excise taxes

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Warren Buffett's Berkshire Hathaway holding company owns lots of things, and earns a nice return on them.  NetJets, one of their divisions, has recently come under fire for paying too little taxes.  The issue is ironic because Buffett has argued that the tax structure favors the rich, and yet one of his companies that serves primarily very well-off clientele is paying too little.  This issue is nicely summarized in an article by Andrew Ross Sorkin in the NYT.

Like many tax issues, this one will ultimately be decided based on rather arcane interpretations of the statute and how it applies to a particular business activity and ownership structure.  If you want to read the arcana, the IRS can oblige:  here's an internal memo from a few weeks back.

But sometimes it is useful to step back a bit and ask whether the issue is even being framed properly.  Ignoring for a minute whether or not NetJet is legally obligated to pay a tax on tickets based on how they have sold partial interests in planes, most reasonable people would agree that users of aviation services should pay for the infrastructure the planes need to fly (primarily the airports and the safety inspections) and to manage the airspace.  It turns out that the ticket taxes in question fund something called the Airport and Airway Trust Fund, and that this Trust Fund is a major source of funding for the supporting infrastructure of air travel.  Here's the summary from the Federal Aviation Administration:

The Trust Fund's purpose was to establish sources of funding that would increase concurrently with the use of the system, and assure timely and long-term commitments to capacity increases. The Trust Fund was designed to finance investments in the airport and airway system and, to the extent funds were available, cover the operating costs of the airway system as well.

Trust Fund revenues are derived from excise taxes on:

  • Domestic airline passenger tickets
  • Domestic airline passenger flight segments
  • International passenger arrivals and departures
  • Air cargo waybills
  • Aviation fuels
  • Amounts paid for the right to provide mileage rewards

A full listing of funding sources and rates can be found in this FAA Excel file.  (Note that if the trust fund is not funding both the capital and operating costs of the oversight system, there would be a net subsidy from general taxpayers to consumers of air travel.)

Private planes, even NetJet's, use public air space that is managed by the FAA.  They may have some private airports that receive no federal funding -- but it is more likely that most of the places they land and take off are in fact at least partly supported using ticket tax revenues (as well as taxes on aviation fuel, that it appears NetJets probably does pay).  More important than determining whether a particular ownership structure allows certain planes to avoid paying ticket taxes is whether all planes and companies using the system are paying to support it at a rate commensurate with the needed funding and their use of the system.