When Tom Brady and the New England Patriots travel to Pittsburgh to play the Steelers, the state of Pennsylvania sends a tax bill to each of the Patriots; the idea is that the players earned their paychecks in Pennsylvania that week, so they should pay Pennsylvania state income tax for a pro rata portion of their annual salaries.
It would be reasonable to assume that the international tax system for passenger airlines worked the same way, but it doesn’t. When Qantas Airlines flies from Sydney to Los Angeles, the Australian-based airline is exempt from U.S. income taxes. Similarly, when American Airlines flies abroad, it pays income taxes only in the U.S. Various treaties and tax provisions create this reciprocal arrangement to encourage growth in the industry based on mutual opportunities to compete.
As a general proposition, this seems like a pretty good system, or at least it used to be. The global aviation landscape radically changed when the United Arab Emirates and Qatar began massively subsidizing their own airlines in violation of “Open Skies” agreements. Their $50 billion violation is so big in magnitude it is difficult to grasp. But try this: $50 billion is larger than the gross domestic product of most of the countries in the world (it would rank 80th out of 188 countries).
Free market competition, based on the rule of law, requires people and companies to comply with agreed upon rules and standards. Cheaters are not supposed to prosper, only the most efficient and most competitive are supposed to rise to the top. That is why the American Conservative Union continues to press the Trump Administration to prevent foreign governments from giving massive subsidies to their own countries’ airlines in violation of capitalistic principles.
But it is even more absurd that U.S. taxpayers are currently subsidizing those same foreign airlines. Every member of Congress should be able to get behind this fundamental principle: foreign airlines that receive government subsidies should not be rewarded with additional U.S. tax breaks shouldered by hardworking Americans, nor should foreign schemes to destroy U.S. jobs be incentivized through our own tax code.
The Senate tax bill contains an amendment sponsored by Sen. Johnny Isakson that would limit the reciprocity provided in Section 883 of the U.S. tax code when: (1) there is no income tax treaty between the foreign government and the U.S. and (2) there are fewer than two flights a week by major U.S. airlines to that foreign country. The Isakson’s amendment would subject certain foreign airlines to U.S. taxes on their U.S. revenue where there is no reciprocity of competition. It would not keep those airlines from flying to the U.S., but it would make sure that American taxpayers no longer have to subsidize them.
Opposition has emerged from an organization called IATA, which is basically the United Nations for aviation. They assert that the Isakson provision would “upend decades of international precedent.” They are correct, but they neglect to add that UAE and Qatar have begun getting gigantic government subsidies, upending decades of free market competition. Isakson’s amendment simply adjusts international tax policy to the new norm that UAE/Qatar have created, a norm with “competitors” that are not constrained by international agreements or limited by financial norms of profit and loss.
A core tenant of tax reform is to use the tax code to improve American competitiveness in international commerce. The Isakson amendment does exactly that by eliminating a tax benefit for foreign airlines that don’t play by the rules. Now that is a “pay for” that everyone should support.
Dan Schneider is executive director of the American Conservative Union.