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Testimony of Elliot Seiden
Chairman of the
Coalition for Fair FAA Funding
before the
NATIONAL CIVIL AVIATION REVIEW COMMISSION
May 28, 1997

Chairman Mineta, members of the National Civil Aviation Review Commission, thank you for this opportunity to discuss the future of Federal Aviation Administration financing. My name is Elliott Seiden, and I appear before you today wearing two hats -- one for my employer, Northwest Airlines, where I am Vice President, and the other as Chairman of the Coalition for Fair FAA Funding. The Coalition for Fair FAA Funding is an informal coalition of air carriers including the Regional Airline Association (representing 69 regional carriers), American, Continental, Delta, Northwest, TWA, United and US Airways. Together with their affiliated commuter carriers, the Coalition accounts for approximately 85% of all domestic air travel.

INTRODUCTION

We are most grateful for this forum today and for the serious, thoughtful and expeditious manner in which the Commission is moving toward a comprehensive proposal for FAA reform. The airlines, our passengers and the communities that enjoy the benefits of airports and air transportation owe each of you a debt of gratitude for your commitment to improving the national air transportation system.

We face today as important a policy issue in aviation as any we have faced since economic deregulation of the industry. In fact, questions of how best to finance the FAA and whether the existing aviation ticket tax distorts air travel costs are themselves left over from the deregulation process.

In deregulating the aviation industry, the government stopped telling airlines and passengers how much fares should be, leaving ticket prices to the forces of supply and demand and sparking dramatic improvements and increases in air service in the United States. But, in deregulating ticket prices, we all missed something. We missed the fact that a tax linked to ticket prices is itself a form of economic regulation because it distorts differences in fares and bears no relationship whatsoever to the cost of the government services its revenues are used to provide.

The Coalition believes that it is now time to address this last vestige of CAB-style price regulation by replacing the outmoded and inequitable aviation ticket tax with a fair, stable usage-based system of FAA financing. As you well know, it is not often that the seven major carriers, plus the Regional Airline Association, can agree on anything, small or large, but we are absolutely committed to realizing fundamental FAA financing reform and to paying our fair share of FAA costs under this new system. In addition, we are fundamentally opposed to any proposal that increases the total amount of revenues collected from the airline industry and its passengers.

The Coalition proposed last June an interim user tax formula that would replace the existing ticket tax dollar-for-dollar. This new user tax formula was based on three primary indicators of system usage -- aircraft size, passengers flown, and distance traveled. We are the only group to make a specific proposal for change. While we believe that the principles embodied in this proposal are sound, we welcome a full debate regarding alternative formulas and are willing today to support a reasonable alternative usage-based tax system. Indeed, we are willing to provide new alternative usage-tax formulas to you or to any other policy makers in order to promote a full debate on this important issue.

Turning to the merits of the move toward a usage-based FAA funding mechanism, there are two basic principles which motivate our efforts,

1) Financing reform is a fundamental element of overall FAA reform,

2) Passengers deserve an equitable aviation tax system.

 I would like to discuss each of these topics in turn.

 FINANCING REFORM IS A FUNDAMENTAL ELEMENT OF OVERALL FAA REFORM

 It is clear to all of the users of the national aviation system that insufficient progress has been made to date toward improving FAA operations and modernizing its single largest function, air traffic control. Previous attempts to update and improve the system have been plagued by cost overruns and delays. Yet the need for ATC modernization -- and the resultant costs to passengers, carriers and the federal government -- grow more acute each year.

The FAA Reauthorization Act of 1996 set in motion a process, focused largely on this Commission, to address the fundamental inefficiencies and backward incentives at the FAA. The Coalition believes that moving to a usage-based tax system is essential to achieving this goal of lasting systemic improvements at the FAA. We premise this belief on the following.

First, any revenue stream employed has the capacity either to enhance or to undermine financial discipline at the FAA. Let me repeat that last phrase -- "financial discipline at the FAA" -- because one does not often hear the words "financial," "discipline" and "FAA" uttered together in a serious policy forum. It is, however, the most basic principle that we must strive for in reforming the FAA.

No successful business operates without financial accountability and a basic understanding of its costs, the value of its product, and the needs of its customers. The FAA itself needs to operate in a business-like manner in order to become a more cost effective provider of air traffic management services. The cost of operating the ATC system is determined by traffic volume and the continuing need to upgrade technology. By tying the FAA's funding to measurements of actual system use, rather than to the wholly unrelated cost of airline tickets, you will dramatically strengthen the link between the FAA and its users.

Second, as the FAA approaches the 21st Century and grapples with increases in traffic and critical modernization needs, any new financing mechanism must offer true revenue stability. One might think that the existing ticket tax is a stable funding source since it is tied generally to passengers and passenger traffic. A tax on the price of airline tickets, however, bears no relationship to operating and modernization costs.

When ticket prices fall -- during a recession or a fare war -- FAA revenues fall without regard to air traffic control usage or system needs. This disconnect between the existing ticket tax and ATC funding needs means, for example, that a fare war will lead to lower air fares and lower taxes, thus depressing ATC funding exactly when it is most needed to provide for increased traffic volume. A usage-based funding system would raise revenue in direct proportion to use of the system. As use of FAA services increases, FAA revenue increases.

PASSENGERS DESERVE AN EQUITABLE AVIATION TAX SYSTEM

We should also agree that a fundamental principle of any federal fee or tax system is equity. Equity, at once the simplest and most challenging principle of financial reform, is what American passengers and participants in the airline industry deserve as supporters and users of the FAA's services.

Even though the existing aviation ticket tax has always been inefficient, prior to deregulation it had a certain element of fairness because the CAB dictated that on a per mile basis, fares in all markets were the same. Applying a percentage sales tax to uniform ticket prices produced roughly proportionate sharing by all passengers in financing air traffic control services.

Today, however, airline ticket prices vary widely, even on the same flight. As a result, the aviation ticket tax forces passengers who pay higher fares -- whether as a result of their destination, their date of purchase, or their carrier of choice -- to pay a disproportionate share of the costs of FAA services. This is simply unfair. When Congress imposes fees or taxes to pay for a specific government service, it is simply untenable to ask two people receiving exactly the same FAA service to pay wildly different amounts. This is particularly true when the inequities clearly and consistently favor some groups over others, as is the case with the ticket tax which hits travelers on thinly traveled routes from small communities particularly hard.

Consider, for example, a passenger that flies the 339 miles from Garden City, Kansas to Kansas City. This passenger will pay between $40.64 and $27.20 under the ticket tax even though he or she receives very little in the way of ATC services because the air space for this route is relatively uncongested, and Garden City does not even have a control tower. Compare this with a passenger that flies the 397 miles from Orlando to Atlanta. This route is heavily congested, requiring substantial ATC resources to safely guide each flight to its destination. Yet, a passenger flying this route on ValuJet pays as little as $3.90 under the ticket tax.

The single most important step that we can take in moving toward a user-based financing system is to impose some fundamental fairness in the system. If FAA fees represent a reasonable allocation of its costs, users of the system, be they passengers or airlines, will be treated fairly.

ACHIEVING FAA FINANCING REFORM

Our goal as a coalition is to help forge a consensus in the aviation industry and on Capitol Hill on how to replace, dollar-for-dollar, the taxes that our passengers now pay with a more appropriate revenue mechanism. We do not advocate an increase in any other sector's funding responsibilities, nor do we take a stand on how these sectors should pay their share. We have no hidden agenda to put any other company out of business, harm any sector of the industry, or cripple any community. We simply believe that now is the time to replace the outmoded aviation ticket tax with a stable and equitable usage-based tax system.

For perhaps the first time, we have the basic FAA cost information necessary to make this needed transition to a user tax. The FAA and Coopers & Lybrand agree that the comprehensive cost allocation study conducted by Gellman Research Associates provides an adequate basis for devising a usage-based financing system.

In addition, the balanced budget agreement between Congress and the Administration relies heavily on the revenue expected from the authorization of a long-term FAA funding mechanism. As a result, Congress must act. We believe that there is a growing consensus within Congress to seize this opportunity to shift from the ticket tax to a more equitable usage-based tax system. This new system must not, however, increase the total tax burden imposed on the air carriers and our passengers.

Any tax plan that raises additional revenue would amount to a new tax on the flying public in order to pay for federal expenditures that are wholly unrelated to the FAA and the ATC system. Instead, Congress and the Administration need to remain focused on their stated objectives in reviewing the structure of aviation taxes -- to create the right incentives for improved operations at the FAA and to create a tax system that is more equitable for the flying public -- and I sincerely hope that your recommendations will encourage them to do so.

Thank you for this opportunity to present this statement on behalf of the Coalition for Fair FAA Funding.