Tax Hikes To Hit Corp. Budgets

<B> Tax Hikes To Hit Corp. Budgets</B>

By Mary Ann McNulty

<i>Chicago</i> - If you budgeted a 4 percent to 6 percent rise in air travel costs this year, chances are you've already blown the budget, thanks to Congress' tax changes.

In fiscal year 1998, which runs through September, Congress approved a 4.2 percent jump in airfare taxes, and an additional 4 percent boost in each of the next four years for a company with $1 million in annual air spend, average ticket price of $500 and four segments a ticket, consultant Robert Langsfeld told participants in a series of Association of Corporate Travel Executives meetings held last month. Besides explaining the tax impact, Langsfeld, along with colleague John Fazio and Chip Mahan, travel reengineering manager for the National Security Agency, discussed net fare deals, transaction-based agency pricing, on-sites and other concepts travel managers need to evaluate to take control of their travel spend.

"If your mix is 90 percent domestic and 10 percent international, it's a 39 percent increase in your tax buying over the next four years," Langsfeld said of the new Airport and Airway Trust Fund laws.

Instead of the flat 10 percent tax on domestic airfares, the new law taxes airfares at a lower percentage, currently 9 percent, but adds segment fees. Through September, the tax is 9 percent, plus a $1 segment fee. As of Oct. 1, the tax is 8 percent, plus a $2 segment fee. In fiscal year 2000 and after, the tax rate will be 7.5 percent with a segment fee of $2.25 from Sept. 30, 1999 to Jan. 1, 2000; $2.50 in 2000, $2.75 in 2001 and $3.00 in 2002. After that, the taxes will be indexed for inflation, "which will make it even more difficult to project changes," Langsfeld said.

On international tickets, Congress has increased the tax from $6 to $12 and added another $12 tax on tickets that begin or end in the United States.

"If you fly short distances or are located in a 'connection city,' you'll pay more because of the segment fees. Besides the ultimate consumer, the shorter haul carriers stand to take more of a financial hit from this tax. One airline said the tax will cost it $5 million," Langsfeld said.

The tax changes also will impact those buying frequent flyer miles from the airlines, as the law taxes the purchase of those miles at the same percentages as airfare taxes--9 percent through September, 8 percent in fiscal year 1999 and 7.5 percent in fiscal year 2000 and after. Already rental car companies have reduced the airline frequent flyer miles they give customers in conjunction with rentals, or eliminated such tie-ins altogether (<i>BTN</i>, Nov. 3, 1997).

The tax is one reason corporations are taking a serious look at net fare deals, said Langsfeld and Fazio. Such deals, along with transaction based pricing with agencies, also are allowing corporations to take control of their total travel spend and be less impacted by such industry changes as the recent commission cuts.

Mahan said the benefits of net fare deals include lower ticket taxes and reduced agency and airline cost accounting.