Taxation in the Aviation Industry: Insights and Challenges

Taxation in the aviation industry has evolved considerably over the last 25 years. Despite the vital role aviation and airports play in efficiently moving goods and people, the effect of taxation in this industry is understudied. Understanding how passengers and carriers respond to taxes and government fees is crucial to efficiently raising government revenue. After an overview of how taxation has evolved in the industry, this paper estimates how fares adjust in response to tax changes. Exploiting variation in taxes across similar routes and over time, the results suggest taxes are over-shifted to consumers (i.e., a $1 increase in taxes results in more than a $1 increase in the total fare). The paper discusses potential explanations for this result: the nature of competition in the industry and the propagation of taxes within a network.