The Battle over Air Passenger Duty

1st December 2013

By John Stewart

Yesterday was the 20th anniversary of the introduction of Air Passenger Duty (APD).  It has proved hugely controversial.  Environmentalists and most residents groups’ believe it is not high enough.  Aviation interests argue it is crippling the industry.

 Even today the Sunday Telegraph is reporting that some 250 chief executives have written to the Chancellor, in advance of his Autumn Statement this week, claiming APD is harming the economy.  http://www.telegraph.co.uk/finance/newsbysector/transport/10485312/Scrap-air-passenger-tax-rises-urges-CEOs.html

In a sense, both sides are right.  Air Passenger Duty has the potential to transform demand for air travel.  And both sides know it.  If it is removed, more people will fly.  If it is increased, demand over time is likely to fall.  Higher rates of APD would hit leisure travel hardest as it is much more price-sensitive than business travel.  Less demand for air travel would, in turn, reduce the demand for new runways.

Howard Davies, the chairman of the Airports Commission, has argued that it is not his job to advise on taxation rates; that he has to work within the current regime.  In my view, he is correct.  It is the job of governments to decide the extent they want to use fiscal measures to manage demand.

When Kenneth Clarke, as Chancellor of the Exchequer, introduced APD 20 years ago in his budget of November 1993 it wasn’t to manage demand but to ensure aviation paid its fair share of taxation: “First, air travel is under-taxed compared to other sectors of the economy. It benefits not only from a zero rate of VAT; in addition, the fuel used in international air travel, and nearly all domestic flights, is entirely free of tax. A number of countries have already addressed this anomaly”.

By 2007 the Government was framing APD as a response to rising aircraft emissions.  But, in recent years, government has seen it as a substitute for tax on fuel and VAT.  Ministers regard it as easier to impose APD than enter into prolonged international negotiations to get agreement for aviation fuel to be taxed or for a VAT-type tax to be imposed on international flights.

At present there is a huge discrepancy between what motorists are taxed and the tax paid by the aviation industry.  Revenue from car travel (tax on fuel and VAT) bring the Treasury about £12 billion a year.  APD raises around £2.8 billion.  It would need to be quadrupled match the income from car travel.

Of course, the aviation industry argues that, unlike roads, it doesn’t depend (certainly in theUK) on state money to build and maintain its infrastructure.  It also points out there are tax-breaks given to rail and bus travel.  However true those arguments are, I’m not sure they fully answer Kenneth Clarke’s original point that aviation fails to contribute its fair share of general taxation.

The industry also argues that APD does not exist in other countries.  That is true.  However, there are a variety of ticket-type taxes or other charges in many European countries.  For example inAustria, the ticket fee depends on the distance, 7€ is for the short distances, 15€ for middle and 35€ for long distance.  None of them – yet – bring in as much money as APD.

But politicians across Europe are beginning to understand APD-type taxes have two potential benefits:  they rake in money during these recessionary times; and they can act as an effective tool to regulate demand if they want to do so.  That’s why they fill environmentalists and residents with hope and strike fear into the heart of the aviation industry.

I suspect the battle will go on for at least another 20 years.

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