advice paper September 2017 I NO: 17–23 air departure tax royal society of edinburgh response Introduction Question 1 Do you support the Scottish Government’s policy plan to reduce the overall 1 The Royal Society of Edinburgh (RSE) welcomes burden of ADT by 50% by the end of the current the opportunity to respond to the Scottish session of the Scottish Parliament? Government’s consultation on the Air Departure Tax (ADT), which is will replace the current Air 5 The RSE has reservations over whether the Passenger Duty (APD) from April 2018. planned reduction of ADT by 50% would play any significant role in achieving the strategic 2 The RSE submitted evidence in response to the objectives set out by the Scottish Government Scottish Government’s consultation on a Scottish of improving connectivity in Scotland or replacement for Air Passenger Duty in June 2016. strengthening the Scottish economy. This Advice Paper echoes the points made in that response. Question 2 3 The RSE has undertaken a considerable amount Please explain your answer to question 1. of work on taxation, Scotland’s fiscal framework Strategic and Policy Objectives and the further devolution of fiscal powers 6 The RSE strongly supports the objective set out to Holyrood in recent years, including the in the consultation document of improving following papers: Scotland’s connectivity, and the wider aim • Competitive and Fair Taxation (July 2015)1 of a stronger economy which is better equipped • Scottish Fiscal Commission to provide the best possible opportunities and (November 2015)2 quality of life for the population. We have reservations, however, as to whether the • A Scottish Replacement for Air Passenger broad-brush measure of reducing the rate of Duty (June 2016)3 the Air Departure Tax would play any significant • A Scottish Approach to Taxation role in accomplishing these goals, as (a) much of (October 2016)4 the impact comes from boosting tourism and it is not clear that this significantly enhances 4 This response was prepared using the expertise connectivity, and; (b) the strongest boost to of a Working Group of RSE Fellows from connectivity through air travel accrues to the a wide range of institutions and with diverse Highlands and Islands, where airports are already backgrounds. The Advice Paper has been exempt from the current APD. approved by the General Secretary of the Royal Society of Edinburgh. 1 https://www.rse.org.uk/wp-content/uploads/2016/09/AP15_12.pdf 2 https://www.rse.org.uk/wp-content/uploads/2016/09/AP15_23.pdf 3 https://www.rse.org.uk/wp-content/uploads/2016/09/AP16_13.pdf 4 https://www.rse.org.uk/wp-content/uploads/2016/10/AP16_21.pdf 1 advice paper 17–24 7 While the rationale for the reform appears to 11 The RSE recognises that increased connectivity be to improve Scotland’s competitiveness, in is an important aspect of improving the Scottish comparison to both the rest of the UK and the economy and the lives of the people living in world, we find that the proposals do not appear Scotland. However, as noted above, we think that to adequately consider or address: this objective is best addressed by exempting airports in the Highlands and Islands. We also • the efficiency of APD as a revenue-raising tax; note that significant improvements in • the regressive nature of APD; connectivity may encourage people to travel • the lack of examination into how a 50% more frequently and so come with an reduction would actually play a role in environmental cost. Therefore, a balance must achieving the stated objectives. be found which allows economic growth, while contributing to our environmental targets. 8 The RSE recognises the actions of the Scottish Government in setting some of the most 12 Consideration must also be given to whether any ambitious and challenging climate change targets economic benefits derived from a reduction in the in the world, in the Climate Change (Scotland) rate of ADT would benefit all regions of Scotland Act 2009 and proposed in the Climate Change equally or would accrue unevenly. Edinburgh Bill also currently out for consultation. However, and Glasgow airports accounted for more than we find it difficult to reconcile these ambitions three-quarters of Scottish air passenger traffic with the proposed reduction in a tax which serves in 2015 7 and would almost certainly benefit an important environmental purpose as a form disproportionately from the reform. Furthermore, of carbon tax. as airports in the Highlands and Islands are already exempt from current APD a reduction in Economic Considerations the rate for flights leaving other Scottish airports 9 The RSE considers that arguments suggesting could actually be argued to reduce the competitive that the effect of a 50% reduction in ADT would advantage of the exempt airports. be to boost tourism, create jobs and increase Tax Revenue growth in Scotland are not well established. While it does seem likely that a reduction in ADT 13 The RSE believes that a strong case can be would result in, at least, a small increase in made for retaining the current rates as a source tourism to Scotland, we have significant doubts of revenue. Firstly – because it includes residents that the suggested reform would achieve the from outside the UK –- it broadens the tax base. outcomes the Scottish Government desires for Secondly, the demand for air travel is relatively the economy. inelastic, in that it does not respond greatly to small changes in prices. This means that ADT is 10 We also note the trends in air travel across the a relatively stable source of revenue. Finally it is UK. The number of people travelling through difficult, if not impossible, to avoid paying the tax. UK airports has increased year-on-year since All these factors make a relatively high rate of 2010, from fewer than 211 million passengers to Airport Departure Tax an important component over 251 million passengers in 2015.5 This is also of a well-designed tax system. true in Scotland where numbers have increased from under 21 million in 2010 to over 25 million passengers in 2015.6 Considering the trend is already towards greater numbers of air passengers in both the UK and in Scotland, we are unsure of the necessity of action which seems likely to increase further the amount of air travel undertaken. 5 https://www.gov.uk/government/statistical-data-sets/avi01-traffic-passenger-numbers-mode-of-travel-to-airport 6 https://www.transport.gov.scot/publication/scottish-transport-statistics-no-35-datasets/ 7 https://www.transport.gov.scot/publication/scottish-transport-statistics-no-35-datasets/ 2 advice paper 17–24 14 We consider the current system of APD has Emissions and the Environment proved itself to be an efficient tax in raising 17 In addition to raising revenue for the government, revenue for government. The most recent ADT would also serve as an important environmental Government Expenditure and Revenue Scotland tax. Due to international agreements – following (GERS) report found that Air Passenger Duty is the principles of the Convention on Civil Aviation estimated to raise £264 million for the Scottish – airlines are exempt from paying taxes and custom Government in 2016-17.8 We believe that duties on various aviation-related goods, including consideration should be given to whether it is aviation fuel. Thus, while unleaded petrol and wise to reduce a consistent source of government diesel for cars in the UK are taxed at a rate of revenue during a period when it is almost £0.5795 per litre plus VAT 10, aviation kerosene universally accepted that public finances are strained, and are likely to be so for the foreseeable is in the privileged position of having no tax. future. We note this in the context of revenues 18 The tax exempt status of aviation kerosene from North Sea Oil falling sharply. North Sea essentially acts as a government subsidy on air oil and gas production brought in just under travel; one which is not afforded to any other £11 billion in 2011-12, but will cost the UK mode of transport. In 2014, aviation emissions exchequer over £300 million in 2016-17. 9 accounted for around 6% of all UK greenhouse gas emissions.11 Forecasts by the Department for 15 By cutting the rate of ADT, the Scottish Transport suggest that emissions from domestic Government could reduce its own revenue, and international flights could account for 20.6% while increasing that of the UK Exchequer. of UK carbon emissions by 2050.12 Considering We consider that more work must still be these realities we question the rationale for undertaken for it to be confidently suggested reducing the rate of ADT, which is the only that the proposed reduction in the rate of ADT quasi-carbon tax on air travel. would significantly increase tourism in Scotland. However, if this were to be the case, the Scottish 19 The RSE’s previous Advice Paper on A Scottish Government might be sacrificing revenue Replacement for Air Passenger Duty (June 2016)13 derived from a tax it will collect (ADT) in order was written prior to the referendum on the UK’s to increase revenue from a tax (VAT) that the UK membership of the European Union. We noted Exchequer receives from tourists’ expenditure that while the RSE could see no environmental while in Scotland. The Scotland Act 2016 justification for cutting the rate of APD, the need legislates for Scotland to be assigned only the first for a quasi-carbon tax, such as ADT, could be 10p of VAT receipts. The Scottish Government lessened in the future depending on the success would, however, benefit from increased income of the EU Emissions Trading System (EU ETS).14 tax revenue from any new jobs created.