FAA tax, my trip to Denver and I am bummed out....

I am bummed out.

In case you haven’t been following this – the Federal Aviation Adminstration tax (which is about 10% of your airline ticket cost) was “suspended” on July 22 due to disagreements between the HofR and Senate.  This tax pays for the construction of new airport expansions.

If you paid for your ticket before July 22 (which I did for my Dallas to Denver flight), and flew both ways BEFORE Congress reinstated the tax, you might be able to petition the IRS for a refund (Delta and United were both offering simply to refund the tax on your credit card).

Unfortunately, before I got back to Dallas from Denver next week, the tax was reinstated… so no refund for me... in fact, Obama signed the bill into law today, painfully while I was in the air to Denver....

You can read about it here:

http://www.reuters.com/article/2011/08/05/uk-congress-reaches-deal-to-end-faa-shut-idUSLNE77400A20110805

An interesting tax “phenomenon” occurred when the tax was dropped two weeks ago.

Typically politicians will say that instituting a tax hike will penalize consumers with higher prices. 

This whole FAA tax suspension proved that is not necessarily true by proving the reverse.

When the tax was suspended, you would have expected prices of airline tickets to drop.

For example, if the price of the ticket was $300 before the suspension (based on $270 for the flight and $30 for the tax), you would have expected the price to decrease to $270.

Guess what happen?  Airlines simply all raised their fares $30 – so they were still collecting $300 per ticket.

A tax cut – or a tax hike – does not mean that the consumer will pay less or pay more.  In this case, a strong oligopoly (few companies controlling most of the airline tickets) could coordinate their action to insure they got all the money from the tax cut.

Cutting taxes doesn’t always mean more money for consumers – corporations could simply keep the money and increase their net income (or pay workers more, or reinvest in operations more, or pay more to shareholders). 

Raising taxes doesn’t always mean higher prices for consumers – corporations might be forced to keep prices the same and pay the tax themselves – thereby reducing their net income.

Similarly, if Congress were to increase the gas tax, or increase the taxes paid by oil companies on their income – it doesn’t necessarily mean that consumers would pay higher prices at the pump – corporations could simply make less income.  It all depends on the supply and demand forces working within that sector of the economy at the time.

In four words – “well, it all depends….”