United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Aviation, 

Committee on Transportation and 

Infrastructure, House of Representatives

FEDERAL AVIATION 

ADMINISTRATION 

Observations on Selected 

Changes to FAA’s Funding 

and Budget Structure in the 

Administration’s 

Reauthorization Proposal 

Statement of Gerald L. Dillingham, Ph.D. 

Director, Physical Infrastructure Issues 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Wednesday, March 21, 2007

 

GAO-07-625T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

March 21, 2007

FEDERAL AVIATION ADMINISTRATION

Observations on Selected Changes to 

FAA’s Funding and Budget Structure in 

the Administration’s Reauthorization 

Proposal 

Highlights of GAO-07-625T, a testimony 

before the Subcommittee on Aviation, 

Committee on Transportation and

Infrastructure, House of Representatives 

Recently, the administration 

submitted a proposal for 

reauthorizing the Federal Aviation 

Administration (FAA) and the 

excise taxes that fund most of its 

budget. FAA’s current 

authorization expires in 6 months. 

The proposal calls for major 

changes to FAA’s funding and

budget structure that are intended 

to address concerns about the longterm revenue adequacy, equity, and 

efficiency of FAA’s current funding

structure and to provide a more 

stable, reliable basis for funding a 

new air traffic control system that

FAA is developing (at an estimated 

cost of $15 billion to 22 billion 

through 2025) to meet forecasted

increases in air travel demand. The 

proposal would introduce costbased charges for commercial

users of air traffic control services, 

eliminate many current taxes,

substantially raise fuel taxes for 

general aviation users, charge

commercial and general aviation

users a fuel tax to pay primarily for

airport capital improvements, 

modify FAA’s budget accounts to 

align with specific FAA activities, 

and link the portion of FAA’s 

budget that comes from the 

Treasury’s General Fund with 

public benefits FAA provides. 

This statement offers GAO’s 

observations on the proposed 

changes in FAA’s (1) funding and 

(2) budget structure and is based 

on GAO’s analysis of FAA’s 

proposal and a recent GAO report 

on FAA funding options. 

Funding Structure: The current funding structure has supported FAA as 

FAA’s budget has grown, and it can continue to do so to fund planned 

modernization. Excise tax revenues are forecasted to increase if the current 

taxes are reauthorized without change and thus could support additional 

spending. If necessary, Congress can obtain more revenue by increasing the 

excise tax rates or the General Fund contribution to FAA’s budget, although 

the nation’s fiscal imbalance could make such an increase difficult. FAA is

concerned because revenues from the current funding structure depend 

primarily on ticket prices and passenger numbers, which are not well linked 

to FAA’s workload and costs. The proposed new funding structure would 

link revenues more closely with costs to ensure that revenues rise with 

increases in FAA’s air traffic control and safety activities. According to FAA, 

cost-based user charges would also be more equitable and could create 

incentives for more efficient use of the system by aircraft operators. How 

well FAA’s proposed funding structure, if enacted, would achieve these goals 

is uncertain because it depends on two unknowns—the soundness of a new 

FAA cost allocation methodology and the extent to which the proposed 

structure links revenues to costs. Also uncertain are the adequacy of FAA’s 

proposed fuel tax rate to collect anticipated revenues, the implications of a 

proposed advisory board, and the impact of a proposal to give FAA limited 

debt-financing authority. Furthermore, GAO notes, user charges would 

reduce Congress’s role in setting revenues. 

Budget Structure: Modifying FAA’s budget accounts is consistent with 

FAA’s emphasis on aligning revenues and costs, but may present 

implementation issues, in that some FAA activities may be difficult to 

categorize. More specifically, the proposed restructuring could allow FAA to

better identify funding options that link revenues and costs and may improve 

transparency by showing how much is being spent on specific FAA 

activities. However, some activities, such as those related to safety, may not 

lend themselves to placement in discrete categories. Linking the General 

Fund contribution to public benefits is appropriate, but since some activities 

may provide both public and private benefits, judgment rather than a precise 

calculation may determine the contribution. 

Concluding Observations: The administration has introduced a complex 

proposal for funding FAA that GAO believes deserves serious and thoughtful 

consideration. While not necessary to provide more money for FAA, the 

proposed structure may address some of the concerns raised by the current 

structure if its cost allocation is sound. Because FAA’s cost allocation model 

is new, further analysis and more time may be needed to determine whether 

it can adequately support a cost-based funding structure for FAA. Timely 

reauthorization of funding for FAA for at least the next year is, however,

critical to prevent a lapse in funding for most FAA activities, regardless of 

the action taken on the proposed changes. 

www.gao.gov/cgi-bin/getrpt GAO-07-625T

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gerald L. 

Dillingham at (202) 512-2834 or 

dillinghamg@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

We appreciate the opportunity to participate in this hearing today to 

present GAO’s observations on major changes to the Federal Aviation 

Administration’s (FAA) funding and budget structure that are included in

the administration’s recently submitted reauthorization proposal. FAA 

operates one of the safest air transportation systems in the world. This 

system is, however, under growing strain as the skies over America 

become more crowded. Demand for air travel has increased in recent 

years, with over 740 million passengers flying in fiscal year 2006 and 1 

billion passengers expected to fly in 2015, according to FAA estimates. 

Already, this increasing demand for air travel has led to an increase in 

flight arrival delays, which are now approaching the record levels set in 

2000, when one in four flights reached its destination behind schedule. The 

system is also expected to absorb a growing variety of aircraft, from the 

jumbo Airbus A380, which can hold more than 500 passengers, to very 

light jets, which might greatly increase the number of aircraft in the sky 

while transporting six or fewer passengers on any given flight. FAA is 

therefore developing a modernized air traffic control system, called the

Next Generation Air Transportation System (NextGen), to meet the 

forecasted increases in air travel demand. The administration’s 

reauthorization proposal serves as a blueprint for funding FAA as it begins

its transformation to NextGen. 

According to FAA, the changes to its funding and budget accounts that the 

administration has proposed are intended to provide a more stable and 

reliable funding structure to pay for NextGen. FAA also says that the 

proposed changes would improve the revenue adequacy, equity, and 

efficiency of its funding and better link revenues with the costs that users 

of the National Airspace System (NAS) impose on the system. These 

funding changes include introducing user charges for commercial aircraft 

based on the cost of the air traffic control services they receive; 

eliminating many current taxes; substantially increasing the fuel taxes 

general aviation operators pay; charging both commercial and general

aviation a fuel tax to pay for airport capital improvements, the Essential 

Air Service (EAS) program,1

 and air traffic system research and 

development; modifying FAA’s budget accounts to align with FAA’s 

 1

The EAS program, established after airline deregulation in 1978, is designed to ensure that

small communities that received passenger air service before deregulation continue to have

access to the nation’s air transportation system. 

Page 1 GAO-07-625T 
activities or lines of business; and linking the contribution to FAA’s budget 

from the General Fund of the U.S. Treasury to the public benefits FAA 

provides.2

 These changes would begin in fiscal year 2009. If implemented, 

the changes would alter the basis for funding FAA, in part by recovering 

the costs of services provided by FAA’s Air Traffic Organization (ATO) in 

accordance with the cost assignments in a recently issued FAA cost 

allocation study. These changes would also redistribute the funding 

burden among user groups, increasing the share general aviation would 

contribute. FAA has stated that currently general aviation is not paying its 

fair share of the costs for services that it uses. Some stakeholders, such as

general aviation, question whether all of the proposed changes are 

necessary, or even desirable, saying that the current funding structure has 

supported FAA adequately in the past and can generate more revenue in

the future if Congress chooses to increase appropriations for aviation.

These stakeholders also state that the current distribution of funding for 

FAA costs among aviation users is reasonable. 

The current authorization for FAA and for the excise taxes that fund most 

of FAA’s budget expires at the end of September of this year. Regardless of 

the action taken on the proposed changes, timely reauthorization of 

funding for FAA for at least the next year is critical, because the 

uncommitted balance3

 in FAA’s principal funding source, the Airport and 

Airway Trust Fund (Trust Fund),4

 is low relative to recent levels.5

In my statement today, I will present GAO’s observations on the proposed 

changes in FAA’s (1) funding and (2) budget structure, including the 

proposed method of determining the General Fund contribution to FAA’s 

budget. 

My remarks are based in part on work we did for a report we issued last 

year that analyzed (1) FAA’s current funding structure—both its 

advantages and the concerns that FAA and others had identified about its 

 2

Appropriations from the General Fund supplement appropriations from the Airport and 

Airway Trust Fund as necessary to pay for budgeted FAA programs. 

3

The uncommitted balance represents money against which there is no outstanding budget 

commitment or budget authority to spend. 

4

Excise tax revenues are deposited in the Trust Fund, from which they can be appropriated 

by Congress to fund FAA. 

5

The Trust Fund’s uncommitted balance at the end of fiscal year 2006 was less than $2

billion. At the end of fiscal year 2001 it was $7.3 billion. 

Page 2 GAO-07-625T 
long-term revenue adequacy, equity, and efficiency—and (2) several 

funding options to assess how those options might address those 

concerns.6

 For that report, we reviewed relevant literature, examined FAA 

data and forecasts, and interviewed officials from FAA and other 

government agencies, representatives of aviation industry groups, and 

academic and financial experts. In addition, for this statement, we 

analyzed selected funding and budget elements of the administration’s 

reauthorization proposal and FAA’s newly released cost allocation study, 

focusing on their implications for revenue adequacy, equity, and 

efficiency, and discussed them with FAA officials and representatives of 

aviation industry groups. We conducted our work from February to March 

2007 in accordance with generally accepted government auditing 

standards. 

• Funding Structure: The current funding structure has supported FAA as 

FAA’s budget has grown, and it can continue to fund planned

modernization. Trust Fund revenues are forecasted to increase if the 

current excise taxes are extended without change and therefore could 

support additional congressional spending on aviation. If necessary, 

Congress can obtain more revenue by increasing excise tax rates or the 

General Fund contribution, although the nation’s fiscal imbalance could 

make such an increase difficult. Nonetheless, FAA is concerned about the 

long-term revenue adequacy, equity, and efficiency of its current funding 

structure, and its proposed new funding structure is intended to address 

these concerns by linking revenues more closely with costs. By more 

closely linking revenues with workload and costs, FAA states that it will 

be better able to pay for future air traffic demands, for example the 

transition to NextGen, which is estimated to cost between $15 billion to 

$22 billion through 2025.7

 It is uncertain how effective FAA’s proposed 

cost-based funding approach, if enacted, will be in addressing these 

concerns. Its effectiveness depends on how accurately FAA’s new cost 

allocation methodology assigns costs and on how closely the proposed 

approach adheres to the principle that there should be a direct link 

between a user’s revenue contribution to funding FAA and the costs the 

user imposes. Stakeholders have raised questions about both of these 

Summary 

 6

GAO, Aviation Finance: Observations on Potential FAA Funding Options, GAO-06-973 

(Washington, D.C.: September 29, 2006). 

7

FAA is working through the Joint Planning and Development Office with other 

government agencies to design NextGen. The Joint Planning and Development Office is 

responsible for NextGen cost estimates. 

Page 3 GAO-07-625T 
considerations. Also uncertain are the equity of the tax burden commercial 

and general aviation would incur for airport capital improvements, the 

adequacy of FAA’s proposed fuel tax rate to collect anticipated revenues, 

the implications of a proposed advisory board, and the impact of a 

proposal to give FAA limited debt financing authority. In addition, FAA has 

not taken into account a potential reduction in demand that could result 

from a fuel tax increase and could lead, in turn, to less fuel tax revenue

than anticipated. The implications of an advisory board that has some 

influence but limited authority in setting user fees and the advantages of 

debt financing are unclear. 

• Budget Structure: FAA’s proposal to modify its budget accounts is 

consistent with its emphasis on aligning revenues and costs but may 

present implementation issues in that some FAA activities may be difficult 

to categorize. More specifically, the proposed restructuring could allow 

FAA to better identify funding options that link revenues and costs and 

may improve transparency by showing how much is being spent on each 

line of business. However, some activities, such as those related to safety, 

may not lend themselves to placement in discrete categories. Linking the

General Fund contribution to public benefits is an appropriate way to 

recognize that users are not the only beneficiaries of a safe air 

transportation system. Judgments, however, will still be necessary, since 

many activities that create public benefits, such as safety, also benefit 

users. 

Although there have been fluctuations in its funding sources, FAA is 

primarily supported by the Trust Fund (82 percent), which receives 

revenues from a series of excise taxes paid by users of the NAS. These 

excise taxes are associated with purchases of airline tickets and aviation

fuel, as well as the shipment of cargo. These Trust Fund revenues are then

available for use subject to appropriations. In addition to these revenues, 

in most years, General Fund revenues have been used to fund FAA. About 

$2.6 billion was appropriated for fiscal year 2006 from the General Fund 

for FAA’s operations. This amount represents about 18 percent of FAA’s 

total appropriation. 

The Trust Fund was established by the Airport and Airway Revenue Act of 

1970 (P.L. 91-258) to help fund the development of a nationwide airport 

and airway system. The Trust Fund provides funding for FAA’s two capital 

accounts—the Airport Improvement Program (AIP) and the Facilities and 

Equipment (F&E) account—which provide grants to airports and funds for 

modernizing the air traffic control system, respectively. The Trust Fund 

also provides funding for the Research, Engineering, and Development 

Background 

Page 4 GAO-07-625T 
(RE&D) account and supports part of FAA’s Operations account. To fund

these accounts, the Trust Fund is credited with revenues collected from 

system users through the dedicated excise taxes. In fiscal year 2005,8

 the 

ticket tax was the largest single source of Trust Fund revenue, followed by

the international departure and arrival tax, the passenger segment tax, and 

fuel taxes (see table 1 for a description of current taxes). 

The administration’s reauthorization proposal would change FAA’s 

financing system from one based mainly on excise taxes to one based 

more on cost-based charges. Under the proposed system, funding for ATO 

would come primarily from user charges on commercial aircraft and fuel

taxes on general aviation aircraft.9

 In addition, contributions from the 

General Fund would be appropriated to FAA to cover ATO costs of 

providing services to military and other public aircraft, flight service 

stations, and a few other services.10 Funding for AIP, EAS, and part of 

RE&D would come from an equal fuel tax on both general and commercial 

aviation and a tax on arriving and departing international passengers. 

Funding for Safety and Operations would include some fees, but mostly 

General Fund contributions. The reauthorization proposal would also 

create an advisory board and give FAA limited borrowing authority.11 

Table 1 compares elements of the current and proposed funding structure 

for FAA. 

 8

Fiscal year 2005 is the last year for which complete tax data are available. 

9

FAA would also receive authority to impose a fee for use of congested major airports that 

would apply to both commercial and general aviation aircraft. 

10Military and public aircraft include flights for government purposes, such as those used 

by the Departments of Defense, State, and the Interior. These aircraft are internationally 

defined as state aircraft that are exempt from paying fees and taxes. A flight service station 

is an air traffic facility that provides weather briefings and flight planning services, largely 

to general aviation pilots. Other services that FAA proposes to exempt from fees include, 

but are not limited to, air ambulances, aviation safety regulation and oversight, and the 

operation of air traffic control towers at airports with fewer than 100,000 passenger 

boardings per year. 

11Other provisions in the reauthorization proposal address funding during the transition to

a user-based funding structure and the creation of a reserve fund to be available in case 

future revenues fall short of expectations. 

Page 5 GAO-07-625T 
Table 1: Elements of the Current and Proposed FAA Funding Structure 

Current FAA funding structure Proposed FAA funding structure 

7.5 percent tax on ticket price of domestic airline tickets. Eliminated. 

$3.30 per-passenger tax on domestic passenger flight segment. Eliminated. 

Not applicable. User fee for jet and turboprop commercial aircraft. Fees for en 

route and oceanic air traffic services may be based on distance 

traveled or other factors consistent with U.S. treaties and 

international agreements. A user fee for (1) operations conducted 

in terminal airspace may be based on aircraft weight and (2) 

takeoffs and landings at airports with more than 100,000 

passenger boardings annually. 

Not applicable. Congestion fee for landings and takeoffs by all aircraft at 

congested large-hub airports based on time of day and day of 

week. Daytime fees could differ from nighttime fees. 

6.25 percent tax on shipping price for transportation of domestic 

cargo or mail. 

Eliminated. 

$0.043 per-gallon tax on domestic commercial aviation fuel. $0.136 per gallon tax on domestic commercial aviation fuel to fund 

AIP, EAS, and RE&D account. 

$0.193 per-gallon tax on domestic general aviation gasoline. 

$0.218 per-gallon tax on domestic general aviation jet fuel.

$0.70 per-gallon tax on both domestic general aviation gasoline 

and jet fuel, with $0.564 per gallon to fund air traffic control 

services and $0.136 per gallon to fund AIP, EAS, and RE&D

account. 

$14.50 per-passenger tax for international passenger arrivals and 

departures.

$6.39 per-passenger tax on international passenger arrivals and 

departures to fund AIP, EAS, and RE&D account. 

7.5 percent tax on award value of frequent flyer awards. Eliminated. 

$7.30 per-passenger fee for passenger service between the

continental United States and Alaska or Hawaii or between Alaska 

and Hawaii. 

Eliminated. 

Minimal aircraft certification and registration fees set below the 

cost of providing the service. 

Aircraft certification and registration fees to fund additional 

activities and tied to the cost of providing service. 

General Fund contribution. General Fund contribution. 

No debt financing authority. $5 billion in Treasury debt financing authority for NextGen-related 

capital needs for fiscal years 2013-2017. 

Management Advisory Council reviews and makes 

recommendations on FAA management, policy, spending, funding 

and regulatory matters affecting the aviation industry. 

Air Transportation System Advisory Board established to make 

recommendations on setting of user fees. 

Source: GAO analysis of FAA data. 

The administration’s proposal also calls for changing FAA’s budget 

structure by establishing two new budget accounts—(1) Air Traffic 

Organization and (2) Safety and Operations—to align with FAA’s lines of 

business and proposed funding. These two new accounts would replace 

the Operations and F&E accounts. The proposal retains the AIP and RE&D 

Page 6 GAO-07-625T 
accounts. See table 2 for a comparison of the current and proposed FAA 

budget structure. 

Table 2: Current and Proposed FAA Budget Accounts

Current budget account Proposed budget account 

Account name Operations Safety and Operations 

Activity funded Aviation safety 

Commercial space transportation 

FAA overhead

ATO salaries and expenses 

Aviation safety 

Commercial space transportation 

FAA overhead

Funding source Trust Fund (about 68 percent)

General Fund (about 32 percent) 

User fees (about 32 percent) 

Trust Fund (about 4 percent) 

General Fund (about 64 percent) 

Account name Facilities and Equipment Air Traffic Organization (ATO) 

Activity funded Air traffic modernization Air traffic modernization 

ATO salaries and expenses 

Funding source Trust Fund (100 percent) Trust Fund (11 percent) 

User fees (74 percent) 

General Fund (15 percent) 

Account name Airport Improvement Program Airport Improvement Program

Activity funded Airport capital development Airport capital development

Funding source Trust Fund (100 percent) Trust Fund (100 percent) 

Account name Research, Engineering, and Development Research, Engineering, and 

Development

Activity funded Research on aviation safety, capacity, and environmental

issues 

Research on aviation safety, capacity, 

and environmental issues 

Funding source Trust Fund (100 percent) Trust Fund (about 88 percent)

General Fund (about 12 percent) 

Source: GAO analysis of data from the Budget of the United States Government Fiscal Year 2008 (Washington, D.C.: Feb. 5, 2007).

In January 2007, FAA released a new cost allocation study.12 This report 

sets forth a methodology for assigning air traffic costs to user groups on 

the basis of aircraft type. The two principal user groups are the highperformance group, which includes all fixed-wing turbine engine aircraft 

operations, and the piston aircraft group, which includes piston engine

 12Federal Aviation Administration, FY2005 Cost Allocation Report (Washington, D.C.: Jan.

31, 2007). 

Page 7 GAO-07-625T 
fixed-wing aircraft operations and helicopters. According to FAA, this cost 

allocation methodology is based on the assumption that high-performance 

users generally compete for the same air traffic control resources and 

their operations are more time-sensitive than piston aircraft operations, 

requiring more complex air traffic equipment and procedures. Piston 

aircraft operations, on the other hand, tend to be less time-sensitive and 

typically rely on less complex equipment. Differences in the speed and 

cruising altitudes of the two aircraft types also affect their en route costs. 

The current funding structure, with some modifications to the excise taxes 

and tax rates and changes in the levels of General Fund contributions, has 

successfully funded a growing FAA budget. Trust Fund revenues are 

projected to increase substantially at current excise tax rates. If, to fund 

the additional costs of NextGen or for other reasons, Congress chooses to 

increase spending on aviation beyond what can be paid for at current 

excise tax rates, it can obtain additional revenue through the current 

funding structure by increasing excise tax rates, the General Fund 

contribution, or both, although the nation’s fiscal imbalance could make 

such an increase difficult. Nonetheless, because some factors that drive 

tax revenues, such as ticket prices, are not well linked to FAA’s workload 

and costs, FAA has been concerned about the long-run revenue adequacy, 

equity, and efficiency of its funding.13

Observations on 

Proposed Changes to 

FAA’s Funding

Structure 

Some of the administration’s proposed changes for funding FAA, such as 

establishing direct user charges for commercial aviation and substantially 

increasing fuel taxes for general aviation are intended to link FAA’s 

revenues more closely with its costs. For other elements of FAA’s budget, 

however, it is not possible to establish a direct link between revenues and

costs. For example, because AIP expenditures are not the direct result of 

costs imposed by users of the NAS, the proposal to fund AIP through equal 

fuel taxes on all aircraft operators can best be evaluated on equity 

grounds. Better alignment of FAA’s revenues and costs can address some 

of the concerns about the current funding system that derive from the lack 

of connection between some key drivers of current FAA revenues, such as

ticket prices, and FAA’s workload and costs. However, the effectiveness of 

the proposed funding structure in linking costs with revenues depends 

 13Revenue adequacy refers to the ability of FAA’s funding system to produce revenues 

commensurate with workload changes over time. Equity refers to the fairness of the 

distribution of costs to aviation users. Efficiency refers to incentives that encourage the

efficient use of the NAS. 

Page 8 GAO-07-625T 
critically on how well FAA’s new cost allocation method assigns costs to 

users and on how closely the proposed funding structure adheres to the 

principle of cost-based funding, and questions remain about both 

considerations.14 Furthermore, FAA’s method for estimating the fuel tax 

rates needed to collect its intended level of fuel tax revenue may have 

underestimated the tax rates needed by not accounting for possible 

reductions in fuel consumption due to the higher tax rates. The 

implications of some of the other proposed changes, including one 

creating an advisory board that can make recommendations on fee setting

and another authorizing limited authority for FAA to use debt financing,

are uncertain. 

FAA’s Current Funding 

Structure Has Kept Up 

with Demand for Many 

Years and Can Provide 

Funding to Cover the 

Development and 

Implementation of 

NextGen 

Congress has used the current funding structure—excise taxes plus a 

General Fund contribution—to fund FAA for many years. As the number 

of air travelers has grown, so have excise tax revenues. Even though 

revenues fell during the early years of this decade as the demand for air 

travel fell, they began to rise again in fiscal year 2004, and FAA estimates 

that if the current taxes remain in effect at their current rates, revenues 

will continue to increase. While retaining the basic structure for funding 

FAA, Congress has at times changed the mix of excise taxes and some of 

the tax rates. For example, when the taxes were most recently 

reauthorized in 1997, Congress added the passenger segment tax while 

reducing the passenger ticket tax rate from 10 percent to 7.5 percent.15

Congress has also appropriated varying amounts of General Fund 

revenues for FAA during the past 25 years, ranging from 0 to 59 percent of 

FAA’s budget and averaging around 20 percent since fiscal year 1997. The 

fluctuation in the amount of the General Fund contribution occurs 

because the contribution is based on the incoming Trust Fund revenues 

that are available to fund the Operations account after revenues have been 

allocated to fund the F&E, AIP, RE&D accounts. Therefore, fluctuations in

the Trust Fund revenues and FAA expenditures require different levels of 

General Fund contributions. 

 14Cost-based funding attempts to establish a more direct link between a user’s payment for 

services and the costs the user imposes on a system. 

15At that time, Congress also increased the international departure tax from $6 to $12 per 

person, applied this tax to international arrivals, and added the frequent flyer tax and the

Hawaii/Alaska passenger taxes.

Page 9 GAO-07-625T 
As air traffic grows and FAA embarks on modernization through NextGen, 

Congress may appropriate additional funds to FAA to fund new 

investment and to maintain a safe and efficient airspace system, although 

there is considerable uncertainty about how much NextGen will cost. FAA 

estimates that NextGen will cost between $15 billion to $22 billion through 

2025. However, funding NextGen does not mean that the current funding 

structure needs to be changed. According to projections prepared by the 

Congressional Budget Office (CBO),16 revenues obtained from the existing 

funding structure are projected to increase substantially. Assuming that 

the General Fund provides about 19 percent of FAA’s budget, CBO 

estimates that through 2016 the Trust Fund can support about $19 billion 

in additional spending over the baseline FAA spending levels CBO has 

calculated for FAA (the 2006 funding level, growing with inflation) 

provided that most of that spending occurs after 2010. How far this money 

will go to fund modernization is subject to a number of uncertainties—

including the future cost of NextGen investments, the volume of air traffic,

the future costs of operating the NAS, and the levels of future 

appropriations for AIP, all of which may influence funding for FAA. 

However, if the desired level of spending exceeded what was likely to be

available from the Trust Fund at current tax rates, Congress could make 

further changes within the current structure that would provide FAA with 

additional revenue if Congress believed that larger FAA appropriations 

were appropriate—for example, if FAA experienced increased workload 

demands as a result of increased demand for air traffic services. Congress 

could raise more revenue from airspace system users for NAS 

modernization or for other purposes by raising the rates on one or more of 

the current excise taxes. Congress could also provide more General Fund

revenues for FAA, although the nation’s fiscal imbalance may make a 

larger contribution from this source difficult. Thus, it is necessary to look 

at factors other than a need for more revenues to justify a major change in 

FAA’s funding structure. 

 16Congressional Budget Office, Financing Investment in the Air Traffic Control System 

(Washington, D.C.: Sept. 27, 2006). 

Page 10 GAO-07-625T 
FAA has expressed concern that revenues from the current funding 

structure depend heavily on factors, such as ticket prices, that are not 

connected to FAA’s workload and costs. According to FAA, under the 

current structure, increases in the agency’s workload may not be 

accompanied by revenue increases because users are not directly charged 

for the costs that they impose on FAA for their use of the NAS. Revenues 

collected from excise taxes are primarily dependent on the price of tickets 

and the number of passengers on planes, while workload is driven by flight

control and safety activities. This disconnect raises three key concerns 

about the current funding structure—its long-term revenue adequacy,

equity, and efficiency. Moreover, these three concerns are supported by 

long-term industry trends and FAA forecasts of declines in inflationadjusted air fares, the growing use of smaller aircraft, and FAA’s 2007 cost 

allocation study. The administration has used these concerns as its 

rationale for proposing major changes in FAA’s funding. 

Funding Changes in 

Reauthorization Proposal 

Are Intended to Address 

Concerns about Long-term 

Revenue Adequacy, Equity, 

and Efficiency of Current 

Funding Structure 

Many of the proposed changes for funding FAA contained in the 

administration’s reauthorization proposal are intended to address the 

concerns about revenue adequacy, equity, and efficiency by linking FAA’s 

revenues more closely with its costs. The proposal calls for a combination 

of methods for funding FAA, which we previously reported might best 

address concerns with the current system by providing a better link 

between revenues and costs than any option used separately.17 For 

example, the proposal would eliminate all the excise taxes except the 

taxes on fuel and the tax on arriving and departing international 

passengers. The ATO, the largest part of FAA’s budget, would then be 

funded by direct user charges on commercial aircraft—including air taxis, 

fractionally owned aircraft, and aircraft providing charter service—that 

use the NAS, fuel taxes paid by general aviation users of the NAS (both 

turbine and piston), and General Fund revenues to cover the costs of 

exempt aircraft such as military and other state aircraft and flight service 

stations. 

The proposal would also allow FAA to establish a fee for all aircraft using 

the nation’s most congested airports. Based on the time of day or day of

the week, the fee would be designed to increase efficient use of the NAS 

by discouraging peak-period traffic at congested airports and, thus, 

reducing delays. Under such a fee, cargo carriers could pay lower fees by 

operating at night than they would pay by operating at peak periods of the 

 17GAO-06-973. 

Page 11 GAO-07-625T 
day, creating an incentive for some cargo carriers to switch daytime 

operations to nighttime. The fee could also create incentives for general 

aviation aircraft flying to and from metropolitan areas with congested 

airports to use other nearby airports instead. 

The shares of ATO costs to be recovered from commercial and general

aviation aircraft, respectively, and the General Fund contribution to cover 

the costs of exempt aircraft would be based on the results of FAA’s cost 

allocation study. In addition, the proposal would authorize FAA to impose 

fees to pay for costs related to certain aircraft certification and 

registration activities that it conducts.

18

Basing cost recovery for ATO only on cost allocation is a policy choice. In

many other countries, cost recovery is based in part on cost allocation and 

in part on other principles, such as ability to pay.19 For example, some 

countries charge a fee for en route services based on weight and distance; 

weight is included as a factor in charging formulas because many believe 

that it reflects an aircraft operator’s ability to pay. Using additional 

principles for cost recovery could result in different distributions of the 

funding burden among user groups. 

For one large area of FAA’s budget, AIP, it is not possible to establish a 

direct link between revenues and costs because AIP expenditures are not 

the direct result of costs imposed by users of the NAS. FAA distributes AIP 

grants on the basis of congressional priorities established in authorizations 

and appropriations. Accordingly, equity would appear to be the best 

criterion to use in evaluating the administration’s proposal to fund AIP 

through a fuel tax of 13.6 cents per gallon on commercial and general 

aviation operators and a tax of $6.39 per passenger on the use of 

international travel facilities.20

 18FAA issues certificates and registrations to aircraft owners as well as certifications of 

domestic and foreign repair stations that are authorized to perform maintenance on U.S.

registered aircraft. Other certification fees include charges to flight schools, training 

centers, and maintenance technical schools and fees for training provided to foreign 

aviation authorities, among others. 

19The ability-to- pay principle is a concept of tax fairness that states that those individuals 

with a greater financial capacity—measured by wealth, income, or other levels of wellbeing—to bear a tax burden should pay more in taxes than those individuals with a lesser 

financial capacity. 

20The fuel tax and the international passenger tax also pay for EAS and for part of the 

RE&D account.

Page 12 GAO-07-625T 
According to an FAA official, the decision to establish equal tax rates for 

commercial and general aviation operators was made to achieve fairness 

and simplicity. One way to evaluate the fairness or equity of funding AIP in

this way would be to compare the distribution of the funding burden 

among user groups with the distribution of the grants funded by AIP.21

With all aircraft being charged the same fuel tax rate, according to FAA 

forecasts for fiscal year 2009, commercial aircraft operators would pay 

about 88 percent of the fuel tax revenues collected primarily to fund AIP, 

while general aviation operators would pay 12 percent. However, under 

the current AIP program, about one-third of AIP grants would go to 

airports with no commercial service, and some additional grants would go 

to airports where general aviation traffic makes up a substantial share of 

the aircraft operations.22 Thus, under the administration’s proposal, 

commercial aviation users would appear to be paying for a large share of

the benefits that come from capital spending at general aviation airports. 

This result is no different from what happens today; commercial aviation 

users currently pay for a large share of these benefits, since the largest 

share of the Trust Fund comes from passenger ticket taxes. 

Some portion of these benefits may accrue to commercial aviation users if 

capital spending at general aviation airports keeps general aviation traffic 

from using congested commercial airports. However, most of the benefits 

from capital spending at general aviation airports would likely go to users

of those airports or their surrounding communities—or to the general 

public to the extent a national system of airports that includes general 

aviation airports creates public benefits. In that case, funding those 

benefits by fuel taxes paid by commercial aircraft may raise equity issues. 

An alternative approach that would be consistent with a policy choice to 

charge general aviation users less than the cost of the benefits they receive 

from AIP grants would be to use General Fund revenues to fund part of 

AIP. 

 21Other ways to evaluate the equity of funding AIP in this way might lead to different 

findings.

22This allocation of AIP grants among airport types might change if the AIP provisions of 

the reauthorization bill are adopted.

Page 13 GAO-07-625T 
A better alignment of FAA’s revenues and costs can address revenue 

adequacy, equity and efficiency concerns, but the ability of the proposed 

funding structure to link revenues and costs to address these concerns 

depends critically on two things—first, the soundness of FAA’s cost 

allocation system in allocating costs to users and, second, how closely the 

proposed funding structure adheres to the principle of cost-based funding. 

FAA’s new cost allocation study was released at the end of January, so we 

and others have had only a short time to review it. However, we, as well as 

industry stakeholders, have raised a number of concerns about the study 

and its cost allocation methodology. For example, FAA divides NAS users 

into two groups: high-performance aircraft, such as jets and turboprop 

aircraft, and piston aircraft. According to FAA, dividing users this way 

creates two principal groups whose flights impose substantially different

costs on FAA. High-performance aircraft which fly at higher altitudes and 

speeds, and normally use Instrument Flight Rules, are “controlled” through 

en route airspace and for landings and takeoffs by air traffic controllers. 

Therefore, they impose higher costs on FAA than piston aircraft which fly

at lower altitudes and often use Visual Flight Rules, under which they are 

not “controlled” through en route airspace but can use air traffic control 

services for landings and takeoffs. 

Concerns about the 

Soundness of the Cost 

Allocation Methodology 

and Adherence to Principle 

of Cost-Based Funding 

May Limit Proposal’s

Ability to Address FAA’s 

Key Concerns 

However, FAA did not conduct a statistical cost analysis to determine 

whether high-performance aircraft of different types might impose 

sufficiently different costs on the system to warrant dividing NAS users 

into more than two groups. For example, differences in aircraft weight23

could affect terminal airspace costs even though they may not affect en 

route costs. Although there may be no effect of aircraft weight on en route 

costs, FAA officials told us that the administration’s reauthorization 

proposal requests authority to set terminal airspace user fees based in part

on weight because they believe that larger aircraft require greater 

separation, thus imposing greater terminal airspace costs. Under FAA’s 

cost allocation methodology, fixed costs24 are assigned to the group that is

the primary user of the air traffic control services that generate those 

costs. Accordingly, it might be more consistent to divide high-performance 

 23We cite weight only as an example. Statistical cost analysis might identify other factors 

that could be relevant in dividing aircraft into principal groups that impose different costs 

on the NAS. 

24Fixed costs refer to the costs associated with a product or service that remain constant

when the level of output changes. 

Page 14 GAO-07-625T 
aircraft into subgroups before FAA allocated the fixed costs of air traffic 

control services used by aircraft in all groups to the group that is the 

primary user of that service.25

Creating only two principal groups resulted in the allocation of some 

portion of the fixed costs to general aviation jet aircraft, because the highperformance group, which FAA defines to include general aviation jet

aircraft, is the primary user of services that are responsible for most fixed 

costs. If instead, for example, FAA had created three principal aircraft 

groups—piston, heavy high-performance, and light high-performance—

and if the heavy high-performance group was the primary user of services 

that are responsible for most fixed costs, then the fixed costs would have 

been allocated only to that group. The effect of this change in 

methodology would likely have been that general aviation turbine users 

would have been allocated a smaller share of total ATO costs and a lower 

fuel tax rate would have been needed to collect their share of FAA’s 

revenues. 

Because a sound cost allocation methodology is central to the successful 

application of cost-based funding, more time may be needed for FAA to 

further analyze the differences among aircraft types that lead to 

differences in the costs they impose on the NAS. More time may also be

needed for a fuller analysis and discussion of FAA’s cost allocation 

methodology, after which, perhaps, a wider consensus might be reached 

on FAA’s cost allocation methodology. At the request of this Committee, 

we are continuing to review FAA’s cost allocation methodology. 

In addition to our concerns about the cost allocation methodology, we 

have identified some instances in which the reauthorization proposal does 

not strictly adhere to the principle of cost-based funding. For example, 

FAA has made what it terms a policy decision to not apply the congestion 

charge for using terminal airspace near large, busy airports to all aircraft 

that fly through that airspace. Aircraft flying near busy airports and using 

the same airspace but not taking off or landing at these airports would not 

be charged, even though such flights would use air traffic control services 

provided by the same approach control centers. FAA officials told us that 

they made this decision because the approach control centers would not 

 25According to FAA, one potential concern with dividing the high-performance group into 

smaller groups by weight is that the dividing point would be arbitrary and could result in 

large differences in costs assigned to aircraft that do not differ much by weight but do fall 

near the dividing line, yet on opposite sides.

Page 15 GAO-07-625T 
exist if they were not serving traffic at the busy airports. In addition, they 

said, FAA wanted to create incentives for general aviation aircraft to avoid 

flying to or from the busy airports and to use other nearby airports 

instead. Although that rationale could provide a justification for allocating 

the fixed costs of such centers to users of the busy airports, allocating all 

of the variable costs to users at those airports is a deviation from a costbased approach. While such policy decisions on pricing may be 

appropriate in some instances for various reasons, but they create 

deviations from the principle of cost-based funding that may limit the 

ability of the administration’s proposal to address concerns about the 

disconnect between revenues and costs associated with the current 

funding structure. 

Proposed Fuel Tax Rates 

May Not Yield the Revenue 

to Produce Anticipated 

Fuel Tax Revenues

The proposed fuel tax rates, although much higher than current rates, may 

not yield the revenue that FAA expects to collect from fuel taxes. FAA 

estimated the tax rates necessary to collect from general aviation 

operators the share of ATO costs allocated to them and from both 

commercial and general aviation operators the revenue needed to fund the 

proposed level of $2.75 billion for AIP, EAS, and the portion of the RE&D 

account to be funded through fuel taxes (less the share paid by 

international passengers). FAA officials confirmed for us that in 

performing these estimates they did not take into account possible 

reductions in fuel purchases due to the increase in the tax rates. Although

we do not know by how much such purchases would decline, 

conventional economic reasoning, supported by the opinions of industry 

stakeholders, suggests that some decline would take place.26 Therefore, the 

tax rate should be set taking into consideration effects on use and the 

resulting impact on revenue. FAA officials told us that they believe that 

these effects would be small because the increased tax burden is a small 

share of aircraft operating costs and therefore there was no need to take

its impact into account. Representatives of general aviation, however, have 

said that the impact could be more substantial. 

Even if there is no change in fuel purchases due to higher tax rates, FAA’s 

forecasts suggest that fuel tax revenues might be less than the proposed 

 26FAA could use variations in fuel prices over time, such as the big increase in 2005 due to

crude oil price increases, to estimate the decline in fuel purchases likely to result from fuel

tax increases of the magnitude proposed. We recognize that in making such estimates FAA 

would need to take into account the effect that other factors such as the state of the 

economy that can have on fuel purchases. 

Page 16 GAO-07-625T 
spending to be funded by those tax revenues.27 Furthermore, we observe 

that the administration’s proposed spending for AIP is substantially below 

the levels at which Congress funded the program in recent years. If 

Congress were to adopt the proposed funding structure but fund AIP at 

the same level as this year, fuel tax rates would need to be raised above 

the proposed level to obtain enough revenue to fully fund AIP without 

resorting to alternative funding sources, such as the General Fund or 

drawing down the Trust Fund balance. 

Proposal to Create an 

Advisory Board Has 

Uncertain Implications 

While Proposal 

Authorizing Limited 

Borrowing Authority Is 

Unlikely to Have a Major 

Impact 

The proposed creation of an advisory board raises questions about the 

influence that NAS users would have on fee setting and the impact that 

such a board would have on congressional oversight. According to the 

reauthorization proposal, the advisory board would be able to recommend 

user fee amounts to the FAA Administrator, who would have the final 

decision in setting fees. If the advisory board objected to the fee, the

Administrator would be required to publish a written explanation in the 

Federal Register. Aviation stakeholders could appeal the fee to the 

Secretary of Transportation but there would be no judicial review of the 

Secretary’s appeal decision.28 According to a recent report by the 

Congressional Research Service, the FAA Administrator would have 

substantial discretion in how much to use the advisory board’s expertise.29

Congress would have no role in setting fees, whereas under the current 

system, Congress sets the tax rates. The combination of these elements 

raises the issue of how to ensure the appropriate level of congressional 

oversight. With a user fee, Congress would set the total amount to collect 

and spend from the fees through the appropriations process. 

 27For example, FAA’s fuel consumption forecasts for fiscal year 2009 imply fuel tax 

revenues for the Trust Fund of about $2.2 billion, and about $0.5 billion is forecasted to be 

collected in tax revenue from international passengers, for a total of about $2.8 billion 

(differs from components because of rounding). However, proposed AIP obligations for 

that year are about $2.9 billion and spending for EAS and RE&D to be funded from these 

revenues will increase that amount. 

28Appeals would need to be based on evidence that the fees (1) are not based on 

appropriate costs, or (2) do not fairly allocate costs among users or (3) are unreasonably

discriminatory to a particular category of users or (4) are not in accordance with the

agency’s strategic business plan. 

29Congressional Research Service, Federal Aviation Administration Reauthorization: An 

Overview of Selected Provisions in Proposed Legislation (Washington, D.C.: Mar. 14,

2007). 

Page 17 GAO-07-625T 
The authorization of limited borrowing authority (up to $5 billion) for FAA 

in the administration’s proposal seems unlikely to have a major effect on 

FAA’s ability to pay for capital investment associated with moving to 

NextGen, because the payback period is relatively short. With a maximum 

payback period of 5 years, the advantage of matching the time period for 

paying for a capital investment with the time period in which the benefits 

of that investment are realized is unlikely to be achieved. As a result, the 

advantage of this type of borrowing compared to appropriations also 

funded by Treasury debt is less clear. In either case, user fee collections 

could offset the borrowing. However, it is possible that having FAA 

borrow from the Treasury with a relatively short time period for 

repayment could serve as a way to tighten and make more explicit the link 

between the borrowing and the fees that are the source of repayment—

and could ensure that the fees were set at a level sufficient to provide the 

needed funds. 

Limiting FAA’s authority to borrow from the Treasury and collecting 

revenue from user fees, as proposed, is preferable to giving FAA direct 

access to capital markets or repaying debt with appropriations or new 

borrowing. The Treasury can borrow at lower interest rates than FAA 

could achieve by going to the capital markets because Treasury securities

are considered risk-free, since they are backed by the federal government. 

We have recommended that only those agencies that would be able to

repay their borrowing through revenue collections be granted authority to 

borrow. In addition, we have reported that debt financing raises issues 

about borrowing costs that are particularly important in light of the federal 

government’s long-term structural fiscal imbalance. Mandatory federal 

commitments to health and retirement programs will consume an everincreasing share of the nation’s gross domestic product and federal 

budgetary resources. Accordingly, any program or policy change that may 

increase costs requires sound justification and careful consideration 

before adoption. 

Page 18 GAO-07-625T 
The reauthorization proposal to align FAA’s budget accounts with FAA’s 

lines of business has advantages and disadvantages. Such a restructuring 

is consistent with FAA’s emphasis on aligning revenues and costs and 

could allow FAA to more specifically distinguish those funding options 

that provide a better links between costs and revenues. For example, an 

ATO account dedicated to the operation, maintenance, and upgrade of the 

NAS could better enable the agency to charge for direct usage of the NAS. 

In addition, such a system could show the costs attributable to each line of 

business, thereby supporting the agency’s internal financial management. 

However, some FAA activities may not be clearly divisible into discrete 

categories. For example, one new account—the Safety and Operations 

account—includes safety-related activities. Nonetheless, there could be

some ambiguity in how safety activities are defined and in how their costs 

should be allocated between aviation users which benefit directly from a 

safe air traffic control system and the public which receives general safety

benefits. 

Observations on 

Proposed Changes to 

the Budget Structure 

and on the Method for 

Determining the 

General Fund 

Contribution 

Linking the General Fund contribution to FAA’s budget, as the 

administration is proposing, would explicitly recognize that users of the 

system are not the only beneficiaries of it. Such an approach allows for a 

“bottom up” calculation of the General Fund contribution that is based on 

the different public benefits that FAA provides, such as safety and use of 

the NAS by federal agencies. This approach is different from the current 

one, which bases the General Fund contribution on how much money is 

left in the Trust Fund to fund the Operations account after Trust Fund 

revenues for that particular year have been allocated to fund the F&E, AIP, 

and RE&D accounts. An approach that links a General Fund contribution 

to public benefits is consistent with the principle of public finance that 

public benefits should come from the General Fund and not from user 

contributions. This should not, however, be viewed as a precise 

determination. Some aviation activities, such as safety, benefit both users 

and the nonuser public. Others, such as a national airport system that 

includes small airports that receive federal grants, may be seen as a 

benefit solely to the users of those airports, to their communities, or to the 

broader public. In addition, such a change in the method of determining 

the General Fund contribution may result in an increase or a decrease in

that contribution, which would have implications for how aviation 

activities are funded. 

Page 19 GAO-07-625T 
The administration has introduced a complex proposal for funding FAA, 

and we believe that it deserves serious and thoughtful consideration. 

Adopting this proposal is not necessary to provide more money to FAA if 

Congress thinks that additional spending on aviation is needed to address 

air traffic increases and new investment demands, including NextGen, 

because additional funding can be provided within the current structure. 

However, given the current federal fiscal imbalance, appropriating 

additional funds to aviation may be difficult. Furthermore, the proposal 

may address some of the concerns that FAA and other stakeholders have 

raised with the current funding structure, such as equity, but only if the 

cost allocation from which the cost-based funding is derived is sound. 

FAA’s cost allocation methodology is new and has raised issues, 

suggesting that further analysis and more time may be needed to reach a 

consensus as to whether it is sufficiently sound to support a cost-based 

funding structure for FAA. 

In the meantime, the taxes that currently provide most of the revenue for 

FAA are scheduled to expire at the end of the current fiscal year. Given the 

relatively low uncommitted balance in the Trust Fund, a lapse in tax 

revenues could affect the funding of most FAA activities. Thus, timely 

reauthorization of the current tax revenues to avoid a tax lapse is critical 

even if Congress chooses to continue its consideration of the 

administration’s proposal or other alternatives for funding FAA beyond 

this fiscal year. 

Mr. Chairman, this concludes my prepared statement. I would be pleased

to respond to any questions that you or other Members of the 

subcommittee might have. 

For further information about this testimony, please contact Gerald L. 

Dillingham at (202) 512-2834. Other key contributors to this testimony 

include Jay Cherlow, Ed Laughlin, Maureen Luna-Long, Maren McAvoy, 

Jennifer Kim, and Elizabeth Eisenstadt. 

Concluding 

Observations 

Contacts and 

Acknowledgments 

Page 20 GAO-07-625T (540145) 
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