In a budget tabled last week by Ontario's newly elected Liberal government, Premier Kathleen Wynne has proposed to phase in a four-cent-per-litre increase in the aviation fuel tax to 6.7 cents by 2017. The current tax of 2.7 cents per litre has been in place for more than two decades, but would rise by one cent per litre each year.
The increase, which the government has pledged as part of $29 billion it has dedicated to transit and transportation infrastructure uprgrades in the next decade, is expected to add an estimated $100 million in costs for airlines — cost that will likely be passed on to consumers through higher fares.
"It will cause the ticket prices to go up but you might not notice it because it's a small portion...of the fuel bill," said David Tyerman of Canaccord Genuity.
For Air Canada, the estimated $50 million in addition costs represents a fraction of the more than $11 billion it spends annually on fuel, salaries, currency fluctuations and other factors, said Tyerman.
Airlines constantly adjust prices for cost increases and declines, but unlike fuel prices and currency fluctuations that can change rapidly, this tax increase is predictable and will be easier to plan for in advance, the analyst added.
However, the association that represents Canada's largest air carriers said the tax increase will put Ontario at a disadvantage.
"I suspect maybe other provinces feel they are more competitive now," said Marc-Andre O'Rourke, executive director of the National Airlines Council of Canada.
He said Ontario's rate would be "completely out of whack" with other provinces and would be one of the highest fuel taxes in North America. The association is calling for the increase to be put on hold while the implications are studied.
British Columbia became the latest province to eliminate its international fuel tax in 2012, joining New Brunswick, Alberta, Quebec and Saskatchewan. Newfoundland and Labrador has no fuel tax for international flights but charges tax for flights to the United States. Manitoba has the highest rate at 3.2 cents, but nothing for U.S. and international cargo flights.
B.C.'s move to eliminate the fuel tax to match nearby jurisdictions in Alberta, Washington state and California cost the government $12 million in annual revenue. But a report said it generated an estimated $20 million in new payroll and consumption tax revenue in the first year resulting from expanded international flights into the province, said Elizabeth Thomson, public affairs officer for the Ministry of Transportation and Infrastructure.
While some provinces have eliminated fuel taxes on international flights, they all charge for domestic flights, ranging from 0.7 to 3.2 cents per litre. At 6.7 cents, Ontario would be more than double its provincial neighbours. Most U.S. airports charge little or no fuel taxes.
O'Rourke said the province may not receive the full benefit from the tax increase because airlines may decide to fuel at airports outside Ontario to save money.
Douglas Hartmayer, director of public affairs for the operator of airports in Buffalo and Niagara Falls, N.Y., sees the tax boosting business on his side of the border.
"I think that anything that widens the gap and makes it more expensive to fly from Canada vis-a-vis Buffalo is going to drive more people to airports in the United States," Hartmayer said.
More than 2.3 million Canadians a year are believed to use the Buffalo airport, a two-hour drive from Toronto's Pearson International Airport, Canada's busiest travel hub.
Most of the cost difference between Canadian and U.S. airfares is attributable to federal tax, fees and surcharges, said Susie Heath, press secretary for Ontario Finance Minister Charles Sousa. She said Ontario's fuel tax is significantly lower than what is charged at airports such as London Heathrow and Paris de Gaulle.
"We know that these changes affect different communities in different ways, which is why we're working with the Ministry of Transportation to ensure that we are providing relief to vulnerable communities, especially those in remote and northern areas."
A study led by Fred Lazar, associate economics professor at York University's Schulich School of Business, concluded the tax hike will hurt the provincial economy, cut jobs and drive away tourists.
He said the provincial GDP would fall between $67 and $97 million in 2017, resulting in a decrease in up to 2,907 full-time jobs and discourage at least 292,000 air travellers.
Lazar calculates the tax will increase air fares between $1.25 to $12 per ticket depending on airport and destination.
That would hamper Air Canada's efforts to make Toronto's Pearson Airport a North American gateway and hurt the smaller airline, Porter Airlines, which uses Billy Bishop Toronto Centre Airport as its network hub.
Follow @RossMarowits on Twitter