Air departure tax in Scotland: an economic assessment

1. Introduction

In November 2014, the Smith Commission Report recommended that the power to charge tax on air passengers leaving Scottish airports be devolved to the Scottish Parliament. It also outlined how the Scottish Government ‘ will be free to make its own arrangements with regard to the design and collection of any replacement tax, including consideration of the environmental impact’ ^[4] .

Following an amendment to the Scotland Act 1998 in May 2016, the Scottish Parliament was given the power to legislate for a replacement to UK Air Passenger Duty ( APD) ^[5] . As a result, in December 2016 the Air Departure Tax (Scotland) Bill was introduced to the Parliament ^[6] . The Bill sets out how Air Departure Tax ( ADT) will be structured and operated, with detail on the tax rate amounts and tax bands that will apply to be delivered in secondary legislation in autumn 2017 (the Bill having been enacted in summer 2017). ADT is expected to apply to all flights departing from Scottish airports ^[7] from 1 April 2018, at which point UK APD will be ‘switched off’ in Scotland. ADT will be collected and managed by Revenue Scotland, Scotland’s tax authority for devolved taxes.

The Scottish Government has a long-standing policy to reduce the overall burden of APD (i.e. the total tax receipts from APD) by 50% by the end of the current session of the Scottish Parliament, expected to be in May 2021.

The Scottish Parliament’s Finance and Constitution Committee is the lead Committee for ADT and its Stage 1 Report on the Bill was published on 1 April 2017. Among other things, the report recommended that the Scottish Government commission an independent economic impact analysis of the reduction in ADT to inform the introduction of secondary legislation on ADT tax rate amounts and tax bands. The report also recommended that the Scottish Government undertake regular evaluations of the socio-economic and environmental outcomes of ADT.

To address the Committee’s recommendation for an independent economic impact assessment to be conducted on the impact of a 50% reduction in the overall burden of ADT, the Scottish Government commissioned Peter Brett Associates LLP ( PBA) and Northpoint Aviation to undertake this research. This report contains the findings of the research and establishes a plan for the future monitoring and evaluation of ADT.

Overview of Approach

The approach taken to the study has combined air travel demand forecasting with economic impact analysis. Both of these elements have been informed by a programme of consultation with key industry stakeholders from airports, airlines, industry representative groups and tourism representatives, with this building on an initial literature review.

The report is structured as follows:

• Section 2 establishes the current demand for, and supply of air services in Scotland at current tax levels.
• Section 3 establishes the ‘logic modelling’ framework, a process whereby the potential outcomes and impacts of the proposed tax reduction are mapped in a transparent and consistent way within an overall logic flow.
• Section 4 details the ADT scenarios to be tested.
• Section 5 considers the potential outcomes of each scenario in terms of the demand for air travel and changes in the industry supply side.
• Section 6 considers the wider economic impacts associated with each scenario.
• Section 7 establishes the monitoring and evaluation framework against which the implemented option should be reviewed over time.
• Section 8 draws together the previous sections into a set of succinct conclusions.

Scope of Study

There are a number of key points in relation to this study, which should be noted at the outset:

A number of previous studies reviewed here make assumptions in relation to reductions in APD being fully ‘ passed through’ to passengers in the form of lower fares, and how this then manifests itself in terms of wider economic impacts. The reality is more nuanced, with the level of pass-through potentially differing by market segment and airline / airline type. The analysis in this report attempts to account for this through detailed market segmentation and a scenario-based approach which varies the level of pass-through and a set of associated supply side responses.

The reduction in the burden of APD will trigger several complex interactions within the aviation industry, many of which will be commercial in nature. It is therefore not possible for research, no matter how comprehensive, to forecast a single defined outcome of the tax reduction. A series of sensitivity tests has therefore been undertaken to derive a ‘fan’ of possible outcomes and impacts around a set of core assumptions, acknowledging the significant uncertainty which exists. These difficulties of course apply to the analysis of effects of other tax increases or reductions, not just ADT.

Linked to this, a range of assumptions has been made in support of this analysis, e.g. demand elasticities, supply side responses, economic impacts etc. These assumptions are laid out transparently, with any weaknesses due to, for example deficiencies in the data, acknowledged.

In order to protect commercial confidentiality, sensitive information provided by both airlines and airports has been anonymised and where appropriate aggregated. As per the brief, the report is presented in non-technical language to ensure the outputs are widely accessible to a non-technical audience including members of the Scottish Parliament who will vote on legislation, and the general public.

This report has been produced on an entirely independent basis.