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Airport rents and other hidden taxes

GB Geo-Blog

Airport rents and other hidden taxes

As reported by Brent Jang in today’s Report on Business: “Calgary International Airport is pushing to break its long-term lease with the federal government, aiming to…shake off what it views as excessive annual rents that drive up the costs of flying.” I wish the airport well.

When the Canadian Government started transferring control of the 26 major airports across Canada to local, non-profits in the 1990s, the government charged 14 of the new airport authorities rents, supposedly to pay for the value of the assets and to compensate taxpayers for their past investments in these airports. Most of the airports were in poor shape and required massive amounts of investment to bring them up to date. The transfers enabled the federal government to avoid these investments, and the rents provided a relatively hidden source of revenues.

In the fiscal year ended March 31, 2010, the federal government collected $257 million from these rents. During the past 10 years, the rents generated $2.6 billion for the government. However, these rents are largely passed on to the airlines, and in turn to passengers, making air travel more expensive, and placing the ultimate burden on air travelers.

Moreover, in transferring control of Toronto’s Pearson Airport to the Greater Toronto Airports Authority (GTAA), the Chretien Government spared itself the expense of buying out the private developers of Terminal 3, by shifting the burden to the GTAA. The GTAA had to borrow an additional $850 million to pay for Chretien’s folly – his opposition to Brian Mulroney’s attempt to attract private investors.

The federal government’s security policy compounded the costs for air travelers in Canada. In the December 2001 budget, the Chretien Government introduced new security initiatives. With the exception of air security, all of the other initiatives were funded from general revenues. Air security was the only program funded by a user fee, borne directly by air travelers. On February 26 of this year, the Transport Minster in the Harper Government announced increases of 27% to 53% for the existing security tax.

The economic justification for a direct tax on the airline industry for security is very weak. The International Air Transport Association believes that governments have direct responsibility for aviation security and its funding.

The Canadian Government has now collected over $3.2 billion from airlines and their passengers from this Air Travelers’ Security Charge (ATSC).

During the past 10 years, the federal government has collected directly and indirectly almost $8 billion from the air transport industry in Canada. By comparison, VIA Rail continues to receive large annual subsidies. During the past decade, VIA has received almost $2.6 billion in subsidies.

There is something wrong with aviation policy in Canada, when during the 2006-2009 period, the federal government collected $2.1 billion from airport rents and the ATSC; the 15 major airport authorities earned an aggregate net income of $680 million (not bad for non-profits); and the major Canadian airlines scraped out an aggregate net profit of $24 million.

Each decision to impose, increase or expand the scope of a tax or fee is usually made independent of all other such decisions. Therefore, while each is viewed on its own as relatively benign, the combined result is anything but. Indeed, a survey I conducted of 10 selected domestic flights for Air Canada and Westjet shows that the aggregate impact of a host of government policies accounts for 20% to 25% of the total fares.

Productivity growth continues to hover near the top of the federal government’s policy agenda. Without higher and sustained rates of productivity growth, the government will have difficulty achieving its fiscal goals. The air transport industry is a key sector spurring productivity growth.

Consequently, there are sound reasons for ensuring that this industry thrives in Canada and that Canadian carriers succeed in the North American and international markets. Changing the policy course from the current one where this industry is viewed strictly from a fiscal position to one where it is recognized as a key contributor to productivity growth requires cutting the costs faced by this industry. The Calgary Airport initiative is a good starting point.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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