```
                                                                 
Highway Financing: Factors Affecting Highway Trust Fund Revenues 
(09-MAY-02, GAO-02-667T).					 
                                                                 
The Transportation Equity Act for the 21st Century changed the	 
budgetary treatment of programs financed by the Highway Trust	 
Fund. The act guaranteed annual funding levels for most highway  
and transit programs and linked highway user tax receipts, such  
as those from motor fuel and truck tire taxes, to the annual	 
funding levels for highway programs. Revenue aligned budget	 
authority adjustments are made to the annual guaranteed funding  
level provided in the act as highway account receipt levels	 
change. For the first time, the adjustment for fiscal year 2003  
is negative--decreasing the guaranteed level of highway funding  
by $4.369 billion. GAO found that the amounts distributed to the 
Highway Trust Fund for the first nine months of fiscal year 2001,
as adjusted based on the Internal Revenue Service's		 
certifications, were reasonable and adequately supported.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-667T					        
    ACCNO:   A03303						        
  TITLE:     Highway Financing: Factors Affecting Highway Trust Fund  
Revenues							 
     DATE:   05/09/2002 
  SUBJECT:   Highway planning					 
	     Transportation costs				 
	     Trust funds					 
	     Funds management					 
	     Budget authority					 
	     Fuel taxes 					 
	     Strategic planning 				 
	     Future budget projections				 
	     Federal aid for highways				 
	     Highway Trust Fund 				 
	     Treasury Electronic Federal Tax Payment		 
	     System						 
                                                                 
	     Treasury General Fund				 
	     Leaking Underground Storage Tank Fund		 

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GAO-02-667T
     
Testimony Before the Committee on Finance U. S. Senate

United States General Accounting Office

GAO For Release on Delivery Expected at 9: 30 a. m. DST Thursday, May 9,
2002 HIGHWAY FINANCING

Factors Affecting Highway Trust Fund Revenues

Statement of JayEtta Z. Hecker Director, Physical Infrastructure Issues

GAO- 02- 667T

Page 2 GAO- 02- 667T Highway Trust Fund

Mr. Chairman and Members of the Committee: We appreciate the opportunity to
provide testimony on important Highway Trust Fund issues as the Congress
begins to consider the reauthorization of the Transportation Equity Act for
the 21 st Century (TEA- 21). Our statement today is based on our recent
reports and testimonies on the Highway Trust Fund and related issues. 1 As
you know, the Highway Trust Fund is the principal mechanism for funding
federal highway programs authorized by TEA- 21. TEA- 21 ?guaranteed?
specific annual funding levels for most highway programs on the basis of
projected receipts to the Highway Trust Fund and provided for annual
adjustments- referred to as Revenue Aligned Budget Authority (RABA)- to
these funding levels on the basis of actual receipts and revised projections
of trust fund revenue. This helps to ensure that Highway Trust Fund receipts
are linked to federal highway program expenditures. In fiscal year 2003, for
the first time, the RABA adjustment is negative- decreasing the guaranteed
level of highway funding by $4.369 billion. While there is general support
for continuing to link receipts to highway expenditures in the next
reauthorization legislation, there are concerns as to whether future Highway
Trust Fund receipts will be able to meet growing transportation needs.

Consequently, you asked us to discuss (1) how tax revenues are distributed
into the Highway Trust Fund, (2) our review of the fiscal year 2003 RABA
calculation and ways to reduce fluctuations in the RABA

1 U. S. General Accounting Office, Highway Funding: Problems with Highway
Trust Fund Information Can Affect State Highway Funds, GAO/ RCED/ AIMD- 00-
148 (Washington, D. C.: June 2000); Applying Agreed- Upon Procedures:
Highway Trust Fund Excise Taxes,

GAO- 02- 379R (Washington, D. C.: Feb. 2002); Highway Financing: Factors
Affecting Highway Funding Fluctuations and Revenue Trends , GAO- 02- 527T
(Washington, D. C.: Mar. 2002); and Highway Trust Fund: Overview of Highway
Trust Fund Financing,

GAO- 02- 435T (Washington, D. C.: Feb. 2002). Our work was carried out in
accordance with generally accepted government auditing standards.

Page 3 GAO- 02- 667T Highway Trust Fund

adjustment, (3) the impact of gasohol use on the Highway Trust Fund, and (4)
industry proposals of ways to increase revenues into the trust fund.

In summary:

 The Department of the Treasury uses a complex process involving four
organizations within the department to estimate highway user tax receipts,
credit the estimated amounts to the Highway Trust Fund, and subsequently
certify and adjust the amounts credited to the fund by analyzing actual
payment and tax return data. This process is used because Treasury does not
obtain data on the specific excise taxes being paid at the time these
deposits are made. Our past reports have identified errors and problems with
Treasury?s excise tax distribution process. However, Treasury has made and
continues to make improvements to this process. For example, Treasury
recently adopted a new technique for estimating initial distributions to the
trust fund to more closely links projections to actual receipts collected.
This may have contributed to the adjustment for the fourth quarter of fiscal
year 2001 (less than $100 million) being significantly less than the
adjustment for the fourth quarter of the prior fiscal year ($ 1. 2 billion).
2

 We believe the fiscal year 2003 RABA calculation appears reasonable.
Although the fiscal year 2003 RABA adjustment of a negative $4.369 billion
is severe, it is largely a reflection of the multiple ways a downturn in the
economy affects the calculation. For example, about 80 percent of the fiscal
year 2003 RABA adjustment is attributable to the ?look back? portion of the
RABA calculation, which is made up of two elements. The first

2 We have not reviewed IRS?s certification of the receipts for the fourth
quarter of fiscal year 2001 to determine if they were reasonable and
adequately supported.

Page 4 GAO- 02- 667T Highway Trust Fund

element of the look back is the comparison of the actual Highway Account
receipts for fiscal year 2001 with the projections of receipts for fiscal
year 2001 included in TEA- 21. The second element is an adjustment for a
portion of the RABA amount provided in fiscal year 2001, which had resulted
in states? receiving an ?advance? of funds due to optimistic revenue
projections for fiscal year 2001. According to Treasury, actual fiscal year
2001 receipts were lower than expected due to the slowdown in the economy,
which especially affected heavy truck sales, and increased gasohol use. Our
review shows that the amounts distributed to the Highway Trust Fund for the
first 9 months of fiscal year 2001 were reasonable and adequately supported.
The remaining 20 percent of the fiscal year 2003 RABA adjustment is due to
the ?look ahead? portion of the calculation, which compares Treasury?s
current projections of Highway Account receipts for fiscal year 2003 with
the projection of receipts for that year contained in TEA- 21. Although we
did not independently evaluate the methodology and the economic models
Treasury used to develop its revenue projections, our review of a
qualitative description of the process, key inputs, and changes to the
models plus a comparison of Treasury?s projections to those of the
Congressional Budget Office (CBO) gave us no reason to question the
resulting projections. There are several ways that the RABA adjustment could
be changed to help reduce fluctuations in highway funding. For example, the
RABA adjustment could be distributed over 2 years.

 The use of ethanol- blended fuel (gasohol) instead of gasoline reduces
Highway Trust Fund revenue because gasohol is partially exempt from the
standard excise tax on gasoline (18.4 cents), and 2.5 cents of the tax
received on each gallon of gasohol sold is transferred to the General

Page 5 GAO- 02- 667T Highway Trust Fund

Fund. 3 Gasohol was the only Highway Account receipt source to grow from
fiscal year 2000 to fiscal year 2001- increasing about 17.5 percent. Because
of gasohol?s tax provisions, however, increases in gasohol use and
corresponding reductions in gasoline use decrease Highway Account receipts.
We estimate that the Highway Account did not receive about $6.01 billion (in
constant 2001 dollars) from fiscal years 1998 through 2001 due to gasohol?s
partial tax exemption and General Fund transfer. Further, gasohol use is
projected to increase; thus, the impact of these tax provisions could grow
as well. Using Treasury?s projections of gasohol tax receipts, which are
based on current law, we estimate that the Highway Account will forgo an
additional $13.72 billion (in constant 2001 dollars) due to the partial tax
exemption from fiscal years 2002 through 2012 and $6.92 billion from fiscal
years 2002 to 2012 due to the General Fund transfer (in constant 2001
dollars). 4 According to Department of Agriculture (USDA) and ethanol
industry officials, the partial tax exemption for gasohol helps to create a
demand for ethanol and make gasohol prices competitive with gasoline prices.

 Industry groups have proposed a number of ways to increase Highway Trust
Fund revenues in order to address future transportation needs. In 2000, the
Department of Transportation (DOT) estimated that an average annual
investment of $56.6 billion would be needed over the next 20 years

3 For the purposes of this testimony, we use the term gasohol to refer to
all types of ethanolblended fuels. Although biomass methanol fuels are also
eligible for partial tax exemptions, Treasury does not separately track the
small amounts associated with them.

4 The General Fund transfer expires at the end of fiscal year 2005. To
reflect the expiration, Treasury reduces the total federal excise tax on
gasohol blends by 2.5 cents starting in fiscal year 2006. Under Treasury?s
approach, the Highway Account is neither benefited nor harmed by the
expiration. For the purposes of this testimony, we estimated the impact of
the 2.5 cent General Fund transfer assuming the transfer continued through
fiscal year 2012.

Page 6 GAO- 02- 667T Highway Trust Fund

just to maintain the physical conditions of existing highways and bridges.
Additionally, DOT estimated that an average annual investment of $10.8
billion would be needed over the next 20 years to maintain the nation?s
transit systems. These projections coupled with certain trends, such as
increased gasohol use and increased fuel efficiency, have contributed to
concerns about the long- term ability of the Highway Trust Fund to meet
federal funding of transportation needs. To help ensure adequate funding is
available for these needs, industry groups have proposed that the trust fund
be paid interest on its balance. Prior to TEA- 21, the Highway Trust Fund
earned interest on its balance, which was paid by the General Fund. If the
Highway Trust Fund had continued to earn interest on its balance, Treasury
estimates that the fund would have earned about $4 billion from September
1999 through February 2002. Other proposals are aimed at altering the
current user tax structure to increase Highway Trust Fund revenue. For
example, the taxes levied on heavy trucks could be increased- which would
reflect the findings of Federal Highway Administration studies that show the
highway user taxes for heavy trucks do not correspond to the damage they
cause to the nation?s highways. We have not evaluated the public policy
implications of this or other proposals to increase trust fund revenues.
Ultimately, the Congress and the administration must assess the long- term
sustainability of the trust fund and weigh the advantages and disadvantages
of these and other ways to increase revenues.

The Highway Revenue Act of 1956 established the Highway Trust Fund as an
accounting mechanism to help finance federal highway programs. According to
DOT, the Highway Trust Fund was created as a usersupported fund- that is,
the revenues of the Highway Trust Fund were intended for financing highways,
with the taxes dedicated to the fund paid Background

Page 7 GAO- 02- 667T Highway Trust Fund

by the users of highways. This principle is still in effect, but the tax
structure has changed since 1956. In 1983, the Highway Trust Fund was
divided into two accounts: a Highway Account and a Mass Transit Account.
Receipts to the Highway Account are used to fund highway programs, through
which billions of dollars are distributed to the states annually for the
construction and repair of highways and related activities.

Financing for the Highway Trust Fund is derived from a variety of federal
highway user taxes, including excise taxes on motor fuels (gasoline,
gasohol, diesel, and special fuels) and tires; sales of new trucks and
trailers; and the use of heavy vehicles. (See fig. 1.) As table 1 shows, the
excise tax rates and distribution of the tax revenues vary. The different
tax rates reflect federal policy decisions. For example, in the 1970s and
1980s, the federal government adopted numerous policies to encourage the use
of alternatives to imported fossil fuels and to help support farm incomes.
Among these policies were tax incentives that targeted the use of alcohol
fuels derived from biomass materials, such as ethanol. 5 Ethanol- blended
fuels (gasohol) are partially exempt from the standard excise tax on
gasoline (18.4 cents). The proportion of ethanol contained in each gallon of
fuel determines the size of the partial exemption. The most common ethanol
blend contains 90 percent gasoline and 10 percent ethanol and is currently
taxed at 13.1 cents per gallon- an exemption of 5.3 cents. 6 The federal
government also uses the distribution of excise tax receipts to different
accounts to achieve policy goals. For example, a small

5 Biomass- derived alcohol fuels are chemical compounds made from nonfossil
material of biological origin and constitute a renewable energy source. 6
Ethanol- blended fuels containing 7.7 percent ethanol and 5.7 percent
ethanol qualify for a 4.058 cents and 2.978 cents per gallon exemption,
respectively. TEA- 21 extended the exemption for gasohol fuels through
fiscal year 2007 and provided for a phased- in reduction in the exemption
for gasohol.

Page 8 GAO- 02- 667T Highway Trust Fund

part of the excise tax on most motor fuels is distributed to the Leaking
Underground Storage Tank Trust Fund to clean up contamination caused by
underground storage tanks. Additionally, 2.5 cents of the tax received on
each gallon of gasohol is transferred to the General Fund, rather than the
Highway Trust Fund, for deficit reduction purposes.

Figure 1: Revenue Sources of the Highway Trust Fund, Fiscal Year 2001

Source: GAO analysis.

Page 9 GAO- 02- 667T Highway Trust Fund

Table 1: Excise Tax Rates and Distributions of Highway User Taxes, as of
July 2001

Cents per gallon Note: Tax rates for gasohol mixtures vary according to the
amount of ethanol contained in the mixture.

Source: Federal Highway Administration and Treasury.

TEA- 21 continued the use of the Highway Trust Fund as the mechanism for
accounting and distributing for federal highway user taxes. TEA- 21 also
established guaranteed spending levels for certain highway and transit
programs. Prior to TEA- 21, these programs competed for budgetary resources
through the annual appropriations process with other domestic discretionary
programs. New budget categories were established for highway and transit
spending, effectively establishing a budgetary

?firewall? between those programs and other domestic discretionary

Type of tax Tax rate Distribution of tax Highway Trust Fund Leaking
Underground Storage Tank Trust Fund

General Fund Highway Account Transit Account Motor fuels taxes Gasoline
18.40 15. 44 2.86 0.10 - Diesel 24.40 21. 44 2.86 0.10 - Alternative fuels
taxes Gasohol (10% ethanol) 13.10 7. 64 2.86 0.10 2. 5 Liquefied petroleum
gas 13.60 11. 47 2.13 - - Liquefied natural gas 11.90 10. 04 1.86 - - M85
(from natural gas) 9.25 7. 72 1.43 0.10 - Compressed natural gas (cents per
thousand cu. ft.) 48.54 38. 83 9.70 - - Truck- related taxes Tires: 0- 40
lbs, no tax Over 40 lbs - 70 lbs, 15 cents per pound in excess of 40

Over 70 lbs - 90 lbs, $4.50 plus 30 cents per pound in excess of 70 Over 90
lbs, $10.50 plus 50 cents per pound in excess of 90 Truck and Trailer Sales
Tax 12 percent of retailer?s sales price for tractors and trucks over 33,000
lbs gross vehicle

weight (GVW) and trailers over 26, 000 lbs GVW Heavy Vehicle Use Tax Annual
tax: Trucks 55, 000 lbs and over GVW, $100 plus $22 for each 1, 000 lbs (or
fraction thereof) in excess of 55, 000 lbs (maximum tax of $550)

Page 10 GAO- 02- 667T Highway Trust Fund

spending programs. Of the $217.9 billion authorized for surface
transportation programs over the 6- year life of TEA- 21, about $198 billion
is protected by the budgetary firewall- about $162 billion for highway
programs and $36 billion for transit programs.

Under TEA- 21, the amount of highway program funds distributed to the states
is tied to the amount of actual tax receipts credited to the Highway Account
of the Highway Trust Fund. TEA- 21 guaranteed specific levels of funding for
highway programs from fiscal years 1999 through 2003 on the basis of
projected receipts of the Highway Account. TEA- 21 also provided that
beginning in fiscal year 2000, this guaranteed funding level for each fiscal
year would be adjusted upward or downward through the RABA calculation as
the levels of Highway Account receipts increased or decreased. To determine
the RABA adjustment, the Office of Management and Budget (OMB) and the
Office of the Secretary in DOT rely on information on Highway Account
receipts and revised Highway Account projections supplied by Treasury.
Specifically, the Bureau of Public Debt provides the actual Highway Account
receipts for the prior fiscal year; the Office of Tax Analysis (OTA)
provides a projection of Highway Account receipts for the next fiscal year.

Treasury uses a complex process involving four organizations within the
department to estimate highway user tax receipts, credit the estimated
amounts to the Highway Trust Fund, and subsequently certify and adjust the
amounts credited to the fund by analyzing actual payment and tax return
data. Our past reports have identified errors and problems with Treasury
Uses a

Complex Process to Credit Funds to the Highway Trust Fund

Page 11 GAO- 02- 667T Highway Trust Fund

Treasury?s excise tax distribution process. 7 Treasury has made and
continues to make improvements to this process.

In most instances, someone other than the highway user initially pays most
highway- related excise taxes. For example, oil companies pay a pergallon
tax on motor fuels at the point where it is loaded into tanker trucks or
rail cars at a terminal. Also, tire manufacturers pay taxes on truck tires,
by weight; and retailers pay taxes on the sales prices of trucks and
trailers. Owners of heavy highway vehicles pay a tax annually on the use of
these vehicles, making this the only highway tax directly paid by the
highway user. Other highway users pay taxes indirectly, since the costs of
these taxes become part of the purchase price of the products taxed.

Most payers of highway user excise taxes make semimonthly deposits to cover
their estimated excise tax liabilities, generally through Treasury?s
Electronic Federal Tax Payment System. 8 Businesses that make these deposits
do not specify which types of excise taxes they are paying with each
semimonthly deposit. However, they are required to report the amounts owed
for each specific excise tax on a quarterly tax return due 1 to 2 months
after the end of each quarter. When filing the return, the taxpayer is
required to make a final payment to make up the difference between the total
of semimonthly deposits and the reported total amount owed for the quarter,
if the latter amount is greater. Payers of the heavy vehicle use tax
generally file returns annually and make payments directly

7 See, for example, GAO/ RCED/ AIMD- 00- 148. 8 The Electronic Federal Tax
Payment System allows taxpayers to make tax deposits electronically. All
business taxpayers that have an annual federal tax liability exceeding $50,
000 are required to use this system for making tax deposits.

Page 12 GAO- 02- 667T Highway Trust Fund

to the Internal Revenue Service (IRS). These payments may be made with the
annual returns or through installments.

All excise taxes received are deposited into Treasury?s General Fund.
Because data are not available to determine the amounts of these receipts
that represent highway user taxes, Treasury initially uses estimates of
highway user tax receipts prepared by OTA to make initial distributions from
the Treasury General Fund to the Highway Trust Fund each month. After this
initial distribution, IRS certifies quarterly the amounts collected for
highway user taxes that should have been distributed to the fund on the
basis of tax returns and payment data. However, IRS does not certify
collections for each quarter until about 6 months after the quarter ends.
IRS needs this period of time to allow for the submission and processing of
returns as well as for recording, reviewing, and analyzing payment and tax
return data. Following certification, Treasury adjusts the amount initially
distributed to the Highway Trust Fund for that quarter. For example, in
March 2001, Treasury made an adjustment to decrease the fiscal year 2001
excise tax revenue distributions to the Highway Trust Fund to correct for
actual collections in the fourth quarter of fiscal year 2000. The certified
fourth quarter receipts were $1.2 billion less than the amount initially
distributed on the basis of OTA?s estimates for that quarter. According to
an OTA official, OTA had calculated the original estimated transfer amounts
for the quarter using an economic model that assumed a higher rate of
economic growth through calendar year 2000 than was actually the case. 9 OTA
has since adopted a new estimating technique that more closely links
projections to actual receipts collected. This may have contributed to the
adjustment for the fourth quarter of

9 Prior to December 2000, the distribution process was linked to OTA?s
receipt estimates for inclusion in the president?s budget.

Page 13 GAO- 02- 667T Highway Trust Fund

fiscal year 2001 being significantly less than the fourth quarter adjustment
of the prior year. In particular, on the basis of IRS certifications, the
adjustment for the fourth quarter of fiscal year 2001 will be about $100
million- that is, the actual receipts collected were about $100 million more
than the amount initially distributed to the trust fund. 10

Treasury?s Financial Management Service and Bureau of Public Debt share
responsibility for making the initial distributions to the Highway Trust
Fund, on the basis of OTA?s estimates, and subsequent adjustments to these
amounts, on the basis of IRS?s certifications. The Financial Management
Service prepares vouchers for these distributions and adjustments. The
Bureau of Public Debt, which maintains accounting records for the fund, uses
these vouchers to record and process the distributions and adjustments. (See
fig. 2 for an illustration of Treasury?s process.) Following the close of
each fiscal year, the Bureau of Public Debt prepares a report on the amount
of tax receipts that were distributed to the fund during that fiscal year.
The Department of Transportation and OMB use the Highway Account receipts
figures in these reports to determine the amounts of highway program funds
to be distributed to the states.

10 We have not reviewed IRS?s certification to determine if they were
reasonable and adequately supported.

Page 14 GAO- 02- 667T Highway Trust Fund

Figure 2: Treasury?s Process for Distributing Taxes to the Highway Trust
Fund

Source: GAO analysis.

Although Treasury has made improvements in its distribution process, other
improvements could be made, such as requiring the taxpayer- at the time of
the deposit- to indicate the specific types of taxes for which deposits are
made. Obtaining this information at the time of the deposit would eliminate
the need to rely on estimates for the initial distributions to the trust
fund. In June 2000, we recommended that Treasury (1) evaluate and decide
whether to use incentives as a near- term method for encouraging taxpayers
to provide detailed data- at the time of deposit- on specific types of
excise taxes for which deposits are made and (2) reexamine taxpayer
capabilities to provide these detailed data and decide

Page 15 GAO- 02- 667T Highway Trust Fund

whether to require such data from taxpayers at that time. 11 Treasury has
not yet acted on our recommendations.

On the basis of the information we reviewed, the fiscal year 2003 RABA
calculation- a negative $4. 369 billion- appears reasonable. The RABA
adjustment for fiscal year 2003 was calculated by (1) comparing the actual
Highway Account receipts for fiscal year 2001 with the projections of
receipts for fiscal year 2001 included in TEA- 21 and an adjustment for the
RABA calculation made for that year (the look back portion of the
calculation) and (2) comparing current projections of Highway Account
receipts for fiscal year 2003 with the projection of these receipts
contained in TEA- 21 (the look ahead portion of the calculation). The sum of
these differences is the RABA adjustment. Table 2 shows the RABA
calculations for fiscal years 2000 through 2003. As shown, the RABA
adjustments for fiscal years 2000 through 2002 were positive- increasing
highway funding levels by a total of over $9 billion. However, the RABA
adjustment for fiscal year 2003 is a negative $4.369 billion.

11 GAO/ RCED/ AIMD- 00- 148. We also made several recommendations to the
secretary of transportation, which were designed to improve the reliability
of the Federal Highway Administration?s attribution of highway funds to each
state. The Calculation of the

Fiscal Year 2003 RABA Adjustment Appears Reasonable

Page 16 GAO- 02- 667T Highway Trust Fund

Table 2: RABA Calculation for Fiscal Years 2000 through 2003

Dollars in millions Note: Actual receipts reflect certified net tax receipts
(excluding fines and penalties) after deduction of transfers and refunds for
the first three quarters of the fiscal year plus an estimate for the fourth
quarter. To account for the differences between actual and estimated
receipts for the previous year?s fourth quarter, Treasury makes an
adjustment to the current fiscal year?s receipts. Treasury prepares
forecasts of tax receipts to the Highway Account of the Highway Trust Fund
for the president?s budget and other analyses. CBO prepared the estimates of
Highway Account receipts contained in TEA- 21.

Source: DOT and Treasury.

Eighty percent of the fiscal year 2003 RABA adjustment is attributable to
the look back portion of the calculation. The actual fiscal year 2001
Highway Account receipts were about $1.6 billion lower than projections in
TEA- 21. According to Treasury, the lower- than- expected highway excise tax
receipts in fiscal year 2001 were due to several factors. Most importantly,
the weakened economy contributed to a decline in highway Look Back Component
Is

the Major Reason for the Negative RABA Adjustment

Fiscal year "Look back" "Look ahead" RABA

FY 2000 1998 actual Highway Account receipts $23, 135 2000 estimated Highway
Account receipts $28, 551 less: 1998 TEA- 21 estimated Highway Account
receipts 22, 164 less: 2000 TEA- 21 estimated Highway Account receipts
28,066 less: look ahead result for 1998 0 Subtotal 971 Subtotal 485 $1, 456

FY 2001 1999 actual Highway Account receipts 33, 815 2001 estimated Highway
Account receipts 30,368 less: 1999 TEA- 21 estimated Highway Account
receipts 32, 619 less: 2001 TEA- 21 estimated Highway Account receipts
28,506 less: look ahead result for 1999 0 Subtotal 1, 196 Subtotal 1, 862 3,
058

FY 2002 2000 actual Highway Account receipts 30, 334 2002 estimated Highway
Account receipts 31,732 less: 2000 TEA- 21 estimated Highway Account
receipts 28, 066 less: 2002 TEA- 21 estimated Highway Account receipts
28,972 less: look ahead result for 2000 485 Subtotal 1, 783 Subtotal 2, 760
4, 543

FY 2003 2001 actual Highway Account receipts 26, 900 2003 estimated Highway
Account receipts 28,570 less: 2001 TEA- 21 estimated Highway Account
receipts 28, 506 less: 2003 TEA- 21 estimated Highway Account receipts
29,471 less: look ahead result for 2001 1, 862 Subtotal (3, 468) Subtotal
(901) (4, 369)

Page 17 GAO- 02- 667T Highway Trust Fund

excise taxes paid. All but one of the Highway Trust Fund receipt sources
were lower in fiscal year 2001 than fiscal year 2000. For example, tax
revenue from the retail tax on new trucks dropped 55 percent from fiscal
years 2000 to 2001. Additionally, the rise in the use of gasohol contributed
to decreased Highway Account receipts. The amount of gasohol receipts
allocated to the Highway Account rose by 17.5 percent between fiscal years
2000 and 2001, which Treasury believes is evidence of an ongoing
substitution of gasohol fuels for gasoline. Because gasohol is taxed at a
lower rate than gasoline and a portion of the tax on gasohol is transferred
to the General Fund, increases in gasohol use and corresponding reductions
in gasoline use decrease Highway Account revenues. On February 11, 2002, we
issued a report on the results of procedures we performed related to the
distributions of excise tax revenue to the Highway Trust Fund in fiscal year
2001. 12 On the basis of this work, we believe the amounts distributed to
the Highway Trust Fund for the first 9 months of fiscal year 2001, which
were subject to IRS?s quarterly excise tax certification process and which
were adjusted on the basis of this process, were reasonable and were
adequately supported according to available information. 13

Although not the main factor, the look ahead portion of the RABA calculation
also contributed to the overall negative RABA adjustment. As previously
discussed, the look ahead is the difference between TEA- 21?s projections
for the next fiscal year to current projections from the president?s budget,
which are prepared by Treasury. We did not

12 GAO- 02- 379R. 13 Additionally, on the basis of our review, we believe
the March 2001 adjustment made by Treasury to reduce fiscal year 2001 excise
tax distributions to the Highway Trust Fund by $1.2 billion was reasonable
and adequately supported. Look Ahead Component

Also Contributed to Negative RABA Adjustment

Page 18 GAO- 02- 667T Highway Trust Fund

independently evaluate the methodology and the economic models Treasury used
to develop its revenue projections. However, on the basis of the general
qualitative description Treasury provided us about its methodology and
economic models used to develop Highway Trust Fund revenue projections, we
have no reason to question the projections for fiscal year 2003. Treasury
uses seven econometric models to forecast each highway excise tax revenue
source, such as the tax on gasoline. These models seek to approximate the
relationship between historical tax liability and current macroeconomic
variables, such as the gross domestic product. This estimated relationship
is the baseline, and Treasury uses it to project future excise tax
liability, given current law and the administration?s economic assumptions.
After calculating future tax liability, Treasury forecasters convert the tax
liability forecast to a tax receipts forecast using information on deposit
rules, payment patterns, and actual collections.

The administration?s economic assumptions drive the projections made with
each model. According to Treasury, receipts forecasting is a policy exercise
conducted for the president to show the state of all revenue sources-
including the Highway Trust Fund- if the administration?s economic
assumptions were to come to fruition. Consequently, Treasury?s forecasts
incorporate economic assumptions formulated for the budget by the ?Troika,?
which consists of the Council of Economic Advisors, OMB, and Treasury.
Because the goal is to provide a forecast consistent with these economic
assumptions, the models use these assumptions directly as explanatory
variables, or link other explanatory variables to the assumptions provided.
While several of the administration?s economic assumptions are publicly
available, such as the gross domestic product and consumer price index, most
Troika assumptions are not publicly available, such as the projected price
of gasoline. Other variables specific

Page 19 GAO- 02- 667T Highway Trust Fund

to the Highway Trust Fund are included in the economic models. Treasury
generally obtains this information from other federal agencies. For example,
Treasury incorporates USDA?s forecast of ethanol use in its gasohol model.
However, according to Treasury, the forecasters must ensure that the
addition of these other variables does not create inconsistencies between
the projections and the administration?s assumptions.

It should also be noted that Treasury does not try to predict future
regulatory or legislative changes at the federal or state levels that could
affect Highway Trust Fund revenue but bases its projections on current law.
Any legislative or regulatory changes that affect Highway Trust Fund revenue
will affect the accuracy of the forecasts. Treasury continuously updates its
models to incorporate legislative, economic, and other relevant changes-
which are then reflected in the next forecasting exercise.

In addition to reviewing qualitative descriptions of the Treasury?s model,
we also compared the model?s projections with CBO?s forecasts. This
comparison did not raise any questions about the reasonableness of
Treasury?s projections. For example, despite different methodologies and
assumptions, Treasury and CBO projections of Highway Account receipts for
the budget window are very similar. (See fig. 3.) Both agencies forecast
steady growth in receipts from fiscal years 2002 through 2012. For example,
both Treasury and CBO project the average annual growth of highway- related
excise taxes will be about 3 percent.

Page 20 GAO- 02- 667T Highway Trust Fund

Figure 3: Comparison of Treasury and CBO Projections of Highway Account
Receipts, Fiscal Years 2002 to 2012

Source: Treasury and CBO.

In January 2002, the administration announced that the fiscal year 2003 RABA
adjustment would be a negative $4.965 billion. The administration
subsequently announced that an error had been made in calculating the RABA
adjustment and that the correct amount was a negative $4.369 billion- a $600
million difference.

The error, which was made in Treasury?s allocation of projected highway tax
revenues to various accounts rather than in its economic models, affected
the look ahead part of the fiscal year 2003 RABA calculation. Specifically,
it occurred in Treasury?s allocation of projected revenues from gasohol
sales to the General Fund, the Leaking Underground Storage $600 Million
Error in

RABA Adjustment Occurred Outside of Treasury?s Models

Page 21 GAO- 02- 667T Highway Trust Fund

Tank Trust Fund, and the Highway and Transit Accounts within the Highway
Trust Fund. In short, the error resulted in the incorrect distribution of
projected gasohol receipts among the funds.

Because gasohol has six different blends- all with different tax rates and
distributions- the gasohol allocations are complicated and require many

?links? among several spreadsheets. With respect to gasohol, the Highway
Account receipts are calculated after allocations for the other accounts-
the Mass Transit Account, the Leaking Underground Storage Tank Trust Fund,
and the General Fund- have been calculated. This is because the Highway
Account is a ?catch- all? for taxes that are not already attributed to other
accounts. A misalignment occurred among the different spreadsheets used to
distribute gasohol tax revenues to the different accounts, which caused too
much of the gasohol revenues to be transferred to the General Fund.
Consequently, the error incorrectly lowered projected Highway Account
revenue beginning with fiscal year 2002.

According to a Treasury official, a number of factors contributed to the
error, including tightened time constraints during this budget cycle for
Treasury forecasters to calculate and review their projections for the
fiscal year 2003 budget. Each forecaster is responsible for reviewing his/
her own calculations. In hindsight, however, this official said that the
internal quality checks his office made were insufficient, especially on the
gasohol calculations, which are very complex. He noted that Treasury plans
to take several steps to avoid such an error in the future, including
requiring Treasury?s forecasters to have their projections spot- checked by
other department forecasters.

The RABA formula, as defined by TEA- 21, contains look back and look ahead
components that tend to accentuate the impact of any shifts in Possible Ways
to Reduce

RABA Fluctuations

Page 22 GAO- 02- 667T Highway Trust Fund

Highway Account receipts. For example, the recent downturn in the economy is
reflected in several elements of the fiscal year 2003 RABA calculation.
First, the actual receipts for fiscal year 2001 were lower than expected.
Second, the downturn made it necessary for Treasury to correct for
optimistic projections of fiscal year 2001 receipts made in December 1999.
Third, the fiscal year 2003 projections are lower than those contained in
TEA- 21 because the updated projections reflect the current economic
conditions.

Several changes could be made to reduce the potential for dramatic swings in
funding for highway programs but maintain a tie to actual receipts credited
to the Highway Account. For example, changes to the RABA adjustment that
could smooth out the impact of significant funding changes could include (1)
eliminating the look ahead part of the RABA calculation, (2) averaging the
look back part of the calculation over 2 years, and (3) distributing the
RABA adjustments over 2 years. In figure 4, we show the actual RABA
adjustments under the current structure and the adjustments that would have
been made using these three options from fiscal years 2000 through 2003.

Page 23 GAO- 02- 667T Highway Trust Fund

Figure 4: Comparison of Different RABA Options

Source: GAO analysis.

As shown in figure 4, the three options appear to produce less dramatic
shifts in funding than the current RABA mechanism over the past 4 years.
However, we did not analyze how these options would perform against
different Highway Trust Fund scenarios or economic cycles in the future.

Page 24 GAO- 02- 667T Highway Trust Fund

The use of gasohol instead of gasoline affects the amount of Highway Account
revenue for two reasons. First, gasohol is partially exempt from the
standard gasoline excise tax. Second, 2.5 cents of the tax received on each
gallon of gasohol sold is transferred to the General Fund. (See fig. 5.) We
estimate that the partial tax exemption resulted in $3.86 billion in revenue
forgone by the Highway Account during fiscal years 1998 through 2001. 14 We
also estimate that the General Fund transfer reduced Highway Account revenue
by $2.15 billion during the same period.

Figure 5: Distribution of Gasoline and Gasohol Taxes to Different Accounts

Note: This figure reflects the tax rate and distribution of the gasohol
blend containing 90 percent gasoline and 10 percent ethanol. Tax rates and
distributions for other gasohol blends vary according to the amount of
ethanol contained in the blend.

Source: GAO analysis.

14 All estimates of revenue forgone by the Highway Account are presented in
constant 2001 dollars. Gasohol Use Has

Significant Impact on Trust Fund Revenues

Page 25 GAO- 02- 667T Highway Trust Fund

Treasury projects that gasohol use will continue to rise steadily through
fiscal year 2012. According to Treasury, such an increase will occur at the
expense of gasoline because some states are in the process of banning or
phasing out the use of methyl tertiary- butyl ether (MTBE) as an oxygenate
additive. Using Treasury?s highway excise tax revenue projections, we
estimate that the partial tax exemption will lower Highway Account revenue
by a total of $13. 72 billion from fiscal years 2002 through 2012. We also
estimate that the Highway Account will not receive $2.36 billion due to the
General Fund transfer from fiscal years 2002 through 2005, when the transfer
ends. 15 In addition, if the amount of the transfer is not dedicated to the
Highway Account following fiscal year 2005, we project that the Highway
Account will forgo $4.56 billion from fiscal years 2006 through 2012. Figure
6 depicts and table 3 summarizes the estimated revenue forgone from fiscal
years 1998 to 2012 by the Highway Trust Fund because of the gasohol tax
provisions.

Figure 6: Estimated Revenue Forgone by the Highway Account Due to Gasohol
Tax Provisions

15 The General Fund transfer expires at the end of fiscal year 2005. To
reflect the expiration, Treasury reduces the total federal excise tax on
gasohol blends by 2.5 cents per gallon starting in fiscal year 2006. Under
Treasury?s approach, the Highway Account is neither benefited nor harmed by
the expiration. For the purposes of this testimony, we estimated the impact
of the 2. 5 cent General Fund transfer assuming the transfer continued
through fiscal year 2012.

Page 26 GAO- 02- 667T Highway Trust Fund

Note: Estimates for fiscal years 1998 to 2000 are based on actual excise
taxes collected. We estimated fiscal year 2001 receipts using actual
receipts collected for the first three quarters and a projection of receipts
collected for the fourth quarter. Estimates for fiscal years 2002 to 2012
are based on Treasury?s projections. Estimates are in constant 2001 dollars.

Source: GAO analysis.

Page 27 GAO- 02- 667T Highway Trust Fund

Table 3: Estimated Revenue Forgone by the Highway Account Due to Gasohol Tax
Provisions

Dollars in millions (constant 2001 dollars)

1998 to 2001 2002 to 2012 Tax provision Total Average Total Average

Partial tax exemption

$3,856 $964 $13,716 $1,247 General Fund transfer

$2,154 $539 $6,921 $629

Combined impact

$6,011 $1,502 $20,637 $1,876

Note: Estimates for fiscal years 1998 to 2000 are based on actual excise
taxes collected. We estimated fiscal year 2001 receipts using actual
receipts collected for the first three quarters and a projection of receipts
collected for the fourth quarter. Estimates for fiscal years 2002 to 2012
are based on Treasury?s projections. Estimates are in constant 2001 dollars.

Source: GAO analysis.

According to USDA and ethanol industry officials, the partial tax exemption
for gasohol is intended to create a demand for ethanol that will raise the
price of ethanol at least to the point where producers can cover costs.
These officials stated that if the partial tax exemption on ethanol was
removed, the price of ethanol would no longer be competitive with the price
of gasoline and the demand for ethanol would disappear. In this case,
ethanol fuel production would not, for the most part, continue. Furthermore,
ethanol industry officials we talked to warned that because a substantial
amount of the corn grown in the United States is used for ethanol, the
collapse of the ethanol industry would affect the corn and agriculture
markets, which could in turn affect the federal government?s agricultural
support payments.

Page 28 GAO- 02- 667T Highway Trust Fund

Industry groups have proposed a number of ways to increase Highway Trust
Fund revenues in order to address future transportation needs. In 2000, DOT
estimated that an average annual investment of $56.6 billion would be needed
over the next 20 years just to maintain the physical conditions of existing
highways and bridges. Additionally, DOT estimated that an average annual
investment of $10.8 billion would be needed over the next 20 years to
maintain the nation?s transit systems. Under its current baseline, CBO
estimates that trust fund outlays exceed revenues each year from fiscal year
2003 to fiscal year 2012. Therefore, CBO estimates that the Highway Account
balance will be depleted in 2006 and that the balance of the Mass Transit
Account will hit zero in 2009. 16 These projections coupled with certain
trends, such as growing gasohol use and increased fuel efficiency, have
contributed to concerns about the longterm ability of future Highway Trust
Fund revenues to meet federal transportation needs.

Industry groups and others have advanced a number of proposals to increase
future revenues, such as crediting the Highway Trust Fund for the interest
earned on its balances, increasing the use of tolls, and/ or establishing an
indexing system to help ensure that gas tax rates are linked to inflation.
Although each of these actions would increase Highway Trust Fund revenues,
we have not evaluated their public policy implications. The discussion that
follows is not intended to show support for any

16 CBO?s baseline projections of tax receipts for fiscal years 2003 through
2012 incorporate the assumption that current tax laws remain in place and
that scheduled changes and expirations occur on time. The only exception to
that rule is the treatment of excise taxes dedicated to trust funds,
including the Highway Trust Fund. For CBO?s baseline projections of outlays
for the Highway Trust Fund, CBO assumes that policy- makers will continue to
control spending through obligation limitations set in annual appropriations
acts. CBO?s estimates of the fund?s outlays are based on historical spending
patterns. We did not evaluate CBO?s methodology or projections. Industry
Groups

Propose Ways to Increase Highway Trust Fund Revenues

Page 29 GAO- 02- 667T Highway Trust Fund

possible alternatives but instead to describe some of the possible ways that
highway funding could be increased.

One way cited to enhance Highway Trust Fund revenues would be to allow the
Highway Trust Fund to accumulate interest on its balance. Prior to TEA- 21,
the Highway Trust Fund earned interest on its balance, which was paid by the
General Fund. According to Treasury figures, if this had been done
throughout TEA- 21, the Highway Trust Fund would have earned about $4
billion from September 1999 through February 2002.

Another way to increase Highway Trust Fund revenues would be to increase
highway excise taxes. Although no tax increase is attractive, there are some
equity arguments that support an increase in certain highway user taxes. For
example, for some time the Federal Highway Administration has reported that
heavy trucks (trucks weighing over 55,000 pounds) cause a disproportionate
amount of damage to the nation?s highways and have not paid a corresponding
share for the cost of the pavement damage they cause. Currently, heavy
vehicles are taxed at the rate of $100 per year plus $22 for every 1,000
pounds (or fraction thereof) they weigh over 55,000 pounds. However, the tax
is capped at $550. In 2000, we reported that the Joint Committee on Taxation
estimated that raising the ceiling on this fee to $1,900 could generate
about $100 million per year. 17 Another option would be to restructure the
existing truckrelated user taxes. For example, according to CBO, replacing
the three truck- related excise taxes (i. e., taxes on tires, sales of new
trucks and trailers, and the use of heavy vehicles) with a single per- mile
tax that is based on a vehicle?s weight and number of axles would better
align the

17 U. S. General Accounting Office, Budget Issues: Budgetary Implications of
Select GAO Work for Fiscal Year 2001, GAO- OCG- 00- 8 (Washington, D. C.:
Mar. 31, 2000).

Page 30 GAO- 02- 667T Highway Trust Fund

taxes a truck pays with the damage it does to the roads. Depending on the
rate of taxation, this change could generate additional revenue for the
Highway Trust Fund.

In summary, Mr. Chairman, the Congress and the administration must
ultimately assess the long- term ability of the Highway Trust Fund to meet
surface transportation needs. The advantages and disadvantages of changing
the trust fund revenue streams must be weighed against future transportation
needs and other national priorities. The upcoming reauthorization of surface
transportation programs provides an opportunity to explore proposals to
increase trust fund revenues. We stand ready to assist the Congress in
examining these issues.

This concludes my prepared remarks. I would be pleased to answer any
questions you or other members of the subcommittee may have.

For questions regarding this testimony, please contact JayEtta Z. Hecker on
(202) 512- 2834 or at heckerj@ gao. gov. Individuals making key
contributions to this testimony included Nikki Clowers, Helen Desaulniers,
Ted Hu, Mehrzad Nadji, Stephen Rossman, Steven Sebastian, Ron Stouffer, and
James Wozny.

(544038) Contact and

Acknowledgments
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