Lawmakers were unable to resolve a partisan dispute over an extension of the agency's operating authority, which expired at midnight Friday.
The subsidy cut was included by Republicans in a House bill extending operating authority for the FAA, which has a $16 billion budget. Senate Democrats refused to accept the House bill with the cuts, and Republican senators refused to accept a Democratic bill without it. Lawmakers then adjourned for the weekend.
But underlying the dispute on rural air service subsidies was a standoff between the GOP-controlled House and the Democratic-controlled Senate over a provision in long-term funding legislation for the FAA that would make it more difficult for airline and railroad workers to unionize.
Obama administration officials have said the shutdown will not affect air safety. Air traffic controllers will remain on the job. But airlines will lose the authority to collect about $200 million a week in ticket taxes that go into a trust fund that pays for FAA programs.
FAA employees whose jobs are paid for with trust fund money will be furloughed, including nearly 1,000 workers at the agency's headquarters in Washington, 647 workers at FAA's technology and research center in Atlantic City, N.J., and 124 workers at the agency's training center in Oklahoma City.
"These are real people with families who do not deserve to be put out of work during these tough economic times," FAA Administrator Randy Babbitt said in a statement.
Airline passengers could see a big savings on their airfares, but the situation is complicated. Federal taxes on a $300 round-trip airfare are about $61, but about half that comes from airport and security fees that will continue to be collected, according to the Air Transport Association.
Airlines, alerted earlier this week that FAA authority could expire, have been making adjustments to their computer systems and websites so that at midnight, taxes would no longer be added to airfares, the association said.
One airline, U.S. Airways, was already raising its fares. Other airlines may try to reap a windfall profit from the tax holiday.
Passengers who bought their tickets before the shutdown, but who travel during the shutdown, may wind up due a refund, Treasury Department spokeswoman Sandra Salstrom said. That's because it's not clear whether the government can keep taxes for travel that takes place during a period when the government doesn't have authority to collect taxes, she said.
Likewise, it wasn't clear if passengers who buy tickets after midnight with no taxes included would wind up owing taxes if their travel took place after FAA's operating authority is restored, she said.
The IRS will probably issue guidance later to clarify the situation, Salstrom said.
Long-term funding authority for the FAA expired in 2007. Unable to agree on new long-term funding legislation for the agency, Congress has kept the FAA operating through a series of 20 short-term extension bills. The extensions had been routine until this week.
The Senate passed a long-term bill in February and the House a different version in April. Lawmakers have resolved most of the differences between the bills, but no progress has been made on a half dozen or more controversial issues.
Republicans say Senate Majority leader Harry Reid, D-Nev., is insisting that a labor provision in the House bill sought by the airline industry must be dropped before negotiations can go forward.
The labor provision would overturn a National Mediation Board rule approved last year that allows airline and railroad employees to form a union by a simple majority of those voting. Under the old rule, workers who didn't vote were treated as "no" votes.
Republicans complain that the new rule reverses 75 years of precedent to favor labor unions. Democrats and union officials say the change puts airline and railroad elections under the same democratic rules required for unionizing all other companies.
The White House warned in March that President Barack Obama might veto the bill if the labor provision is retained.
Just before he blocked the Democrats' extension bill, Sen. Orrin Hatch, R-Utah, said he shared House Republicans' frustration "that favors to organized labor have overshadowed the prospects for long-term FAA" funding.
Another unresolved issue involves about $200 million in air services subsidies to rural communities. The program was created when airlines were deregulated in 1978 to ensure continued air service on less profitable routes to isolated communities. The House long-term FAA bill would eliminate the program except for airports in Alaska.
The Senate bill would eliminate service to 13 communities that are either less than 90 miles from a hub airport or where subsidies total more than $1,000 per passenger. That's the language House Republicans added to their extension bill.
But one of the biggest defenders of the program is Sen. Jay Rockefeller, D-W.Va., chairman of the Senate committee with jurisdiction over FAA legislation. One of the airports that would lose subsidies is in Morgantown, W.Va.