State lawmakers are weighing a proposal from American Airlines and other carriers to exempt them from millions of dollars in sales taxes on fuel, a request that could affect Charlotte’s status as one of the nation’s largest airline hubs.
With a cap on jet fuel taxes set to expire next year, American, which merged with US Airways, has joined Delta, United and other airlines to seek an industrywide exemption from the tax.
A bill to address the issue is expected soon.
“What’s the right answer? I don’t know,” said Republican Sen. Jeff Tarte of Cornelius. “I do know that US Airways is absolutely critical not only to the Charlotte region but to North Carolina.”
Fuel is typically the biggest single expense for an airline. The push for a new tax exemption comes as fuel costs have plummeted and airline profits soar to new records. Last month, American Airlines reported a $597 million profit for its fourth quarter.
And for the coming year, American said it expects to pay $1.73 a gallon for fuel in the coming year. That’s down from $2.91 last year and $3.08 in 2013.
But Airlines for America, a coalition of American and other carriers, has called fuel “by far the industry’s largest and most volatile cost,” accounting for more than a third of its operating expenses. It said without legislative action, North Carolina will have the nation’s fifth-highest jet fuel tax in 2016.
Sales taxes on jet fuel are capped at $2.5 million. US Airways was the lone recipient of the tax break, which expires in January. Legislative analysts say the cap could cost the state $10 million this year.
An American Airlines spokeswoman said the airline supports the proposal to exempt jet fuel from sales tax in North Carolina, and referred further questions to Airlines for America.
Vaughn Jennings, a spokesman for the lobbying group, said North Carolina will be at a disadvantage to other neighboring states such as South Carolina – which doesn’t tax jet fuel – without action on the sales tax.
“Part of what makes NC a strong market for commercial aviation is the state’s currently favorable tax climate,” Jennings said in an email. “Furthering the tax burden on airlines could lead to less revenue to the government, reduced tourism and less economic growth.”
The group also contends that airlines are overtaxed already, and that taxes on jet fuel amount to double taxation.
“It is inherently unfair for consumers to be taxed on the end product – airfare – as well as the components that comprise the airfare,” Jennings said.
Low cost helps hub
Draft legislation from an American lobbyist would exempt jet fuel for all interstate air couriers and passenger carriers.
“I thought it was a little aggressive,” said Republican Sen. Bob Rucho of Matthews.
But Rucho, who chairs the Senate Finance Committee, said lawmakers will evaluate the proposal and its cost based in part on its return on investment.
“We’re going to look at it and make a judgment as to whether that fits into our tax structure,” he said.
A report from the N.C. Department of Revenue shows US Airways received a $9.2 million refund for fuel taxes paid in 2013, the most recent year available. The company was the only passenger airline to claim the fuel tax refund that year.
American said it carried 43.5 million passengers locally in 2013. If the entire $9.2 million tax refund were added to American’s costs and divided among those passengers, the airline’s cost would have risen by about 21 cents per passenger to operate in North Carolina.
American operates its second-busiest hub at Charlotte, behind only Dallas/Fort Worth, with more than 650 daily departures. The airline is Charlotte’s major carrier by a big margin, accounting for more than 90 percent of flights.
Charlotte serves mainly as a connecting hub for domestic passengers in the Southeast, with about 80 percent of passengers switching planes, rather than starting or stopping their trip in Charlotte.
American’s use of Charlotte as a major hub – which is disproportionate to the city’s population – is based largely on the airport’s low operating cost, which makes it cheap for American to fly from the city. Other large American hubs, such as Dallas/Fort Worth, Chicago and New York, have much larger populations, meaning they naturally have more airline passengers.
Critics question tax break
New York-based aviation analyst Bob Mann said the cost difference between Charlotte and other hub cities, many of which cost five times or more per passenger, means the jet fuel tax wouldn’t cause American to pull out of its hub.
“The very advantageous low per passenger costs at Charlotte are a much bigger factor,” Mann said. “Is it (a jet fuel tax) the sort of thing that would deter you from operating at Charlotte? No.”
But, Mann said, in the intensely competitive airline industry, where profit margins have historically been razor-thin or nonexistent, it makes sense for a carrier to fight for every advantage it can get.
“If they see an opportunity, they’ll go for any weak point they can,” Mann said. “It’s $9 million of found money. If you can get that and look at it as a perpetual advantage, sure, it’s worth going for. … A million here, a million there, pretty soon it’s real money.”
“Every bit of cost makes you think twice,” Mann said.
Unite Here, a union that represents 33,000 airport and airline workers, has recently taken aim at aviation fuel tax breaks, calling the issue a question of economic fairness. In a recent study, the group estimated that such tax breaks net airlines about $1 billion a year nationwide.
States differ widely in how they apply jet fuel taxes, the group said. Texas doesn’t tax such fuel, while California does, but gives tax breaks worth $384 million to make up for it.
This week, Unite Here released a study focused on North Carolina specifically and called for state lawmakers to let the tax break expire.
“While many North Carolina taxpayers are still struggling to make ends meet, American Airlines reported record profits,” Unite Here said in a statement. “The special treatment of American Airlines means that North Carolina is giving the airline an unfair advantage over its competitors.”
For legislators, taxes are always a sensitive subject. The airline request comes at a time when legislators let tax credits for historical preservation and the film industry expire. Lawmakers say the airline might be an exception.
“You know what? They’re 93 percent of the flights out of the largest economic engine in the state,” said GOP Rep. Charles Jeter of Huntersville. “It is making a special exception for them. But they’re special.”