Fasten your safety belts. Jeremy Cape of Squire Patton Boggs explains the U.K.’s Air Passenger Duty (APD) and one group’s proposal to impose a frequent flyer levy.
Read the podcast transcript below. This post has been edited for length and clarity.
David Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: taxing the friendly skies. With the holiday season upon us, millions of travelers will be flying home to see family and friends. So what better time is there to talk about the debate over the taxation of air travel and its implications for the environment and questions of inequality? Here to talk to us about aviation taxes worldwide is Jeremy Cape, a tax policy partner with Squire Patton Boggs in London. Jeremy, welcome back to the podcast.
Jeremy Cape: It’s great to be back in Washington D.C.
David Stewart: Now I understand that several countries, including the U.K., have enacted aviation taxes. Can you tell me about how these taxes work?
Jeremy Cape: Aviation taxes in the U.K. were introduced back in the 1990s by the conservative government. It’s charged on all passengers who are leaving U.K. airports. The U.K. was a fairly early adopter in relation to this and initially it was only charged at £5 for flights departing a U.K. airport for another U.K., EU, or European Economic Area airport and £10 for flights heading outside the EEA. It was a very simple tax. But as is often the case, the tax became more complex over time.You can see why you would want to tax flights that are leaving the U.K. for places like Australia at a higher rate than you are if you’re taxing flights that are going to nearer destinations like Morocco. Over time the rules were changed to introduce geographical bands set at 2,000-mile intervals.
I think when this was being introduced there was an environmental element to it, but it wasn’t quite as marked as the discussion now is in relation to aviation taxes. The U.K. government was just looking to a sector that was undertaxed and they looked at aviation where VAT doesn’t apply to international passenger transport, where fuel is not taxed, and they thought, “Here’s an opportunity to be able to raise some revenue.” But inherent in the design of the Air Passenger Duty (APD) was also that you could charge more for more environmentally damaging flights. A flight to Australia is going to have a greater impact on the environment than a flight to somewhere a little bit nearer. The tax was changed over time so that it would tax business travelers because you’re taking up more space in the sky, using more fuel, etc.
David Stewart: It’s kind of an unusual feature of the distance banding where it was only one price per country, which would allow for a traveler from London to Honolulu to pay the same amount that someone would be traveling to Boston.
Jeremy Cape: That’s right. That eccentricity was more accentuated, I think, with the U.S. If you have a flight from London to Boston, it should be taxed at the same rate as a flight to Honolulu or to Los Angeles because the boundaries were drawn to the nearest boundary to the U.K. to determine the banding. Yes, that may have affected flights to China, but we don’t generally fly to as many cities in China as we do to the U.S.
David Stewart: What was the purpose of APD and is it achieving its goals?
Jeremy Cape: APD, I think, was introduced to raise money. That’s what the U.K. government was looking to do in the 1990s. And although there was a reference at the time to the environment, the main reason was to raise the revenue. It does raise revenue. It raises £3.6 billion. That’s less than 0.6% of U.K. tax generally, so it’s not a huge proportion, but it pays for various bits and pieces.
Has it succeeded in reducing the number of flights that are taken by passengers in the U.K.? Well, it’s very hard to be able to say with any certainty. If you look at the number of flights taken by passengers, they’ve gone up since APD was introduced. I think in 2017 there were about three times as many passenger departures as there had been in 1993 when APD was introduced. But would there have been more if it hadn’t been? If you hope that these taxes are reducing flight demand, you’ve seen a lack of success.
David Stewart: Moving on from APD, I understand there’s a group called A Free Ride? They proposed a frequent flyer levy, also known as an FFL. Can you tell us about this proposal and how it works?
Jeremy Cape: The way I understand it is that under the FFL everyone would be entitled to one tax-free return flight from the U.K. every year. The next flight that is taken is taxed, but at a relatively low rate. The third flight, the fourth flight, the fifth flight, the sixth flight, and so on, the tax gradually increases until by the time you’re on your hundredth flight, it’s probably cheaper to buy a plane.
The thinking behind this seems to be that frequent flyers are the problem. I’m probably a frequent flyer. My job requires me to fly to various places in the world. When I’m flying out to Washington D.C., when I’m flying back to London, I’m paying the same tax on that flight as the proverbial little old lady who has never flown anywhere and is flying out to D.C. for the first time because she wants to see the White House. The idea is I’m a problem and my fellow frequent flyers are the problem when it comes to carbon emissions by the aviation sector. If you can stop us from flying quite so much, it’s fine for the little old ladies who are flying once a year or once a lifetime. Let’s get those frequent flyers, let’s tax them, and we can solve the problem.
David Stewart: Now do you think that this sort of tax could be made to work?
Jeremy Cape: The first question is whether it could be made to work from a technical point of view. Quite often when these taxes are introduced, we in the tax community will look and say, “Well, that’s not going to work. It’s too difficult.” You can see that in a way here. How would a website know when I’m booking my flight if I’m on my first flight or my hundredth flight? But I don’t think that’s insurmountable. I think flyers can be required to provide details to measure that, such as passport details, credit card details, and so on. This information exists. I think it could be calculated. I think you could have a system whereby departures from the U.K. are attributed to individuals. It wouldn’t be the hardest thing in the world to work out for yourself how much tax you’re going to have to pay on the next flight you’re going to take.
From a technical point of view, although people criticized it, I wasn’t too bothered. I think that could probably work. My broader issue with the FFL is that I think it’s quite badly designed. I think it’s a populist tax and you’re seeing a lot of these that make it sound like there is a simple solution to a problem and it isn’t going to impact on the vast majority of people. Right? One issue with the FFL is that in terms of the flight that I took out to D.C., the amount of carbon that got emitted on the way out is exactly the same for me as it is for the little old lady taking her first flight. That seems to me that it should be the starting point, right? Let’s look at how much carbon is being emitted on that particular flight and let’s make sure that is appropriately taxed, and then used in such a way as to neutralize the emission.
David Stewart: This tax would definitely raise a fair amount of revenue if it were implemented. What’s that revenue supposed to do? Is it just going to be a revenue raiser or is it going to be directed towards something?
Jeremy Cape: I think there are two elements. I think the idea is taxing frequent flyers, who tend to be wealthier. There are certainly some poor people who fly a lot, but generally it’s the wealthy who flies. There’s a redistributional element. In addition, one would assume they believe that there would be more revenue raised than from APD. I suspect it is possible to raise more tax this way than through APD. Of course, it’s possible to raise more through APD by putting the rates up. There is an element of hypothecating the FFL to environmental measures. The idea is that this would not just go into government coffers. It would be used in a way that will help to save the environment.
David Stewart: This proposal would ramp up the tax for each flight a person takes. Would that really dissuade the truly wealthy from flying?
Jeremy Cape: It’s a really good question. I’m not sure it would. At the margins, you could see someone on their 30th flight deciding, “Actually this is too expensive. I’m going to be paying thousands of pounds to fly a couple of hours that I can just attend via video conference. I’ll just stay at home.” The assumption is that the wealthy won’t be so affected because you could never get the super wealthy. You can never get the tax at such a level that it would dissuade them from making a trip that they have to make.
I’m more concerned at the other end, because the proposal is that the first flight should be tax free. Again, purely populous measure. This means that if I’m one of the approximately 50% of people in the U.K. who don’t fly in a year, I’m suddenly incentivized to fly. Now, admittedly, a lot of them aren’t going to be able to fly. They won’t be able to afford it anyway. But the people who are taking the first flight of the year will, I understand, be paying a lower rate of tax under FFL than they do under APD. At these levels, you’re seeing this backfire.
To be fair to those who came up with the FFL proposal, they have modeled it and they think that it works. But I’ve seen enough tax loopholes in my time to know when something might not work and I could see this not working very well because it ends up encouraging people who never fly to think about flying as an option.
David Stewart: Now you wrote about this topic in a column for Tax Notes. Can you tell me what are your thoughts on how aviation should be taxed?
Jeremy Cape: My starting point on this is that you shouldn’t be looking to the tax system to fix a non-tax problem. Aviation contributes about 2.5% of global carbon emissions. Now you might say, “That’s a lot.” Or you might say, “Well, actually, 2.5%, let’s not focus on that. Let’s focus on the 97.5%.” But in any event, if you take the view that there are too many planes flying, then governments need to respond by reducing the number of flights that can be taken. That’s a hard decision for government. I think that’s why sometimes they look to the tax regime to try and fix the problem. If you can do it through tax, then perhaps that’s going to play out politically with more ease than if you say, “OK, we’re now going to limit every person to a certain number of flights.”
I think one problem is that in trying to find a tax solution to the environmental damage that’s caused by aviation, governments are focusing on the wrong solution. Aviation is a relatively small part of global carbon emissions, so I do think that we need to be looking more broadly at a solution. Carbon taxes, I think, are a good idea. I’ve seen that some suggestion that frequent flyer miles should be abolished because they encourage people to fly. I don’t think that’s correct. I think again, it’s a gimmicky proposal that enables governments to take away the difficult decisions that they otherwise need to make.
David Stewart: I guess having it as a generalized carbon tax would encourage the airline companies to increase efficiency?
Jeremy Cape: Which has happened. If you’re looking at the aircraft manufacturers, they have certainly created far more environmentally friendly planes than was previously the case. I flew out here on an ancient 747, but if I was on one of the more modern Airbus or Boeing models, then my carbon footprint on that flight would have been substantially less. Technology can create the solutions to these issues.
David Stewart: Jeremy, thank you for being here.
Jeremy Cape: Thank you for inviting me.
David Stewart: Have a safe flight home.
Jeremy Cape: I will do and thank you for guilt tripping me.