Cargo carriers concerned about tax hike
JUNEAU — Most attention focused on the state Legislature is on the big revenue bills: a state income tax, more changes in oil taxes and restructuring how Permanent Fund income is managed.
But there are serious issues bubbling just below the surface, and even legislators aren’t aware of how they could adversely affect the state’s economy.
Take air cargo, for example, which provides the majority of the revenues to Alaska’s international airports in Anchorage and Fairbanks.
The state’s proposed increase in jet fuel taxes, which are included in Senate Bill 25 and House Bill 60, would triple the state tax when it is fully implemented, from 3.2 cents to 9.6 cents per gallon, according to information air carriers have given legislators.
The bills are at an advanced stage in the Legislature, pending in both the House and Senate Finance committees.
When a 2.7 cent per gallon “fuel flowage fee” — a kind of tax — is added to the tax increase, the total cost of fueling up a big air cargo jet at Ted Stevens International would be 12.3 cents per gallon, including the tax and the fuel fee, air carriers told lawmakers.
That compares with a 2.4 cents per gallon jet fuel tax at Seattle-Tacoma, 3 cents per gallon tax in Portland and 2 cents per gallon tax in Vancouver, British Columbia, three west coast airports that are competitors with Anchorage for air cargo business. No fuel-flow fee is charged at those airports.
“This scale of a tax increase could tip the scale for these carriers, undermining the Anchorage advantage in air cargo. It could have devastating long-term results for our economy,” said Bill Popp, president of Anchorage Economic Development Corp.
In the midst of Alaska’s recession, the air cargo business, which is growing, is a bright spot. Cargo largely underpins the finances of Ted Stevens Anchorage International Airport, and the airport itself is a huge economic engine for the community, sustaining one in 10 jobs in Anchorage, Popp said.
Cargo operators like FedEx and United Parcel Service use Anchorage as a hub for those carriers’ network of U.S.-Asia flights, and the locations of the hubs, despite Alaska’s higher costs, are supported by the favorable economics of refueling.
This also underpins an extensive number of refueling stops by other U.S. and foreign air cargo carriers. Carriers can load their planes with more paying freight and stop in Anchorage to refuel and make more money compared with flying nonstop, for example from the continental U.S. to Asia.
Landing fees and other costs are already somewhat higher in Anchorage compared with Seattle and Portland and considerably higher than Vancouver.
The current jet fuel taxes are also higher in Alaska but close enough that the overall economics still support stopping in Alaska for refueling and operating hubs here, as UPS and Federal Express do.
However, Popp thinks the magnitude of the tax increase being considered in the Legislature might be enough to tip the balance and begin the erosion of the industry.
Carriers would be encouraged to consider other airports and eventually overfly with cargo as passenger jets now do.
At least one major cargo operator is already flying nonstop West Coast-Asia and U.S. Midwest to Asia, although that is linked to specialty cargos, for now.
Nick D’Andrea, United Parcel Service’s public affairs vice president, said his company is sympathetic to Alaska’s fiscal problem and even supports the motor fuel tax, which would affect UPS’s extensive surface delivery system in the state for freight and parcels.
“We support the motor fuel tax because it’s a user fee,” with the revenues helping support road and highway maintenance, he said.
Other parts of the legislation, which also hikes general aviation fuel and marine fuel, are similarly “user fees” that will help support infrastructure.
“The jet fuel tax is different, D’Andrea said. “It is not a user fee,” linked to support of major airports UPS and other freight operators use.
That’s because the state’s international airport system, which operate the Anchorage and Fairbanks airports, is already financially self-supported through landing fees and the fuel-flowage fee, which also helps support airport operations, D’Andrea said. The airlines own and operate their own fueling facilities.
Instead of supporting airports the major airlines use revenues from the jet fuel tax will go to help support airports outside of Anchorage and Fairbanks that the big cargo carriers mostly do not use and where landing fees are not charged, with maintenance funded through the state’s general fund budget.
That cross-subsidy is seems unfair, D’Andrea said.
However, the more serious effect is that it will undercut the economics of the industry in Alaska. While fuel loaded on planes for international flights is now tax-exempt, D’Andrea said the tax increase on fuel for domestic flights can indirectly affect international flights.
The carriers’ international flights that connect with domestic flights at the hubs in Anchorage would be tax-exempt on the international leg but would pay the higher tax on the domestic leg, D’Andrea said.
D’Andrea said a solution to the problem is to exempt jet fuel sales at the Anchorage and Fairbanks airports from the tax increase because the taxes are not user fees, unlike the other fuel taxes in the legislation.
Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at email@example.com.