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High-flying taxes: ‘Open Skies’ policy If Ottawa is serious about its proposed policy, it must lower the tax burden that hampers competitiveness

After agreements with the United States and the United Kingdom, the government of Canada announced recently it intends to conduct « open skies » negotiations with other countries. Canadian air carriers thus risk finding themselves over the coming years in an environment in which they will have to face increasingly direct competition from their foreign rivals.

In this context, the government’s responsibility is to maintain a tax and regulatory environment favouring the competitiveness of Canadian air carriers. Yet, the various taxes that have been added to the already high fixed costs of airline companies constitute a handicap. Excluding general taxes applicable to all businesses, the specific contribution of the air transport sector to the federal treasury rose by an annual average of 19.6% between 2000 and 2005, reaching $793-million in 2004-2005.

This sharp rise came mostly from the introduction in 2002 of the air travellers security charge, introduced after the attacks of September 11, 2001. This is a source of competitive disadvantage for Canadian air carriers in relation both to alternative modes of transport, where security measures are funded by direct federal assistance, and to U.S. airlines. For example, only last week, Ottawa announced another $14-million to enhance marine security in Nova Scotia.

South of the border, the September 11 Security Fee comes to US$2.50 (about $2.80) per flight segment to a maximum of US$5, with the fee not collected more than twice in the same itinerary. Also instituted in 2002 is the much smaller Aviation Security Infrastructure Fee (ASIF), charged directly to airline companies using U.S. airports. Even adding these two fees, the burden imposed in the U.S. is lower than in Canada, where the fees per segment charged to passengers range from $4.95 for domestic flights to $8.42 for transborder flights and $17 for overseas flights.

The federal government started pulling out of airport infrastructure in 1992, issuing 60-year leases that put airport management, development and operation under the control of local non-profit entities. With this reform the government sought to make Canadian airports and airlines more competitive. But rents are among the main obstacles to the competitive position of Canadian airports compared to U.S. airports, which face no similar cost.

The book value of infrastructure transferred since 1992 has been estimated by the Canadian Airports Council at $1.5-billion. Rents paid by airports from 1996 to 2006 amount to more than $2-billion. If the airports had been privatized and carried « mortgages » rather than leases, the mortgages would be in the process of being paid off.

Moreover, this burden is shared unequally. Nearly the full amount comes from the airport administrations in Toronto (48%), Vancouver (27%), Calgary (9%) and Montreal (7%). Even if Pearson is Canada’s busiest airport, its 2004 market share came to only 31% of total traffic. What it pays in rent is thus far out of proportion to the traffic it generates.

The rents paid by airports to the government have an impact on the landing fees that they charge to airlines. With a 6.9% rise in landing fees, Pearson in 2006 became the costliest airport in the world to land a Boeing 747, moving past Narita airport near Tokyo, which reduced its landing fees.

The previous government announced on May 9, 2005, that it was committed to reducing rents and instituting a new form of calculation, to come into effect in 2010. However, the rate used to calculate this is progressive and imposes a much greater tax burden on high-income airports, which will continue to pay a disproportionate share of rents. Ottawa is not providing any administrative or maintenance service in exchange for the rents it is collecting. It amounts simply to a tax that passengers end up paying, with the revenue going directly to the public treasury.

The federal excise tax on aviation fuel for domestic flights – international flights are exempt under multilateral agreement – is the third largest source of government revenues collected from the airline sector. It was introduced in the 1985 federal budget and set at 2 cents a litre. In 1987, it doubled to 4 cents.

The government’s motivation was to provide an extra source of revenue at a time of record deficits. While the funds collected have certainly helped improve public finances, the deficit has been fully eliminated since 1998, and the tax no longer has the same pertinence. However, it is an extra disadvantage for Canadian air carriers compared to U.S. companies, which currently pay a fuel tax of about 4.3 U.S. cents a gallon, or about 1.3 Canadian cents a litre. The U.S. tax is thus one-third the Canadian tax.

The tax load weighing down the Canadian airline industry is an obstacle to traffic growth in Canada. It also has negative effects on other sectors of the economy that depend heavily on air transport, such as tourism or foreign trade. Travelling by airplane is no longer a luxury, and the financial health of Canadian air carriers benefits the entire economy. In assessing ways of improving the competitive position of the Canadian airline industry, the federal government will have to plan on lowering this tax load, along with its policy of more open markets.

Stéphanie Giaume est chercheure associée à l’Institut économique de Montréal et l’auteure de la Note économique intitulée Des mesures pour accroître la compétitivité de l’industrie aérienne canadienne.

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