San Jose May OK Airline Deal Similar to One it Fought

Jan. 30, 2006
San Jose cried foul when United Airlines and Oakland struck a deal letting the company buy its entire statewide jet fuel supply in that city in exchange for a break on sales taxes.

San Jose cried foul when United Airlines and Oakland struck a deal letting the company buy its entire statewide jet fuel supply in that city in exchange for a break on sales taxes.

The 2003 deal lets Oakland collect all the fuel purchase sales taxes that would have gone to San Jose and various other cities where United operates. Oakland then gives United 65 cents of each sales tax dollar as an ``economic incentive payment'' and keeps the rest.

But Tuesday, San Jose officials will consider making essentially the same deal with American Airlines.

The reason, explained San Jose Economic Development Director Paul Krutko, is that state authorities have decided to let United continue its deal with Oakland for at least the next two years.

That would put American, one of Mineta San Jose International Airport's two biggest carriers, at a competitive disadvantage. So American has asked San Jose for the same kind of deal United got from Oakland, and said it would ask other cities if /the carrier couldn't get it here.

``We currently face a situation in California where some of our competitors have taken advantage of these opportunities,'' American spokesman Tim Wagner said. ``We're just trying to level the playing field.''

Krutko is urging the city council to approve the deal, arguing it will earn the city some $3 million in additional sales tax revenue over the next three fiscal years. Otherwise, American could strike the same deal with another city such as Los Angeles, and then San Jose would lose about $1 million in sales tax revenue over the next three years, he said.

Approval would seem like an easy choice -- more money for both San Jose and one of its top airport carriers.

Except that it would, as Krutko put it in a memorandum to council members, ``seem to contradict the policy directive of the council to oppose the United/Oakland agreement and to support legislation that banned and limited such arrangements.''

United and Oakland took advantage of a loophole in a 1998 law governing California's complex method of allocating local tax revenue from jet fuel sales.

What legislative analysts later called an ``unintended result'' of that law was that if a fuel retailer establishes only one location in the state, all the tax is allocated there rather than to the various airports where it is delivered.

After United and Oakland struck their deal, Los Angeles, San Francisco and San Mateo County complained to state authorities. San Francisco and San Mateo County said the deal was costing them as much as $3 million in annual tax revenues. Los Angeles said it was losing $1.5 million a year.

Assemblyman Leland Yee, D-San Francisco, introduced a bill in late 2004 to outlaw such deals, but the governor vetoed it on grounds that it needed further study. Yee submitted a nearly identical bill again last year as AB 451, which Gov. Arnold Schwarzenegger has signed.

That bill, which San Jose formally supported, bans such deals beginning in January 2008, effectively allowing Oakland's deal with United to continue for two years. San Francisco and San Mateo County then asked the State Board of Equalization to invalidate the deal. But the board's tax committee refused on a 3-2 vote, saying the Legislature had already addressed the matter through Yee's bill.

Under the proposed San Jose deal, American would establish a procurement entity called American Aviation Supply in San Jose, giving San Jose the full sales tax allocation from fuel purchases for American Airlines and its regional affiliate, American Eagle.

The proposed San Jose deal differs from Oakland's in that it guarantees that San Jose will not see its current tax revenue from American reduced. It also provides for renewal options if the Legislature allows Oakland's United deal to continue beyond 2007.

American's Wagner said the deal is important because fuel is an airline's second-biggest expense after labor, and the cost per gallon has more than doubled in the past year to more than $2 a gallon.

Krutko likened the situation to politicians who plead for campaign finance reform but end up raising funds the same way as their rivals when the rules don't change.

``We have to raise money under their rules,'' Krutko said.

San Jose Mercury News

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