Today's lesson in perverse incentives -- airline bag fees. Sadly, Southwest Airlines succumbed in 2025 and started charging bag fees. (Via Quartz Daily Brief.)
Domestic airfare carries a 7.5% federal excise tax that funds the FAA through the Airport and Airway Trust Fund. The IRS has ruled that checked-bag fees aren't payment for the "transportation of a person", so they escape that tax entirely.
That single distinction is the whole game. Move a dollar from the fare column to the fee column and the airline keeps an extra 7.5 cents. Gary Leff, who writes the aviation blog View From the Wing, calculated that American Airlines alone was saving over $75 million a year in taxes by charging for bags instead of folding the cost into fares.
Southwest, by including two free checked bags for decades, paid more tax on the same trip than rivals who unbundled. Washington was penalizing the one airline that didn't nickel-and-dime.
