Senate Proposes Imposing Excise Tax on Redeemed Frequent-Flier Miles

Banks fighting a congressional plan to impose an excise tax on frequent-flier miles scored a big victory Thursday.

Senators hashing out a compromise on the budget reconciliation bill proposed changing the formula so that only redeemed miles would be taxed.

"This Senate counteroffer is a step in the right direction, but it's still not good tax policy," said Donna Fisher, director of tax and accounting at the American Bankers Association. "Our hope is ... that they'll withdraw it completely."

Ms. Fisher asked where the line would be drawn if Congress decides to tax companies that buy frequent-flier miles from airlines. For example, would hotels that offer two nights for the price of one have to pay taxes on the free night?

The House-approved version would levy a 7.5% excise tax on frequent- flier mile purchases while the Senate would set the rate at 10%. The goal is $1.2 billion of revenues over 10 years.

While the Senate compromise would clearly reduce the tax hit, it's impossible to gauge the effect because the airlines do not release statistics on the percentage of frequent-flier miles never redeemed.

Twenty companies have banded together as the Coalition Against New Taxes on Frequent Flyer Programs to fight the proposal. It's being led by American Airlines and its frequent-flier partners Citicorp, MCI Communications Corp., and the Hertz Corp.

The coalition hired Federal Legislative Associates, a lobbying firm here, to make its case to Congress.

In a letter this week to lawmakers on the conference committee, the coalition argued the tax would "have severe consequences for the travel and tourism industry, financial institutions, and other(s) involved in mileage award programs."

Jack Lichtenstein, a principal at Federal Legislative Associates, said the tax provision was not sponsored by a member of Congress, but slipped in by staffers on the Joint Tax Committee.

"We think conferees will look at this and say, 'Wait a minute. How did this get in?'" Mr. Lichtenstein said Thursday. "We've been told (conference committee members) are going to take a serious look at it.

"What they'll do I'm not exactly sure, but we hope they'll eliminate the tax."

The conference committee is expected to make a decision late next week.

In addition to Citicorp, banks signing the July 15 letter include BankAmerica Corp., NationsBank Corp., First Bank System Inc., and First Chicago NBD Corp. Visa U.S.A., MasterCard International, and American Express Co. also are coalition members, as are Marriott International Inc. and United Airlines.

"We've got 20 companies that serve virtually every American consumer," Mr. Lichtenstein said.

Trade groups representing banks, hotels, restaurants, and car rental companies also signed on.

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