Warnings that a new tax on frequent-flier miles would doom the wildly popular credit card incentives were overblown.
Since last October, a 7.5% excise tax has been levied on the mileage points credit card issuers and other companies like hotels buy from airlines. Congressional budget forecasters estimated the tax would cost the private sector more than $100 million a year.
As the plan worked its way through Congress last summer, bank lobbyists threatened to pass on the tax to consumers or drop the incentive programs altogether. The tax was unfair, they complained, because many mileage points issued to customers are never redeemed for travel.
But eight months after the tax took effect, the programs are as popular as ever, and issuers are absorbing the tax out of fear customers would switch to a competitor.
"We're still taking a look at the impact of the tax, but as of now we haven't taken any action," said a spokeswoman for American Express Co.
"This is a huge new tax that banks have to pay, but if companies are dropping out I'm not aware of it," said Donna Fisher, director of tax and accounting at the American Bankers Association.
Outside the banking industry, only a handful of companies have taken steps to force consumers to bear some of the tax. Hertz Corp., for instance, requires customers to spend more to accumulate points and has added a surcharge that ranges from 6 cents to 11 cents per rental for customers who want frequent-flier miles.
Most companies appear resigned to the new tax and are simply asking the Internal Revenue Service to ease the industry's burden when it issues regulations to enforce the law. Repeal is unlikely, they said, because lawmakers would be forced to make up the lost revenue with another tax or cuts in government programs.
"Nobody wants to pass this to customers," said John Gay, lobbyist for the American Hotel and Motel Association, which is leading the Frequent Flyer Tax Coalition in an effort to influence the IRS rules.
The coalition's members include Citibank, Visa U.S.A., MasterCard International, First USA, Diners Club, and the American Bankers Association. The group has asked the IRS to let companies subtract the cost of ancillary services that companies receive as part of the mileage packages they buy from airlines. Credit card issuers and other buyers pay a lump sum for bulk miles as well as advertisements in airline magazines, customer lists, and account statement mailings.
The industry also wants the IRS to make it clear the tax will not be imposed on mileage points issued to foreign travelers who do not fly to the United States. European governments, Australia, New Zealand, and Japan also have asked that non-U.S. travel be exempted from the IRS regulations.
A Treasury Department spokesman said the IRS is "continuing to examine" the industry's concerns. Proposed regulations are expected in late summer.
Critics of the industry's strategy said it should try to abolish, not fine-tune the law.
"They ought to be incensed about this, but it does not seem to be that high on their radar screens," lamented Jack Lichtenstein, a lobbyist who led a previous coalition to stop the tax last year.
"It's ridiculous for people to pay a tax on marketing incentives," he said. "We think this opens the door for some potentially strange forms of taxation."