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85–814—PDF 2002

S. HRG. 107–896

REVENUE ISSUES RELATED TO THE

HIGHWAY TRUST FUND

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

MAY 9, 2002

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

JOHN BREAUX, Louisiana

KENT CONRAD, North Dakota

BOB GRAHAM, Florida

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

ROBERT G. TORRICELLI, New Jersey

BLANCHE L. LINCOLN, Arkansas

CHARLES E. GRASSLEY, Iowa

ORRIN G. HATCH, Utah

FRANK H. MURKOWSKI, Alaska

DON NICKLES, Oklahoma

PHIL GRAMM, Texas

TRENT LOTT, Mississippi

FRED THOMPSON, Tennessee

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

JOHN ANGELL, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Charles E., a U.S. Senator from Iowa .......................................... 3

Jeffords, Hon. James M., a U.S. Senator from Vermont ...................................... 5

ADMINISTRATION WITNESSES

Lyon, Dr. Andrew, Deputy Assistant Secretary for Tax Analysis, Department

of the Treasury, Washington, DC ....................................................................... 6

Hecker, Jayetta, Physical Infrastructure Team, General Accounting Office,

Washingon, DC ..................................................................................................... 9

Cawley, Kim, Unit Chief, National and Physical Resources, Cost Estimates

Unit, Congressional Budget Office, Washington, DC ........................................ 14

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Cawley, Kim:

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 25

Responses to questions from Senators Inhofe and Jeffords .......................... 45

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 3

Hecker, Jayetta:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 48

Responses to questions from Senators Inhofe and Jeffords .......................... 80

Jeffords, Hon. James M.:

Opening statement ........................................................................................... 5

Lyon, Dr. Andrew:

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 82

Responses to questions from Senators Grassley, Nickles, Inhofe, and Jeffords ............................................................................................................... 88

Thomas, Hon. Craig:

Prepared statement .......................................................................................... 91

(1)

REVENUE ISSUES RELATED TO THE

HIGHWAY TRUST FUND

THURSDAY, MAY 9, 2002

U.S. SENATE

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 9:35 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee), presiding.

Also present: Senators Jeffords, Graham and Grassley.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Hearing will come to order. I welcome everyone

this morning. I know this is a bit of a different cut than what the

Finance Committee usually does. And I appreciate very much your

taking the time to prepare something a little bit different than

what we might otherwise do. I say all that because this committee

has not ever had a hearing on the relationship between the trust

funds and authorizing legislation. I thought though that given the

Finance Committees jurisdiction and oversight responsibilities over

the trust funds, that it is incumbent upon this committee to examine those funds and do our best to make sure that they are working

the way that we think is in the public’s interest.

As we approach the re-authorization of both TEA 21 and AIR 21,

the finance Committee will examine the taxes, the revenues and

the balance projections that will be the basis for both the Federal

Highway and Aviation Programs over the next several years.

Before I get to the nuts and bolts of the hearing, let me first say

how pleased I am to see my good friend Senator Grassley from

Iowa here this morning. He and I come from somewhat similar

States—agricultural States—somewhat in the middle of the country and we also have views that are very similar. It’s a real joy to

work with Senator Grassley and I know how interested he is in

transportation issues as well. Iowa just like the State of Montana

is quite rural, there’s lots of highways and working with those similarities I hope to find similar solutions.

I also want to thank Senator Jeffords. Senator Jeffords is chairman of the Environment and Public Works Committee. And we will

work very closely together, cooperatively, as he in that committee,

writes the next highway bill. But since this committee has jurisdiction over the funds that go into the highway trust fund, I think it

would be appropriate for us to be working together.

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I served on that Committee that Senator Jeffords is the Chairman of, for about 20 years—working on both ISTEA and TEA 21.

I can tell you highway re-authorization bills are an integral part—

at least in my State—of our economic development plan. That highway program creates 11,000 jobs in my State of Montana, and

those are good paying jobs. It’s not only building good highways,

good infrastructure, but it’s also jobs that help so many of our

Americans.

We hope to improve upon the highway program by diverting and

adding more revenues to the various trust funds. There are three

ways I think that we can do that.

One is the 21⁄2 cents that goes into the general fund from the sale

of gasohol. I introduced a bill, S. 1306 that transfers 21⁄2 cents to

the Highway Trust Fund. I am happy to report that S. 1306 (also

known as the Highway Trust Fund Recovery Act) was included in

the Energy Policy Act which the Senate passed just recently and

I am hopeful that that will become law by the time that we introduce the re-authorization bill.

The second provision in my proposal involves the ethanol subsidy

and funds lost to the Highway Trust Fund. Currently the Highway

Trust Fund subsidizes ethanol. Now I am a strong ethanol supporter. Ensuring necessary and affordable energy supplies including ethanol-blended motor fuels and other initiatives, is important

I think, to our quality. Policies to achieve these objectives should

not come at the expense of transportation infrastructure improvements. After all cars that utilize gasoline use our highways just

like cars that utilize gasohol. Whether it’s gasohol or gasoline, they

still drive on our highways and it’s my view that the funds that

derive from driving on the highway should go to the Highway Trust

Fund and not into general revenue.

Therefore, in my re-authorization proposal, I plan to include a

general fund transfer for the 5.3 cents lost to the Highway Trust

Fund from the ethanol subsidy. Just to be clear the subsidy does

stay in place but there is equity created between the general fund

and the Highway Trust Fund.

By directing both the 21⁄2 cents and the 5.3 cents to the Highway

Trust Fund, I think we can alleviate a growing problem for many

States—that is lower trust fund contributions and therefore lower

highway apportionments. I might add, I was struck several years

ago—and I know it’s still the case—the Federal Department of

Transportation did a study of highway needs in America and concluded that the program meets only about 50 percent of the needs

in our country. There is huge need for more dollars for bridge construction, railroad crossings, highways, transportation corridors, repairs. It’s actually quite stronger than I think most people realize.

The third provision I will include in my bill will be recouping the

interest from the balance in the Trust Fund. Prior to TEA 21 interest on the Trust Fund was included in the balance. I think that interest should be again, retained for the Trust Fund.

These three provisions will ensure that much needed highway

improvements are made throughout the country. Specifically, it

means more jobs for not only people in my State, but across the

country.

3

*For more information on this subject, see also, ‘‘Overview of Highway Trust Fund Excise

Taxes and Related Internal Revenue Code Expenditure Provisions,’’ Joint Committee on Taxation staff report, May 9, 2002 (JCX–37–02).

In addition I want to look at the RABA issue, that is, how RABA

is presently calculated. A few questions about the calculations

made by Treasury, the IRS and the CBO projection of balances.

Maybe there’s another way we can make those calculations and estimates so that there’s not such great volatility as we are currently

experiencing. Some say it’s up close to 9 billion dollars of difference

because of RABA calculations. My thought is it would be better if

we could even that out a little bit, if there is a way to do so, so

that we avoid the highs and lows that we are now experiencing and

trying to find solutions to.*

That concludes my general remarks. We will have a good number

of questions. I would like to now turn to ranking member of the

committee, Senator Grassley.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA

Senator GRASSLEY. Thank you very much Mr. Chairman and

thank you also for your recognition that Iowa and Montana have

similar approaches to these highway issues.

Now that you are Chairman of the Senate Finance Committee,

people may forget about all your activity on highway trust funds

throughout your career in the United States Senate. I want to

thank you for your leadership in that area when you had another

capacity in the United States Senate because obviously you have

been in the middle of this issue for a long, long time, even before

becoming chairman of this committee.

As Congress approaches re-authorization of TEA–21, it is important for us to evaluate the overall health of the highway fund. This

hearing will help our evaluation—help us evaluate all revenue

sources of the fund to determine if adjustments are appropriate

and to determine if adjustments are appropriate in the way that

we actually spend those Highway Trust Funds.

A number of issues are important. We should be working with

Treasury and Internal Revenue Service to improve the quality and

timeliness of tax return information that report the excise taxes. I

hope the Treasury and The Service will pledge a time line to schedule converting tax returns for excise taxes to an electronic system

of reporting.

I was disappointed in the volatility of current estimates because

Treasury may have been dealing with statistics that were over 6

months old. Not only did these statistics not take into account the

beginning of the recession, March 2001, but failed to predict the

devastating affect of September the 11th on the American consumer spending less money on travel. Obviously recession and a

national crisis are not things that are generally built in to estimate

baselines, but more timely electronic reporting would help give

more accurate real time estimates.

Also of concern is the ongoing evasion of excise taxes. If we are

going to base our entire system on dedicated funds, we must also

focus on aggressive enforcement if evasion schemes are suspect.

This committee has previously focused several hearings on the

4

issue of what we call schemes, scams and cons which degrade the

integrity of the tax system.

The outright evasion of excise taxes hurts the ongoing safety of

our American highway system besides being morally and legally

wrong in its own right. Today more than ever after the crisis of

September 11th the safeness, soundness and security of highway

systems across all of the States is critically important. This nation

needs safe highways and so long as we cannot utilize the general

fund to pay for our highways then we must aggressively guard our

dedicated taxes.

And speaking of guarding our excise taxes, I have a second opportunity to thank Chairman Baucus for the amendment that I

supported as ranking member and added to the Energy Tax Incentive Act of 2002. Under that we will transfer 21⁄2 cents collected

from gasohol out of the general fund to be rededicated to the Highway Trust Fund. This is something that I have wanted to do and

it should have been done since 1998. I understand that our witnesses today will be doing some forecasting as to the effects that

this 21⁄2 cent transfer may have on the Trust Fund in the future.

This committee and Senate Energy Committee—particularly the

bill from Senate Energy—also actively support additional incentives for alternative vehicles, alternative fuels and substantial increases in fuel efficiencies.

Since the Senate has spoken as to the importance of these policies, we must consider whether a totally dedicated trust fund might

need some rethinking. And we may need to ask some hard questions about dedicated funds. Should we continue to use a fuel excise taxes for instance to fund a leaky underground storage fund.

And I could raise a lot of other questions about just formulas generally. But those will be issues that we will touch on during the

debate, but I am also suggesting that we should touch on them.

As Congress continues to encourage fuel efficiency and alternative fuels, we need to review how the dedicated funds of the

Highway Trust Fund are allocated.

I know I have also asked today’s witnesses to discuss simplification. A few months ago when I was chairman of the committee we

devoted an entire hearing to simplification of the tax system. And

I know our chairman shares ongoing concerns that I have that the

tax system is very complex and we should strive to clarify and simplify the tax system.

As we review the future of the Highway Trust Fund, these are

all issues that will remain important to me. And I thank the chairman for holding the hearing. I explained to him privately that I

will not be able to stay at this hearing because of some caucus responsibilities that I have. But I appreciate the opportunity to make

my statement and I obviously will strive to work with you on whatever we do in this area, even though it may be next year.

The CHAIRMAN. Thank you very much Senator Grassley. I deeply

appreciate your hard work and cooperation. Thank you very much.

I’d like to turn it over to the chairman of the Environment and

Public Works Committee, Senator Jeffords, who is taking over huge

responsibilities—and I know fiercely looking forward to them—and

I extend to him my pledge to work cooperatively with him on these

and other issues.

5

OPENING STATEMENT OF HON. JAMES M. JEFFORDS, A U.S.

SENATOR FROM VERMONT

Mr. JEFFORDS. Thank you Mr. Chairman for those kind words

and let me commend you for holding this important hearing. And

thank you for permitting me to make my opening remarks.

I look forward to working closely with you both here on the Finance Committee and on my committee on Environment and Public

Works.

Recent events make clear the need to focus on the Highway

Trust Fund and its management. The President’s budget proposed

for fiscal year ‘03 with it’s proposed reduction in spending on the

highway program has created enormous concern and confusion

among the 50 States and the businesses and individuals who rely

on the transportation system. That is why I introduced as 1917 the

Highway Restoration Act, a bill originally co-sponsored by all 19

members of the EPW Committee. Under S. 1917—which now enjoys 74 co-sponsors—the program will be funded at least the level

authorized.

My near term goal for S. 1917 are three fold. First to secure the

highest level of funding possible for the highway program for fiscal

year ’03. In that regard I work with the Budget Committee to define a program amount that will fit within their overall budget constraints. I support the Budget Committee’s 5.7 billion dollar level.

Second, provided that the necessary budgetary caps can be established I would like to see the fiscal year ‘03 funding protected by

fire walls.

Third, I want to be sure that whatever additional funds are made

available to the program are distributed along TEA–21 formulas.

In the long run, I want to improve the Revenue Allying Budget

Authority (RABA) to avoid this problem in the future.

Today’s hearing on the highway trust fund is also timely as we

embark on authorization of the nation’s surface transportation program. Throughout the interstate highway era, our National program has been supported by the Highway Trust Fund. The Trust

Fund has sustained the program for nearly 50 years. Over this period we have witnessed exponential growth in the use of gas and

diesel fuel powered vehicles, generating ever increasing revenues

for the Highway Trust Fund.

In today’s Finance Committee hearing we will discuss projections

for that fund. These projections will guide the EPW Committee’s

work on future surface transportation policy, program structure

and funding levels.

Mr. Chairman, as you know due in large part to your efforts, the

programs funding grew by roughly 40 percent during the last authorization TEA–21. This was achieved by directing gas tax revenues to the Trust Fund that had formerly gone toward deficit reduction.

As we proceed with the re-authorization we must seek new ideas

to grow the program. I do not anticipate another 40 percent growth

from traditional sources. That is why I am so excited about our

joint EPW-Finance hearing this Fall to examine innovative finance

concepts. Modest Trust Fund reflects changing travel trends and

tight economic times. We need new ideas to confront these new

challenges.

6

Mr. Chairman, I look forward to working with you over the coming months. All those interested in the strong and well funded

transportation program need to pull together. These tight times

will require strength through unity, a national perspective, and a

spirit of cooperation. With that let me close again and thank you

Mr. Chairman for leading the hearing today, listening to me and

I look forward to working with you, we have quite an adventure

ahead of us.

The CHAIRMAN. Indeed we do and I thank you very much Senator and thank you for mentioning the joint hearing we plan to

hold this Fall. I think that will be most constructive. I deeply appreciate your help here.

Now I will turn to the witnesses. Let me announce each of them.

First we will hear from Dr. Drew Lyons from the United States Department of Treasury. Next Ms. Jayetta Hecker from the General

Accounting Office, and last but—as the saying goes—not least we

will have Kim Cawley from the Congressional Budget Office.

Since we don’t have a large number of witnesses today, I’d like

each of you to speak not 5 minutes, but say 10 minutes if you want

to speak that long—shorter if you wish—but certainly you can have

10 if you want to fill up the time. So why don’t you begin Mr. Lyon,

Mr. Lyon or Lyons?

Mr. LYON. Lyon, no ‘‘s.’’

The CHAIRMAN. Singular, okay thank you.

OPENING STATEMENT OF ANDREW LYON, DEPUTY ASSISTANT

SECRETARY FOR TAX ANALYSIS, DEPARTMENT OF THE

TREASURY, WASHINGTON, DC

Mr. LYON. Mr. Chairman and members of the committee, I appreciate the opportunity to appear before you today. With your permission I would like to read a shorter version of my testimony and

submit the full testimony. In my testimony, I will first describe recent trends in highway-related excise taxes.

Second, briefly describe how funds are credited to the Highway

Trust Fund. Third, highlight areas the Treasury is evaluating as

part of its ongoing simplification project. And forth, discuss the administration’s fiscal year 2003 budget forecast of related excise tax.

To begin, let me first review trends in recent excise tax receipts

for the highway account. As has been mentioned, there was a rapid

downturn in highway related excise taxes as the economy began

weakening in the Summer of 2000 and continuing through 2001.

Tax receipts into the highway account fell 3.4 billion dollars between fiscal year 2000 and fiscal year 2001. Dropping from 30.3 billion dollars to 26.9 billion dollars, an over 11 percent decline.

As shown in the table accompanying my testimony, 5 of the 6 receipt sources were lower in 2001 than in 2000. Only taxes on gasohol fuels show an increase. The increase in taxes on gasohol fuels

is evidence of an ongoing substitution of gasohol fuels for gasoline,

which may be used interchangeably in cars and light trucks.

We anticipate that there will be an increasing use of gasohol

fuels, as a proportion of total fuels, as States ban the use of MTBE

as a fuel additive. Since the highway account receives 15.44 cents

per gallon of gasoline, but only about 8 cents per gallon of gasohol,

7

the substitution of gasohol fuels for gasoline will result in a net reduction in highway account receipts.

Looking at the other excise tax sources, the most dramatic declines between fiscal year 2000 and fiscal year 2001 (both in percentage terms and in dollars) occurred in excise taxes related to the

sales and operations of trucks. The reductions in retail truck taxes

were particularly large, because this tax is levied as a percentage

of the sales price on the first retail sale.

During the investment boom of 1998 and 1999 a large volume of

new trucks were purchased at premium prices. As the economy

weakened, reduced demand for new trucks, coupled with large

numbers of these slightly used trucks on the secondary market, depressed prices and sales in the new heavy truck market. Tax revenues from retail truck taxes declined accordingly.

In terms of the administration of the trust fund (how excise taxes

end up being credited to the Highway Trust Fund), motor fuels account for more than 90 percent of trust fund receipts. These fuels

are taxed when they move out the bulk transportation storage network and into tanker trucks at the terminal rack. At this point the

fuel is taxed (or in the case of diesel or kerosene intended for nontaxable purposes), it is dyed. The owner of the fuel as it passes the

terminal rack, known as the registered position holder is liable for

payment of tax.

Tax payers with more than 2,500 dollars in net excise tax liability are required to make semimonthly payments. These taxpayers

typically rely on safe harbor rules in determining the amount to deposit. These deposits are typically made via the electronic Federal

tax payment system. Initially these collections are deposited into

the Treasury’s general fund. At the time of the deposits, tax payers

are not required to itemize which excise taxes they are depositing,

they simply indicate that it is for excise taxes. This deposit may

be for any of approximately 50 different excise taxes.

Even tax payers that exclusively owe taxes on motor fuel, are

likely to have tax liability for a combination of gasoline, diesel, kerosene, gasohol and possibly various alternative fuels. Each of these

fuels is taxed at different rates and distributed in different proportions to different accounts. The two accounts of the Highway Trust

Fund, the Leaking Underground Storage Tank Trust Fund and the

General Fund.

In the absence of sufficient information from the tax payer regarding the composition of excise tax deposits, tax receipts appropriated to the Highway Trust Fund are estimated as called for in

section 9601 of the Internal Revenue Code. Thus on a semimonthly

basis, the Office of Tax Analysis of Treasury allocates incoming excise tax receipts based on historical liability shares as an estimate

of the amounts appropriated to the Highway Trust Fund.

Tax payers will report their tax liability for most excise taxes

quarterly on form 720. This form is due 1 month following the close

of the quarter. The excellent pamphlet prepared by the Joint Committee on Taxation for today’s hearing includes a copy of this tax

form in the appendix.

On the form 720, taxpayers itemize their liability. For example,

reporting the numbers of gallons of each fuel and the tax due and

8

claims of non-taxable use of the fuel. Any balance due or over payment is settled at the time the form 720 is filed.

Taxpayers separately report liability for the heavy vehicle use

tax on form 2290. In general payments must be paid in full with

return or in quarterly installments. In conjunction with these tax

forms, the IRS calculates the Highway Trust Fund certification of

taxes collected for the quarter. After processing the excise tax return, the IRS compares the reported tax liability with the deposits

received from each taxpayer. In cases where taxpayers have reported tax liability exceeding their deposits, deposits are allocated

based on their prorated tax liability to ensure that certified

amounts equal tax collections. In order to allow time for late filing

by taxpayers, amended returns or adjustments from examinations,

the certification is issued approximately 41⁄2 months following the

due date of the return. The certified amount is then compared to

the amounts transferred as estimated.

Reconciling adjustments are made to the Trust Fund Accounts

for any differences between the certified amounts and the amounts

previously transferred.

I would now like to turn to discuss certain administrative and

compliance difficulties with highway excise taxes. Maintaining the

flow of receipts into the Highway Trust Fund requires continuing

efforts to secure better tax compliance. Over the last decade there

have been three major compliance success stories.

First, moving the point of taxation for motor fuels to the terminal

rack, significantly reduced opportunities for tax evasion. Second,

requiring diesel fuel, home heating oil and other diesel subsidies to

be dyed red to be sold tax free eliminated another source of evasion. Third, taxing undyed kerosene on the same basis as the regular diesel fuel with which it is often mixed, has reduced other evasion opportunities.

Combating fuel tax evasion occurring outside the main distribution network is a continuing effort of the IRS in cooperation with

State tax authorities. Untaxed kerosene (intended to be used in

aviation fuel) ‘‘transmix’’ taken out of pipelines, waste vegetable

oils, used dry cleaning fluids and other chemicals, may be mixed

with diesel fuel and find their way into the fuel tanks of trucks on

the road. New initiatives are under way to combat this form of evasion.

One is a detailed computerized information system developed in

cooperation with the petroleum industry and the States, that will

allow all fuels to be tracked from the refinery gate all the way

through the distribution system. Another if fuel finger printing, a

technique that tests samples taken from retail stations for adulteration or for a mismatch with samples taken from the terminal

racks that normally supply those stations.

These continuing efforts are supported in part by a small appropriation from the Highway Trust Fund of monies used specifically

for compliance efforts.

Other taxes can result in significant compliance burdens. For example, the annual use tax involves all owners of heavy highway vehicles and imposes compliance burdens on taxpayers, the IRS and

State agencies. Some vehicle owners evade full compliance by paying only the first quarter’s tax, but not subsequent installments.

9

The retail truck tax is particularly difficult to administer and

compliance is particularly difficult for truck dealers and other as

it requires a number of factual determinations.

The Treasury Department expects to announce proposals to both

simplify and improve compliance with excise taxes that support the

Highway Trust Fund as part of its ongoing simplification project.

Before I close, I would like to briefly describe the administrations

forecast of future excise tax receipts. Looking forward, the administration projects steady growth in highway related excise tax receipts. Net receipts in fiscal year 2003 are projected to be 6.2 percent higher than fiscal year higher than in fiscal year 2001 and 2.9

percent higher than in fiscal year 2002. Average annual growth is

forecast to be more than 3 percent per year over the remainder of

the budget period.

The fiscal year 2003 budget forecasts a faster long run growth in

receipts than in last year’s budget, however this faster rate of

growth is relative to a smaller base. So the forecasted levels are

lower than previously projected.

In the current budget, the administration forecasts net highway

account excise tax receipts to be 28.57 billion dollars in fiscal year

2003. This concludes my oral testimony. I would be happy to answer any questions.

The CHAIRMAN. Thank you very much Dr. Lyon. Next we will

move to Ms. Hecker.

[The prepared statement of Dr. Lyon appears in the appendix.]

OPENING STATEMENT OF JAYETTA Z. HECKER, DIRECTOR,

PHYSICAL INFRASTRUCTURE ISSUES, GENERAL ACCOUNTING OFFICE

Ms. HECKER. Thank you Mr. Chairman and members of the committee. We are very happy to be here today. I have a slide show.

I am actually going to cover a lot of the issues that Dr. Lyon has

covered but with pictures so we will see if that helps cement and

clarify that process.

Our work is based on recent efforts on The Highway Trust Fund,

the RABA, and a range of related issues that are listed in our testimony.

The overview of what we are going to cover is really four areas.

First is the collection and distribution of taxes as Dr. Lyon has covered.

The CHAIRMAN. Do you have copies of those slides?

Ms. HECKER. We do, we did give you copies.

The CHAIRMAN. Okay good. I’ve got glasses, I still have a hard

time reading that.

Ms. HECKER. It is always easier having it in front of you.

The CHAIRMAN. Thank you very much.

Ms. HECKER. So we are on slide two of the overview, the four topics that I will cover. First will be the collection and distribution of

highway taxes that Dr. Lyon has covered. Second is the process for

calculating the RABA and our review of the reasonableness of the

2003 calculation. Third is the impact of gasohol use on the Highway Trust Fund and fourth is some proposals to provide additional

revenues for the Trust Fund.

10

Now the first one we will go into is the collection and distribution

of highway taxes. And basically I am going to show you in sequence

because it’s a lot of things at once. The heart of this, of course, as

Dr. Lyon has said, is that the deposits are not related to the actual

liabilities due. So that’s what makes the whole thing complicated.

And the first thing is you’ve got semimonthly deposits by the distributors, the oil companies or a tire manufacturer. Those deposits

are not identified with a specific excise tax. It could be many, as

he said, there could be up to 50. And therefore the deposits, generally are put in the General Fund to begin with and only after a

complex process is a determination made of how much belongs in

the Highway Trust Fund that then get invested in securities.

So this red arrow in the middle of how the monies that have

been deposited get converted is really the complicated process that

Dr. Lyon began to describe. And there’s really two steps to it. The

first is to try to do it on a timely basis, the Office of Tax Analysis

(OTA) makes—our chart says monthly, Dr. Lyon said semimonthly—receipt estimates. So there is an estimating process. This

isn’t actual numbers, it’s not tax filings. It’s an estimating process

to determine how much gas or other highway products was really

sold in this period, in order to make some preliminary transfers.

And then these other two offices, the Financial Management Service and the Bureau of Public Debt prepare and process a monthly

voucher that makes an initial distribution from the General Fund

into the Highway Trust Fund.

The CHAIRMAN. How often when you go back and check is that

estimate fairly accurate?

Ms. HECKER. It’s never been accurate.

The CHAIRMAN. It’s never been accurate. You’re a candid lady, I

appreciate that.

Ms. HECKER. Well it varies. Sometimes it’s been higher, sometimes it’s been lower.

The CHAIRMAN. How often is the variance, the spread, a little uncomfortable?

Ms. HECKER. I don’t have that data, we can get that for you and

I’m sure Dr. Lyon has

Dr. LYON. Well the total is accurate as it’s based on the total

amount of excise taxes. Those have to be apportioned and we apportion it based on historical shares.

The CHAIRMAN. Alright, so maybe my question isn’t terribly relevant at this point. You can be honest.

Ms. HECKER. This is a pretty convoluted process. And it is related to the way that these taxes are structured and collected. So

it is relevant but it’s pretty confusing and complex.

So the next step is to try to reconcile and more accurately match

those initial deposits into the Highway Trust with the actual liabilities for the different types of fuels or taxes. That happens on a

quarterly basis, when the fuel distributor or the one who is liable,

quarterly makes tax returns. That’s where they say I sold this

many gallons of this, this many gallons of this, or I sold this many

pounds of tires. So Treasury is for the first time matching the liability with the particular deposits that have been made. IRS then

on a quarterly basis when these statements come in is going to certify—of these actual deposits and determine what correcting transVerDate 11-MAY-2000 09:49 Apr 14, 2003 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 85814.000 SFINANC2 PsN: SFINANC2
11

fers need to be made. That also results in quarterly vouchers

through these other two offices that finalize the amounts that actually belongs in the Trust Fund.

We have reviewed this process for several years both on a evaluative basis about how it works, as well as on an accounting basis.

We had concerns about the process. We’ve made recommendations

to improve it’s accuracy. Some improvements have been made and

we actually are observing real improvements in the quality of the

process and the accuracy of the data.

The underlying concern though is one that we raised doubts

about and hasn’t changed. And it’s this basic mismatch with the

initial filings with no information on where it goes—it’s just for an

excise tax—it could be anything. And then the resulting need for

a complex process to attribute it. We said that ought to be looked

at and that’s an outstanding issue that I think Treasury is still

looking at. But the whole basic filing process and the fact that it

isn’t identified is a concern.

The CHAIRMAN. And that’s a concern because of the time it takes

to then put Humpty-Dumpty back together again later on?

Ms. HECKER. Precisely. I think that’s a very direct and simple

way to put a very complex process. Now I have another slide up

here. I am going apologize. I decided to add this one at the last

minute. This is a quick overview of the six major excise taxes that

make up the Highway Trust Fund. Because of this committee’s central focus on the tax base, I decided to end up including this. And

it basically shows you that the gasoline tax provides about 58 percent of the revenues, diesel taxes is about 24 percent, gasohol is

about 9 percent and the three different truck related taxes, tires,

sales of new trucks and taxes on heavy vehicles is about 9 percent.

This is important when we get to the impact of gasohol. And as Dr.

Lyon said that is the only one of the six sources of revenue that

grew last year, but actually it’s growth led to a reduction in the

total amount of money going into the Highway Trust Fund because

of the two tax provisions that you rightly pointed out.

So that’s kind the quick overview of the sources. Those proportions have changed somewhat over time, but it’s been relatively

stable lately.

The next chart now is going to get to the 2003 RABA calculation.

The key there of course is that it’s the result of the TEA–21 effort

to guarantee the funding level on the basis of projected receipts

and have adjustments made each year, both on a look back basis,

(whether the money came in was different than what was projected) and as a look ahead (whether the current projections for the

future are different) than were projected in TEA–21.

So we’ll first look at 2003. The look back part of the RABA cal- culation accounted for a negative $3.4 billion. For the look ahead

there was $900 million less anticipated for 2003 than projected in

TEA–21 and that added up to the $4.3.

We’ve actually done a detailed review of the procedures that led to the negative $3.4 billion on the look back part of the RABA calculation and found that it is reasonable and adequately documented. So we have done a pretty detailed review of that. While

we think it’s a pretty convoluted process, we have verified that $3.4

billion is actually pretty accurate; for the $900 million look ahead,

12

Treasury has a model that contributes to that part of the RABA

number. We have looked at that model, and have no reason to

question it. So basically we think the nature of the structure of the

way RABA is calculated did in fact lead to this $4.3 billion turn

around.

Now the next thing I will comment on is why you get such a dramatic RABA downturn in 2003. You basically have at least three

major hits that occur in 1 year when there is a dramatic downturn

in the economy. You’ve got the difference between the first two columns in the 2003 RABA calculation. The receipts have been projected to be $28.5 billion, that’s what you wrote into TEA–21.

The CHAIRMAN. H A stands for?

Ms. HECKER. Highway Account. So $28.5 billion had been projected to come in, only $26.9 billion came in so that was a $1.6 billion hit on RABA. Then the $1.8 billion is interesting to see because that is deducted from this years RABA amount. There was

a positive RABA in 2001. So in 2000 when it was projected that

receipts in 2001 would be greater than anticipated in TEA–21, the

advance was made under the look ahead part of the 2001 RABA.

So that $1.8 billion had been paid out, but it then gets deducted

when you do this look back projection for the 2003 RABA that in

fact was an advance.

So basically we found that the 2003 RABA is reasonable and that

the very structure of the RABA, the way it was designed, really

leads to this triple hit where there is a dramatic downturn in the

economy; it will generate these kind of severe downturns.

The next chart I have is basically there are some changes.

The CHAIRMAN. I’m sorry I ask my colleagues to jump in any

time with technical questions too. Why, back on the last chart I

never see 2002 anywhere?

Ms. HECKER. Well that’s the current year. So you’re not getting

the corrections and the look back for the current year that’s in

process. So you go back to an actual year—remember the certification—the data is now certified what actually came in—so the

current year is in process and that’s not part of the look back. You

go back 2 years.

The CHAIRMAN. Thank you.

Ms. HECKER. Okay if the Congress wants to keep a RABA there

are different formulas it could consider. We have developed three

here. Basically two of them would still have had positive pay outs

in 2000, 2001, 2002. But both would have gone negative in 2003.

There is one, (the black line) that could be done by distributing

the RABA adjustment over 2 years. What’s interesting about that

one, while we are not recommending it, it actually had a higher

positive net adjustment for the whole period and it never went negative. So it would be a formula that would soften out considerably

those swings and it actually (at least in the circumstance of the

past few years) would have not resulted in a negative RABA this

year. That’s just for your consideration. We are happy to try to do

some more work for you about what you would like to do with the

RABA.

The next issue, you understood this very well, so this is a simple

primer, I will try to go through this one quickly. This is the third

13

topic on how gasohol impacts the account revenue. There’s basically

two ways that it affects it.

First you see there is the difference in price. Basically that difference is due to a partial tax exemption. There is the 5.3 cents tax

difference per gallon between gasohol and gasoline. As Dr. Lyon

said you can see here the difference of what goes into the highway

account from gasohol, 7.6 cents for every gallon sold, whereas for

every gallon of gasoline you’ve got over 15 cents going in. So you’ve

got even more than the 5.3 difference because of the 2.5 cents

that’s transferred into the General Fund.

So it’s basically again a double hit for the tax provision. As you

rightly said, there was a public policy purpose to this. We focused

on the impact on the Highway Trust Fund, not whether there

should be promotion of alternative fuels and whether there is a national policy purpose. But our analysis focuses on the impact on the

Trust Fund.

Next we’ve taken Treasury’s data and showed it on an annual

basis. Looking back, the partial tax exemption for gasohol cost the

Highway Trust Fund nearly $4 billion in the past 4 years. The

General Fund transfer cost about $2 billion for a total of 6 billion.

Projecting forward, the partial tax exemption will result in lost revenues of nearly $14 billion over the next 11 years. The General

Fund transfer would account for up to about $7 billion for a total

of nearly $21 billion over the next 11 years. So it’s a very substantial amount. And you I think understand those two pieces and how

they both play out.

And this is why that increase in gasohol, the only source of revenue that increased in 2001, actually led to a net reduction of the

revenue that went into the Trust Fund, because it was displacing

gasoline which would have generated much more funds for the

Trust Fund.

Clearly then we are looking at some challenges. While we do

show some continued projections of the Highway Trust Fund revenues, they are no where near keeping pace with the demands that

are projected for major highway improvements.

The ideas that have been put out, clearly you brought up the one

about altering the tax treatment of gasohol. Basically our analysis

shows that both the 2.5 cent and the 5.3 cent per gallon changes

would generate about $1.8 billion extra for the Trust Fund each

year.

The other one you mentioned would be to allow the interest on

the Trust Fund to be accrued to the Highway Trust Fund. That

would, based on our analysis, generate about $1 billion a year.

Other ideas are out there. The increased use of tolls—there is

some very interesting and promising research—on not turning current roads into tolls roads, but the few places where you can really

build some new roads, have those be ‘‘HOT lanes,’’ they call them.

High occupancy toll lanes, and it’s a very promising idea that there

is some research that this is a way that you could both generate

the funds and allocate what is clearly very congested, scarce capacity for expanding these roads.

There are other innovative finance tools that more evaluation

needs to be done on what promise they have. There is some concern

about those because they are not really any new money. Most of

14

these would borrow against the future stream of income and are

not really new money. Mortgages are good, we all buy houses but

it’s not really new money so it’s got to be looked at with an awareness of what it really does.

And finally, one of the most significant ones might be to modify

highway user taxes. It’s never a very attractive option; however

there is some equity basis for this. For example the taxes on heavy

trucks are very well documented to not cover their damage to the

road. The most recent study says that, they pay about half the

damage. Cars pay the full amount. Light trucks actually pay 11⁄2

times the cost. The alignment of the tax base really is not capturing the use and the damage by the different classes of user, so

there’s some opportunity there to generate better equity in the application of those taxes and at the same time very reasonably be

able to generate more income.

These of course, are policy decisions of the Congress. There isn’t

one right answer to these. This is the challenge that as my summary says is really for the Congress. Looking at the sustainability

of the Highway Trust Fund over the long term. That’s an interesting one to look at, both the needs side and the revenue side and

how you get that matched. We are talking mostly about revenue

here, but a lot of that is the TEA–21 process of clarifying goals the

programs, the Federal role and the leveraging of Federal dollars.

And these are basically the significant challenges that face the

Congress in the upcoming re-authorization.

The CHAIRMAN. That was very helpful, thank you very, very

much Ms. Hecker.

Ms. HECKER. Thank you Mr. Chairman.

The CHAIRMAN. While I’m at it I want to thank all three of you.

You perform a great public service all of you here. We appreciate

it in the committee and I know the public does and I know a lot

of people will watch it on C-Span and think boy that’s very interesting, so thank you very much.

Ms. HECKER. Thank you Mr. Chairman.

[The prepared statement of Ms. Hecker appears in the appendix.]

The CHAIRMAN. The same goes for you Mr. Cawley. I like your

title, Unit Chief, National and Physical Resources Cost Estimate

Unit in CBO. You’re the head guy in that unit and we all want to

hear what you have to say.

OPENING STATEMENT OF KIM CAWLEY, UNIT CHIEF, NATIONAL AND PHYSICAL RESOURCES COST ESTIMATES UNIT,

CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC

Mr. CAWLEY. Thank you, Mr. Chairman, and Members of the

Committee. I am pleased to be here this morning to discuss the

status of the Highway Trust Fund. I’ll explain how the Congressional Budget Office (CBO) develops its baseline estimates and review spending and receipt alternatives requested by Committee

staff. I have also distributed copies of a few graphs that we will be

looking at this morning.

The status of the Highway Trust Fund is assessed by asking two

questions. First, will receipts to the fund be sufficient to cover

15

spending? And second, will the trust fund pass the so-called Byrd

test, which was established early in the fund’s history?

The balance of the Highway Trust Fund at the end of last year was about $28 billion. That amount is the difference between receipts and outlays over the life of the fund. The balance shows how

much the fund has available to meet its obligations, but that

amount is not necessarily available for new spending. Existing obligations are greater than the fund’s balances, and many of those obligations must be met using future receipts.

Determining whether or not the fund will pass the Byrd test is

a bit more complicated than checking the fund’s balances.

The CHAIRMAN. Could you explain the Byrd test please?

Mr. CAWLEY. I am going to try. Accounts in the trust fund can

be said to pass the Byrd test if the amount of unspent budget authority in a given year exceeds the balance of the account by no

more than the fund’s projected receipts for the next 2 years. If an

account were to fail the Byrd test, automatic cuts would be made

to contract authority.

Today, the Byrd test does not really effectively measure the status of the trust fund because spending is controlled mainly by obligation limitations set in appropriation acts and not by the budget

authority set in authorization acts. For example, the trust fund

does not fail the Byrd test in CBO’s baseline even though the

fund’s balances would be depleted over the baseline projection period [2003 through 2012]. The trust fund also does not fail the Byrd

test in any of the alternatives that I will be talking about today.

The first chart we have today illustrates CBO’s baseline for the

Highway Trust Fund over the next 10 years [see Figure 1 in the

statement]. We expect receipts over this period, mostly from the

gasoline tax, to average about $39 billion a year. In general, we estimate receipts from motor fuel taxes by projecting growth in the

economy and its effect on fuel use.

I should point out an important revenue baseline assumption

here. Under the Balanced Budget and Emergency Deficit Control

Act, CBO must assume that the tax receipts deposited into a trust

fund will continue to be collected even if the taxes are scheduled

to expire. For example, most gasoline taxes are scheduled to expire

at the end of fiscal year 2005. In our baseline, however, we continue projecting receipts from teh gasoline taxes over the 10-year

period.

Estimated spending from the Highway Trust Fund averages

about $40 billion a year over our baseline period. To make that projection, CBO began with the budget authority and obligation limitations enacted in the 2002 appropriation acts and inflated those

figures for each of the following years. That method of projecting

spending is required by the Deficit Control Act and is consistent

with how CBO estimates spending for other discretionary programs. However, using this rule does not allow the baseline to reflect the RABA (revenue-aligned budget authority) adjustment for

2003 or the expiration of the Transportation Act for the 21st Century (TEA–21).

Under CBO’s baseline assumptions, we projected that the balance in the highway account would be depleted in 2006 because

over the next 10 years, outlays will exceed receipts by $4 billion a

16

year. For the mass transit account, the story is similar: the balances in the account will be depleted by 2009 because over the next

10 years, outlays will exceed receipts by about $600 million a year.

The CHAIRMAN. Now is it true that transit doesn’t get RABA

treatment as does the Highway Trust Fund?

Mr. CAWLEY. That’s correct.

Next, I am going to discuss the balances of the Highway Trust

Fund under three alternative spending plans—that is, obligation

limitations for the highway program—that were requested by Committee staff.

The first alternative would set the obligation limitation for the Federal-Aid Highway program at $28 billion in 2003 and inflate it

for the rest of the baseline period [see Figure 2 in the prepared

statement]. This obligation limitation would equal the amount authorized under TEA–21 without the RABA adjustment. Under this

alternative, balances in the highway account would drop to $11 billion in 2005 and gradually increase in the out-years of the period.

The second alternative that we looked at would set the FederalAid obligation limitation at $29 billion for 2003, the amount assumed in the budget resolution recently reported by the Senate

Budget Committee. Under this alternative, balances would drop to

about $7 billion by 2007 and then gradually increase over the following years of the period.

The CHAIRMAN. Does that include RABA?

Mr. CAWLEY. For 2003, it does not.

The CHAIRMAN. For alternative two?

Mr. CAWLEY. No—just $29 billion.

The CHAIRMAN. It doesn’t assume the RABA provision in the current program?

Mr. CAWLEY. Right.

The CHAIRMAN. Thank you.

Mr. CAWLEY. The third alternative would set the Federal-Aid obligation limitation at $30.1 billion in 2003. Under this alternative,

the balances in the highway account would fall below $1 billion but

would not hit zero during CBO’s baseline period. And that $30.1

billion approximates the highest obligation limitation that could be

inflated in the out-years without depleting the account’s balances

over the baseline period.

But a spending option that draws down the trust fund balance

close to zero runs a significant risk of there not being enough balances to meet the fund’s obligations. Actual spending and receipts

are likely to deviate from projections in one direction or another because the rate of spending may vary, the economy may rise or fall

unexpectedly, or the Congress may appropriate additional resources from the trust fund to meet unanticipated needs.

The last graph that we have today presents the impact of some

alternatives, requested by Committee staff, that would increase receipts to the trust fund [see Figure 3 and 4 in the statement].

The tax on gasohol is currently 13.1 cents per gallon, but receipts

equaling 21⁄2 cents of that amount are deposited in the general

fund, not in the Highway Trust Fund. Under this alternative, receipts from the 21⁄2 cents per gallon of gasohol tax would be transferred from the general fund to the Highway Trust Fund starting

in 2004. This alternative would not change the total amount of reVerDate 11-MAY-2000 09:49 Apr 14, 2003 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 85814.000 SFINANC2 PsN: SFINANC2
17

ceipts to the Federal Government, only where the receipts were recorded. Using CBO’s estimates under this alternative, receipts to

the highway account would increase by about $600 million a year

and by a total of about $5 billion over the baseline period.

With those additional receipts, the obligation limitation for the

Federal-Aid program could be set at $30.7 billion in 2003, and that

amount would not deplete the balances in the account over the

next 10 years. That obligation limitation is about $600 million

higher than what could be set using CBO’s baseline projections of

receipts.

The second alternative would increase highway account receipts

as though the gasohol tax were 5.3 cents higher, or equal to the

gasoline tax. Under this alternative, we estimate that receipts to

the highway account would increase by about $1.3 billion a year,

for a total of nearly $12 billion over the baseline period.

With those additional receipts, the obligation limitation for the

Federal-Aid program could be set at $31.4 billion beginning in 2004

without depleting the account’s balances over the baseline period.

That limitation is about $1.3 billion higher than the limitation

under our baseline projections.

One last alternative I’ll discuss is the impact on the Highway

Trust Fund of a combination of alternatives: first, increasing receipts to the fund by raising the gasohol tax to equal the gasoline

tax and transferring all of the gasohol receipts to the highway account; and second, allowing the trust fund to accrue interest on its

balances. Until 1999, the Highway Trust Fund accrued interest on

its balances, but TEA–21 ended the authority to credit the fund

with interest. Securities credited to a trust fund do not bring the

Federal Government additional receipts; they are an

intragovernmental transfer.

Making the gasohol tax equal to the tax on gasoline and depositing all gasohol receipts into the highway account would increase

receipts to the highway account by about $17 billion. Crediting the

highway account with interest would add almost $2 billion more

over the next 10 years. Using CBO’s estimates of the additional receipts, the obligation limitation for the Federal-Aid program could

be set at $32.1 billion in 2003 and continue to be inflated over the

next 10 years without depleting the balances within the account.

That obligation limitation is about $2 billion higher than what

could be set using CBO’s baseline projections of receipts.

In addition, authorizing the mass transit account to accrue interest would increase the accounts’ receipts by almost $1 billion over

the next 10 years. Under that alternative, balances for the mass

transit account would not be depleted as they are in the CBO baseline. But the balances would fall well below $1 billion for several

years.

That concludes my statement. Unfortunately, my prepared statement today contains some misprinted figures, and I will need to

provide the Committee with a corrected version.

[The prepared statement of Mr. Cawley appears in the appendix.]

The Chairman. Sure, thank you very much. Thank you all very,

very much. I will just take a few minutes here because I know Senator Jeffords has been waiting very, very patiently.

18

Is there any difference in estimates between GAO and CBO here

on what the 21⁄2 cent transfer would be or the 5.4 percent transfer,

using same figures, same estimates, same assumptions, time spans,

current versus constant dollars? I’m just curious whether there is

a difference there that needs to be reconciled.

Ms. HECKER. We haven’t compared methodologies. I just listened

to the numbers and they are very similar to our so maybe——

Mr. CAWLEY. It’s possible that we covered different years; I’m not

sure. Our alternatives started in 2004.

The CHAIRMAN. It would be helpful if you could reconcile methodologies to be sure we are comparing apples to apples here.

Ms. HECKER. That involves Treasury too because it’s Treasury’s

projections that we built our data on and we broke it out by each

source that you had projected too. So really you had to look at each

of the sources because the tax rates are different.

The CHAIRMAN. I only ask because my staff indicates that there’s

about a $4 billion difference in the total. If you compare the CBO

and GAO estimates with respect to both the 21⁄2 cent transfer and

the 5.3 cent transfer it’s $17 billion for CBO, $21 billion for GAO,

that’s a $4 billion difference. One is for 10 years and one is for 11.

Anyway the point is if you could——

Ms. HECKER. After consulting with CBO, we believe that the dif- ference of about $4 billion between CBO’s and GAO’s estimates of

the impact of future gasohol sales on the Highway Trust Fund is

attributable to 3 reasons. First, CBO’s calculation includes a projection for each of the next 10 years, while ours (GAO’s) includes 11

years. Second, CBO’s projections are in current dollars while we

use constant dollars. Finally, to develop our projection of the expected impact of future gasohol sales on the Highway Trust Fund

we used Treasury’s estimates of future gasohol sales, which are

slightly higher than CBO’s estimates.

The CHAIRMAN. One point that struck me quite vividly. And that

is, as you well know in the Energy Bill that is going through Congress, there are lots of tax incentives for hybrid vehicles, for alternative fuel vehicles. Some think that perhaps this country in the

not too distant future is going to perhaps have fuel cell vehicles.

They are not going to be paying a lot of gasoline tax into the Highway Trust Fund. Your thought is—and any suggestions as we transition into different modes of surface transportation and different

energy production and we transition revenues into the Highway

Trust Fund—any thoughts?

Ms. HECKER. Those are very significant issues and I think in

some sense you are really ahead of the curve trying to think about

this for this re-authorization. You could probably make it through

the gasohol projections—although the new energy legislation—we

don’t have the estimates there and that clearly will alter the picture.

Over the long run the vehicles we use, the emissions they have,

are not sustainable and something really will need to be done. So

the current concept of the financing of fuels as cars get more fuel

efficient and alternative fuels are developed, those cars are still on

the road just as you pointed out. There clearly is a need in the long

run to start thinking about differences. There is some very interesting research in intelligent systems and new ways to think about

19

taxation that go to the issue of the equity that I talked about. That

would better capture both the weight and the distance traveled. It’s

perhaps not ready for this re-authorization but some more experimentation and development of basically new ways of taxing and

raising the revenues that keep that basic user fee concept which

is really important, of tying the taxation to the use and the damage—and that’s already been eroded—clearly that might be an area

that the committee would want to explore.

The CHAIRMAN. Well it definitely is and at some point I will

make a formal request to GAO to study this—the viability of the

Trust Fund and particularly with respect to hybrids and alternative fuels and so forth. Because I just think—even though you

could well be correct that, that will be significant next re-authorization, not the upcoming—it still is important for us to start

thinking about it. Getting ahead of the curve as best we can so that

we are minimizing ad hoc, immediate catch up kinds of solutions

that aren’t thought through as well as they possibly could. That I

think is key. I’ve taken a lot of time already, I would like to turn

it over to my good friend Jim Jeffords.

Senator JEFFORDS. I have a related question here. The staff of

the Joint Committee on Taxation provided a paper entitled, Overview of Highway Trust Fund Excise Taxes and Related Internal

Revenue Code Expenditures Provisions, as background for today’s

hearing. In that paper on pages 10 and 11, there is a discussion

entitled ‘‘Raising Revenues’’, which addresses the matter of fees

versus taxes. Much of the policy dialogue surrounding our surface

transportation programs is premised on the notion that the Highway Trust Fund is comprised of fees that are paid into the fund

by users. Is that an accurate premise? Are we dealing here with

user fees, or are we dealing with taxes? Anyone have thoughts?

Ms. HECKER. I haven’t read the study, but I am happy to comment. The difference between fees and taxes and user fees is a very

significant difference. And that is the point I was trying to make.

That I think the concept has been there, but it has been eroded

and it isn’t well enough a line to really call most of these taxes user

fees. That you really—a user fee really relates to the cost imposed

by individual users. So we would be happy to take a look at that

study and comment on it. That’s a very important distinction and

one that should be noted.

Senator JEFFORDS. I would appreciate the comments of Mr.

Cawley.

Mr. CAWLEY. As the study points out here, there is often disagreement in discussions about what constitutes a user fee and

what constitutes a tax. Not every case has been entirely clear. Certainly, the current taxes imposed on fuels are taxes. I haven’t read

their work here and I’m not sure of the importance of the distinction that the JCT is trying to make.

Senator JEFFORDS. We would appreciate if you would take some

time and send us a written answer on that, I would appreciate it.

Mr. CAWLEY. Okay.

The CHAIRMAN. If I might add, what is the legal distinction between taxes and fees? Have the courts addressed this? I am sure

they have, anyone know?

20

Mr. CAWLEY. We are all economists here. I think in the budget

world, the idea is that a fee is tied to the receipt of a benefit in

exchange for payment of the fee in a very direct way.

The CHAIRMAN. Unlike highway taxes? I’m being facetious here.

Mr. CAWLEY. When we talk about taxes, we are usually talking

about the government’s sovereign power to tax. It may not be related to a direct benefit to an individual.

The CHAIRMAN. A fee may not or a tax may not?

Mr. CAWLEY. A tax.

The CHAIRMAN. That’s clearly a very valid point that Senator Jeffords has raised.

Dr. Lyon, you talked earlier about some abused of collections and

reporting outside sort of the distribution network, as I understood

you. And you had some pretty innovative thoughts that Treasury

is thinking of to track some of this down. From my notes here new

techniques I didn’t write new techniques down but you are talking

about better tax compliance needed outside the main distribution

system and certain dollars lost, but you are coming up with some

new techniques to try to minimize that. I forgot what they were.

Would you explain that please?

Dr. LYON. Some of those are new technology, and again new

technology may help address how we can collect taxes on the regular base. One I mentioned is fuel fingerprinting which helps attempt to analyze the physical contents of the fuel at a retail station

and compare it to the nature of the fuel of the supplier that typically services that service station to make sure that molecularly it

is the same fuel. It is has been adultered that could be detected

and at least trigger an investigation.

The CHAIRMAN. How much is unreported, do you think? Roughly

what percent, that is due as unreported?

Dr. LYON. I don’t know.

The CHAIRMAN. Do you have a gut guess?

Dr. LYON. No I don’t.

The CHAIRMAN. I am sure somebody does in Treasury. At least

I hope somebody in Treasury does. Could you get that to us. And

other compliance problems that Treasury is having with respect to

fuel taxes and give us some recommendations.

Dr. LYON. Sure.

The CHAIRMAN. I think Ms. Hecker, you were talking about some

recommendations you will be making soon with respect to RABA

and you have your different lines in your chart, what is a tool averaging it out. But you said you are not recommending that. I there

any reason why you are not recommending that?

Ms. HECKER. Because it’s your discretion. There isn’t really one

right answer. I mean we are happy to do whatever additional analysis might be useful but I don’t think there’s really one right answer. It’s a policy call on the part of Congress about tying the

funds and what your intent is. I think clearly the concern was with

the major negative this year there was concern that you didn’t

want to have a negative. And what we tried to do was identify

some alternative that might smooth out a downturn. And clearly

we’re reminded these days that there are economic downturns and

that it in fact caused a very significant shift. So it’s really a policy

call on the part of Congress.

21

The CHAIRMAN. Right and frankly that black line you had is

quite attractive to me the averaging distributing adjustment over

2 years.

Ms. HECKER. Right.

The CHAIRMAN. And it’s what I would like to include in the Highway Bill. I think it makes good sense. It does have the effect, as

you say of flattening out the curve a bit to minimize the volatility

that otherwise occurs under current law.

Ms. HECKER. Yes, however the interesting thing about that is

that there would have been a net increase in the pay out from that

one.

The CHAIRMAN. Now why is that?

Ms. HECKER. I’m sure it’s just quantitative, but basically averaging out you wouldn’t have had the negative this year. You

wouldn’t have had the positive advance—it would be more reliably

related to what actually comes in. We’ve got this lag in data so it’s

more reliable.

The CHAIRMAN. I know what you are saying—I can’t articulate

it either but I think you are on to something.

Would either of you or Dr. Lyon explain—let’s say January 1 is

the date that let’s say—somebody drives up to a gasoline pump and

fills his tank up full of gas. Maybe it’s truck or diesel fuel, I don’t

know if there is or isn’t—looking at this chart that you gave to us,

Ms. Hecker, which is a very interesting one about the flow of all

this and Mr. Lyon you described it as well. By what date is either

the monthly or the quarterly voucher made for initial distribution

or for final adjustment, either one? How many days does it take to

get from January 1 to that voucher?

Dr. LYON. My understanding is that the semi monthly deposit

would be made mid January. Initially that deposit would go into

the General Fund. Within several days from the semi monthly deposit I think we would then make the transfer to the Highway

Trust Fund based on an estimate of what that excise tax payment

reflects. Again, the depositor would be paying a number of different

excise taxes at the same time.

The CHAIRMAN. Well let’s say we are in the middle of a re-authorization period, middle of re-authorization of the Highway Bill.

And we are at January 1 in the middle and that’s when the guy

New Year’s Eve and that’s when the guy drives up to the pump to

fill it up, by what date can whoever makes this, either a state have

the obligation or know what the obligation is. I’m not quite sure

what I’m asking here but I’m just trying to get a sense of how this

works.

Ms. HECKER. The allocation to the State is another matter entirely. We haven’t gone into that. We’ve done some work on that

in the past. That is very complicated because it’s a formula that

tries to estimate how much gas was actually purchased in that

State and none of it is reported like that. So there is another whole

estimating process to figure out how much actually was purchased

in that State. Because all of this reporting has nothing to do with

where the gas was bought. It was where it was sold to a distributor

or transferred into a tanker truck. So you’ve opened up another

whole can of worms and you will have to have another whole hearing on that one. That is a very complicated process.

22

The CHAIRMAN. You seem to know something about it.

Ms. HECKER. Well, I have an answer from a financial person who

actually has tracked this and done interviews and he said the short

answer to your question of the actual certification into the Trust

Fund not by State, is September 30th.

The CHAIRMAN. September 30th, it takes about 9 months?

Ms. HECKER. A full 9 months.

The CHAIRMAN. Okay now let’s just go to the next question. We

have the certification, roughly how long after the certification—I’m

assuming—is my assumption correct that it is a sequential process?

Ms. HECKER. I think some of it is parallel. There is a process

going on that is estimating how much was purchased in each State

and it is a complex process that has very little to do with this. Because this is not the data. This is not going to tell you how many

of them went to Montana and how many went to Chicago. It’s the

filling of the tanker truck. I did not prepare on that. We have done

some work and I would be happy to back up and talk to you.

The CHAIRMAN. Well we are going to have to deal with that at

some point either formally or informally. The Highway Bill has to

be re-authorized, it would be a good idea as possible to help with

the mechanics here so we know what we are doing.

Ms. HECKER. If I could add about the State issue. There is a very

complicated relationship here because all of the increased use of

gasohol really penalizes the States that are using it because that

formula is based on how much gasoline is sold.

The CHAIRMAN. Correct.

Ms. HECKER. And so the more you have the increased use of gasohol and so again you have another area where there is probably

some increased urgency to think through how that allocation to the

State is made particularly if the Energy Bill passes and those extra

incentives are there, the States that are making extra use of gasohol will be penalized in the allocation that they get.

The CHAIRMAN. I would like to frankly, to get into some preliminary thought on that because if the Energy Bill does pass we are

certainly going to have to address that question very thoroughly.

Senator JEFFORDS. I would like to join in that request.

The CHAIRMAN. Yes, I think it is very important. I have no more

questions I do have a lot more questions frankly. This has opened

up more questions than it answered but we will have to deal with

those later.

Senator JEFFORDS. I have no further questions at this time. I

think we all are going to have to re-look at things. There are so

many changes that are going on with different results. This is

going to be a very interesting time to figure out how we come to

better systems. Thank you.

The CHAIRMAN. It is just clear that there are real trends which

could reduce the funds. Gasohol is one new fuels is another. As our

country changes it’s transportation modes, this is not automatic

just because the economy is going up and people are driving cars

perhaps a little more, that there is more dollars in the highway

Trust Fund. And add to that too is the tremendous needs of this

country, tremendous opportunities of transportation related infrastructure development. It’s kind of exciting actually. There is a lot

to look forward to. This has been a good start. We will have many

23

other steps along the road, but thank you very much all of you.

Hearing is recessed.

[Whereupon at 10:54 a.m. the hearing was concluded.]

(25)

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