium. "If you look at it from that standpoint, they clearly aren’t paying their due.”

Unlike most of the rest of the world, which charges fees based on aircraft weight and distance flown, the taxes private jets in the US pay are different from the ones imposed on airlines.

Private aircraft operators pay 21.8 US cents per gallon of jet fuel. By contrast, airlines and charter operators have three separate taxes: an excise tax of 7.5 per cent on tickets or charter charges, a fee of $4.10 per passenger and 4.3 cents per gallon of jet fuel.

The result is that airline passengers are subsidising some of the world’s largest corporations and wealthiest people under the current system, says Matthew Gardner, a senior fellow at the nonprofit Institute on Taxation and Economic Policy.

"Pretty clearly, we all feel the pain every time we buy an airline ticket and see how big a share of the costs those fees are," Mr Gardner says.

Bloomberg calculated the difference between airline and private-jet taxes on 10 domestic routes, ranging from 4,000km to 550km on a variety of typical aircraft. While the taxes can vary significantly due to many factors, there were sharp disparities in all of the examples. On average, private flights generated only about 7 per cent of comparable airline taxes in the examples.

A transcontinental flight from New York to Los Angeles on a Virgin America Airbus A320, would be charged about $3,900 in taxes, assuming the plane was 85 per cent full and passengers paid the average fare calculated by the transportation department’s bureau of transportation statistics.

The tax bill for a flight between the same cities on a privately owned Bombardier Global 6000, one of the world’s longest range corporate jets, would be about $525. That is about 87 per cent less than the airline flight.

The differences can be far greater if the private plane is a smaller model that burns less fuel.

A trip from Nashville, Tennessee, to Philadelphia by Southwest Airlines, which typically uses a Boeing 737-700 on that route, would typically be charged more than $2,000 in taxes. An Embraer Phenom 100E, a smaller and more fuel efficient corporate jet, on the same leg would be assessed about $50, or about 2 per cent of the Southwest plane.

Groups representing private aircraft, known as general aviation, have vigorously fought attempts to alter the current tax system, calling it equitable. Three main trade groups have spent a combined $56 million on lobbying on this issue and others in the past decade, according to the Center for Responsive Politics.

"I haven’t seen anything to suggest we are not paying a fair share," says Ed Bolen, the president and chief executive of the National Business Aviation Association, a Washington-based trade group representing more than 11,000 companies.

Business aircraft are an important segment of aviation tying rural areas to the rest of the US, and that sector supports $200 billion in economic activity each year, Mr Bolen says. They impose fewer costs on the system than airliners because they often fly to less congested airports, he says. The group believes many costly elements of the air-traffic system were put in place to accommodate air carriers at large hub airports, and operators of smaller aircraft should not have to pay for them.

Mark Baker, the president and chief executive of the Aircraft Owners and Pilots Association, which represents more than 300,000 private pilots, says the Bloomberg analysis was similar to the airline industry’s "false criticisms of general aviation".

"The fact is that from infrastructure to technology to labor, the airlines drive the costs and general aviation is a very small part of that," Mr Baker says.

The starkly different tax rates have been a long-simmering point of contention between airlines and their brethren in the corporate aviation world, and they help explain why the two groups have been at each other’s throats on a House proposal to move the air-traffic system out of the FAA and into a nonprofit corporation.

In Canada, where air traffic is managed by such a corporation, private jets pay less than airliners, but at rates that are far more equitable than in the US. Such an arrangement would cost American private-plane operators hundreds of millions of dollars a year, according to FAA documents and a Bloomberg assessment of sample flights.

Airlines have supported moving to such a private system, while private-aviation groups are adamant opponents.

However, even critics of the tax rates concede the situation is not likely to change anytime soon. The powerful lobby representing high-end private aircraft operators has successfully fought off several such attempts in recent decades.

Any potential changes in the taxes on private aviation were effectively taken off the table this year by the powerful chairman of the government's transportation and infrastructure committee, the Pennsylvania Republican Bill Shuster.

In order to mute opposition to his plan to create a nonprofit company to operate the air-traffic system, Mr Shuster’s bill would keep the current tax levels for private planes. His attempt to mollify private plane owners has had little effect as they continue to oppose his proposal. The bill has passed the committee and is awaiting a vote before the full House.

The taxes on different aviation sectors fund the Airport and Airway Trust Fund, which helps to pay for the FAA, air-traffic control and airport construction projects. Last year the trust fund contributed $14.3bn toward the FAA’s $16.3bn budget, or 88 per cent.

Overall, high-performance business aircraft - those powered by jets or turbo props - accounted for about 10 per cent of all flights overseen by FAA controllers last year and 8per cent of miles flown, according to an agency estimate.

The FAA estimated that these business planes contributed $104m to the trust fund in 2016. That amounts to just 0.7 per cent of the overall aviation taxes. That compares to 92 per cent of the tax payments, or more than $13bn, that came from US carriers, foreign airlines and charter carriers - most of which were paid directly by passengers.

While the use of private aircraft has occasionally drawn criticism --such as when Detroit car makers flew on separate company planes to Washington in 2008 to seek bailouts from ongress - it has tended to be short-lived.

Both US presidents George W Bush and Barack Obama floated proposals to hike taxes or fees on private jets while they served in office. Both considered adding a per-flight fee for private flights and Mr Obama in 2011 suggested changes in how private planes were depreciated on tax returns, which would have increased what owners paid. None of the plans came to fruition.

The disparity in aviation tax payments hasn’t changed much in decades, says George Donohue, a professor at George Mason University in Virginia who served as associate administrator of the FAA during the 1990s. Prof Donohue studied the issue during his tenure at FAA and says the disparities were about the same as now.

"I always found it amusing that people in the business jets are great capitalists, except when they get cross subsidies," he says.

The Patriots, fresh off their Super Bowl victory this year, decided to enter the world of private aviation as sports teams have found it increasingly difficult to charter large aircraft.

Their purchase of two 767s, one a spare to ensure they will not miss a trip due to maintenance issues, illustrates how the tax rates can vary significantly for identical flights.

Flying from the team’s home base in Providence, Rhode Island, to the first road game September 17 in New Orleans on one of the private 767s, the team would be charged an estimated $1,100 in fuel taxes. That is higher than a typical private jet because the twin-aisle 767, designed for long-range international routes, burns more fuel.

But it is still far less than if the team made an identical flight on a chartered 767. The taxes on a charter would be more than three times higher, an estimated $4,700, based on published rates and Boeing’s estimate of fuel use. The team’s private flight would also raise far less than a plane load of Patriots fans would pay taking an airline from Boston to New Orleans - about $2,400 - even though they would be on a much smaller plane that burned significantly less fuel.

Patriots spokesman Stacey James declined to comment.

If the purpose of aviation taxes is to create an equitable way to pay for the air-traffic centres, computers and radars, the existing system is a failure, says Robert Frank, a professor at Cornell University’s Johnson Graduate School of Management.

“It doesn’t sound like this fee structure comes even close to imposing fees on the costs respective users impose on the system."