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When Airline Tickets Start Looking Like Cigarettes

Cigarettes are some of the most heavily taxed goods around. According to this source, the average state tax per pack of cigarettes is $1.23, plus an additional $1.01 of federal taxes, as well as any local taxes. With an average price per pack in the United States of $4.82, the combined state and federal taxes make up 46 percent of the price. In Chicago, total taxes per pack are a whopping $4.67 per pack! I don’t know the exact price of cigarettes in Chicago, but taxes must be around two thirds of the total cost.
So what does this have to do with airline tickets? The overall tax rate on airline tickets hasn’t reached cigarette proportions just yet (according to this site, taxes are 16 percent of airline ticket prices), but in some special cases, the tax on plane tickets makes the purchaser wish they were getting the cigarette treatment.
Recently, my friend and co-author Chad Syverson decided to take his parents to Europe. Their itinerary took them from Fargo, North Dakota, to Chicago to London to Munich. Their return trip takes them from Frankfurt to Chicago and finally back to Fargo, roughly 10,000 miles of flying later. All of the flights are on the same airline.
The tickets were remarkably cheap — only $438.82 per passenger round trip. How much of that money goes to the airline? A paltry $138. The rest — over $300 — is taxes. Percentage-wise, that’s even higher than the cigarette taxes in Chicago.
It also makes you wonder how the airline can sell the ticket so cheaply. The fuel costs alone for the extra weight of a passenger and luggage must get close to their revenue on the ticket. It wouldn’t surprise me if it took 100 gallons of fuel to fly one passenger 10,000 miles with numerous takeoffs and landings along the way. (That would still be only one third as much gas as it would take to drive that distance.) Even so, it would mean the airline was pricing below marginal cost, which is a serious no-no in economics.