Air tax doubts fly in from all angles

By David Cronin

Date: 30/06/05

A UNIFORM approach among EU governments to using an air travel levy for increasing development aid would avoid adverse economic effects, a new study by the European Commission suggests.

The Union's finance ministers will debate the air tax idea again at their 15 July meeting. Earlier this month they agreed that decisions on whether a levy should be compulsory or voluntary would be left to individual member states.

While the Commission's analysis says that the overall economic impact of the scheme should be negligible "if consumers are well-informed and rational", it indicates that differing attitudes to the tax from EU governments could distort competition.

Germany, Belgium, Luxembourg and France have indicated they would be prepared to introduce the measure as a formal tax. Yet other countries are worried about negative consequences for their tourism industries and contributions are likely to be left to the discretion of passengers.

The EU executive says that passengers are unlikely to change travel plans because of a small levy of just a few euros. But it says that a "mixed approach" of voluntary and mandatory contributions by different EU states "might have effects of destination-switching".

"Peripheral countries and regions that are more dependent on aviation for transport could be more affected," it adds.

The paper describes an airline tax as "one of the more promising options" for increasing development assistance, citing estimates that additional aid of about €42 billion per year is needed if the UN's Millennium Development Goals of reducing the most extreme forms of poverty by 2015 are to be attained.

The Commission calculates that a tax of €5 per passenger on intra-EU flights and €10 on other international flights would raise about €2.8bn a year, but would lead to a 3-4% fall in air travel.

But it says the predictability of the resources raised by the scheme are uncertain, given that it will depend on public acceptance.

It therefore casts doubts on an idea under discussion by EU finance ministers of using the scheme for an international finance facility, under which bonds from capital markets are used to raise cash for aid.

The risks for bond-holders could be "too high", it says, if repayments are based on "the unpredictable revenues of voluntary contributions".

The Association of European Airlines has been campaigning against the levy proposal. Its spokesman David Henderson said it would be a "total fallacy" to claim that the tax will not have an impact on air travel demand.

Francisco Javier Padilla from Brussels anti-poverty group Centre National de Co-opération et Développement said a compulsory tax would be far better for increasing aid. "You could raise 7-10 times more money with a real tax than with a voluntary contribution," he said.

Article reports on a study by the European Commission which said that a uniform approach among EU governments to using an air travel levy for increasing development aid would avoid adverse economic effects.