-ZT-

#D-96-10

1-May-96
DISTRIBUTIONAL EFFECTS OF A PROPOSAL TO
REPEAL THE 1993 TRANSPORTATION MOTOR
FUELS EXCISE TAX (4.3 CENTS PER GALLON) (1)
Catendar Year 1997
CHANGE IN FEDERAL TAXES (3) FEDERAL TAXES (3) Effective Tax Rate (4)
INCOME FEDERAL UNDER UNDER Present
CATEGORY (2) TAXES (3) PRESENT LAW PROPOSAL Law Proposal
Millions Percent Billions Percent Billions Percent Percent Percent
Less than $10,000........ -$509 7.7% $7 0.6% $6 0.5% 6.9% 6.4%
10,000 to 20,000........ -930 -2.7% 35 2.9% 4 2.9% 9.1% 8.8%
20,000 to 30,000....... -930 -1.3% "1 6.0% 70 5.9% 14.2% 14.0%
30,000 to 40,000. -1,002 1.0% 100 8.4% 99 8.3% 16.9% 16.7%
40,000 to -B56 -0.8% 103 8.7% 102 8.7% 18.1% 18.0%
50,000 to A311 0.5% 243 20.4% 241 20.5% 20.4% 20.3%
75,000 to 100,000. -690 0.4% 183 15.5% 183 15.5% 23.2% 23.1%
100,000 to 200,000....... +594 0.3% 227 19.2% 227 19.2% 24.7% 24.6%
200,000 and over.......... -176 0.1% 219 18.4% 219 18.5% 29.6% 29.6%
Total, All Taxpayers...|  -$6,998 0.6% $1,187 100.0% $1,180 100.0% 20.5% 20.4%

Source: Joint Committee on Taxation
Detall may not add to total due to rounding.

(1) The proposal would be effective July 1, 1996.
(2) The income concept used to place tax retums into income categories Is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable soca! security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
[8] excluded income of U.S. citizens living abroad. Categories are measured at 1996 levels.
(3) Federal taxes are equal to individual Income tax (Including the outlay portion of the EIC), employment tax (attributed to employees),

and excise taxes (attributed to consumers). Corporate income tax is not Included due to uncertainty conceming the incidence of the tax.

Individuals who are dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
The indirect effects of excise tax changes are not included.
(4) The effective tax rate Is equal to Federal taxes described in footnote (3) divided by: income described In footnote (2) plus additional

income attributable to the proposal.

Page 2 of 6



Table 1. Present-Law Federal Motor Fuels Excise Tax Rates
on Various Transportation Sectors

(rates shown in cents per gallon)
Transportation Sector Trust Fund General Fund Total Tax

Highway Transportation’

In general (trucks, automobiles)

Gasoline 14.0 4.3 18.3
Diesel fuel 20.0 43 24.3
Special motor fuels’ 14.0 43 18.3
Intercity bus
Gasoline no tax no tax no tax
Diesel fuel 3.0 43 73
Rail Transportation no tax 5.55 5.55
Water Transportation
Inland waterway 20.0 4.3 24.3
Recreational boats
Gasoline 14.0 43 18.3
Diesel fuel no tax 24.4 24.4
Air Transportation
Commercial aviation no tax* 43 43
Noncommercial aviation
Gasoline 14.04 43 18.3
Jet fuel no tax? 43 43

' Reduced highway motor fuels excise tax rates apply to mixtures of taxable fuels with ethanol
and methanol produced from renewable sources (i.¢., "gasohol") and to certain "neat" (at least 85 percent
pure) methanol fuels produced from natural gas.

? Examples of special motor fuels are propane, liquefied natural gas ("LNG"), other liquids used
as a fuel in highway transportation, and compressed natural gas ("CNG"). CNG, a gaseous fuel rather
than a liquid fuel, is subject only to a General Fund tax of 48.54 cents per thousand cubic feet.

> Before January 1, 1996, commercial aviation trust fund taxes consisted of a 10-percent

domestic passenger tax, a $6 dollar international passenger departure tax, and a 6.25-percent domestic air
cargo tax.

* Before January 1, 1996, an additional 1-cent-per-gallon tax was imposed on noncommercial
aviation fuel.

° Before January 1, 1996, a 17.5-cents-per-gallon tax was imposed.

3-


-9T-

#D-96-10

1-May-96
DISTRIBUTIONAL EFFECTS OF A PROPOSAL TO
REPEAL THE 1993 TRANSPORTATION MOTOR
FUELS EXCISE TAX (4.3 CENTS PER GALLON) (1)
Calendar Year 2001
CHANGE IN FEDERAL TAXES (3) FEDERAL TAXES (3) Effective Tax Rate (4)
INCOME FEDERAL UNDER UNDER Present
CATEGORY (2) TAXES (3) PRESENT LAW PROPOSAL Lew Proposal
Millions Percent Billions Percent Billions Percent Percent Percent
Less than $10,000. -$537 -7.3% $7 0.5% $7 0.5% 7.5% 7.0%
10,000 to 20,000. -977 -2.7% 36 2.5% 35 2.5% 8.9% 8.7%
20,000 to 30,000. -978 1.2% 81 5.6% 80 5.6% 13.8% 13.7%
30,000 to 40,000. 1,055 0.9% 116 8.1% 115 8.0% 16.6% 16.4%
40,000 to 50,000. -900 -0.7% 121 8.4% 120 8.3% 17.5% 17.4%
50,000 to 75,000. -1,380 -0.5% 280 19.4% 279 19.4% 19.6% 19.5%
75,000 to 100,000....... -729 0.3% 235 16.2% 234 16.3% 22.9% 22.8%
100,000 to 200,000. -630 0.2% 292 20.2% 292 20.3% 24.7% 24.7%
200,000 and over... -188 0.1% 275 19.0% 275 19.1% 30.0% 30.0%
Total, All Taxpayers... _-$7,375 0.5% $1,443 100.0% $1,436 100.0% 20.5% 20.4%

Source: Joint Committee on Taxation
Detail may not add to total due to rounding.

(1) The proposal would be effective July 1, 1996.

(2) The income concept used to piace tax returns into income categories is adjusted gross income (AGI) plus: [1) tax-exempt

interest, [2] employer contributions for health plans and life Insurance, [3] employer share of FICA tax, [4] worker's compensation,

[5] nontaxable socal security benefits, [6] Insurance value of Medicare benefits, [7] alternative minimum tax preference items, and

[8] excluded income of U.S. citizens living abroad. Categories are m
(3) Federal taxes are equal to individual income tax (including the outlay portion of the EIC),
and excise taxes (attributed to consumers). Corporate income tax is not Included due t
Individuals who are dependents of other taxpayers and taxpayers with negative income

The indirect effects of excise tax changes are not included.

(4) The effective tax rate is equal to Federal taxes described in footnote

income attributable to the proposal.

Page 6 of 6

easured at 1996 levels.

employment tax (attributed to employees),
lo uncertainty concerning the incidence of the tax.
are excluded from the analysis.

(3) divided by: income described in footnote (2) plus additional



Taxable Fuel
Gasoline and diesel fuel
{all taxable uses except trains
and intercity buses using dyed
diesel fuel)

Train and intercity bus
diesel fuel

Inland waterway

Aviation jet fuel

Point of Imposition

Generally, removal from pipeline
or barge terminal

Retail use (if dyed); otherwise,
removal from terminal facility

Retail use

Wholesale sale®

The first issue to be addressed in setting an effective date is the speed with which persons
actually paying the tax are made aware that the tax has been repealed (i.e., a law has been signed
by the President). In all cases, this could be expected to be accomplished in less than a week.
For example, gasoline and diesel fuel terminal facilities (where a substantial majority of the
transportation motor fuels excise tax is collected) are required to register with the Internal
Revenue Service ("IRS") as a condition of holding non-tax-paid fuel. The IRS could be
instructed to notify all registered facilities immediately upon enactment of the legislation.

The second issue involves the speed with which the tax reduction can be expected to be
reflected in lower consumer prices. There is no technical tax barrier to immediate flow-through
to consumers of the tax reduction. The extent to which the tax reduction is enjoyed by
consumers is determined by market forces of supply and demand. Generally, economists believe
that in the long run, fuels excise taxes are borne by consumers in the form of higher fuel prices.
Likewise, reductions in those excise taxes could be expected to result in lower fuel prices.

In the short-term, the collection structure of the gasoline and diesel fuel excise taxes
could mean that a rate reduction is not immediately reflected in price changes. Gasoline and
diesel fuel generally are distributed in bulk from refineries (or port of importation) to terminals.
Computerized record keeping systems track the removal of fuels from terminals, and the price
charged. Wholesale distributors remove the fuels by truck, with tax being collected on removal
as a part of the fuel price they pay. (The tax is imposed on owners of record of the fuel inside
the terminal facility, not on wholesale distributors.) Wholesale distributors subsequently deliver
the fuel they remove to retail outlets, service stations, truck stops, and fleet purchasers. Stocks
of fuel on which tax already has been paid generally are held for sale beyond that point at all
times. Owners of this fuel may be reasonably expected to attempt to recoup all costs already
incurred. However, new lower-taxed fuel being removed from terminals beginning on the

> Most major airports are served by wholesale distributors that deliver aviation fuel
directly into airplanes, with tax being collected at what is substantively the retail level.

-8-



highway fuels taxes (explained below). The excise taxes on noncommercial aviation fuel were
increased by 25 percent by the 1990 Act as part of a general extension of and increase in Airport
and Airway Trust Fund taxes. As enacted, these increases were temporary: the additional
highway and rail taxes were scheduled to expire after September 30, 1995, and the additional
noncommercial aviation fuel taxes were scheduled to expire after December 31, 1995 (when all
other Airport and Airway Trust Fund taxes were scheduled to expire).

Highway transportation motor fuels tax revenues from this 1990 increase were divided
equally between the Federal Highway Trust Fund and the General Fund of the Treasury.
Revenues from the noncommercial aviation fuels tax increase were retained in the General Fund
for a two-year period, followed by three years in which revenues were deposited in the Federal
Airport and Airway Trust Fund. Revenues from the 2.5-cents-per-gallon excise tax on train
diesel fuel were retained in the General Fund.

Use of transportation motor fuels excise taxes for Federal trust fund financing
Highway Trust Fund

The Highway Trust Fund was established in 1956 to provide a financing source for the
then-new Interstate Highway System and for continuation of other Federal-aid highway
programs. The other highway-aid programs previously had been financed through the General
Fund. Existing General Fund excise taxes on gasoline, diesel fuel, and special motor fuels were
increased from 2 cents per gallon to 3 cents per gallon, through 1958, with the revenues being
dedicated to the Trust Fund. The Trust Fund tax rate was further increased to 4 cents per gallon
in 1959. The tax rates remained at that level until 1983 following enactment of the Surface
Transportation Assistance Act of 1982, which increased these excise tax rates to 9 cents per
gallon.

Beginning in 1985, the diesel fuel excise tax rate (but not the gasoline excise tax rate)
was increased by an additional 6 cents per gallon, to a total of 15 cents per gallon. The 1985
increase was enacted as a revenue offset for a reduction in an annual use tax; imposed on heavy
trucks, the primary users of diesel fuel. No further increases in the highway motor fuels excise
tax rates were enacted until 1990

Inland Waterways Trust Fund

Federal excise taxes have been imposed on motor fuels used in vessels operating on a
designated inland waterway system since 1980. The initial tax rate was 4 cents per gallon.
Following a series of scheduled, phased increases, the tax currently is imposed at a permanent
rate of 20 cents per gallon. Revenues from this tax are dedicated to the Inland Waterways Trust
Fund to finance construction and rehabilitation expenditures for navigation of 26 specified inland
and intracoastal waterways.

5.


Il. LEGISLATIVE BACKGROUND OF TRANSPORTATION
MOTOR FUELS EXCISE TAXES

ise of motor fuels excise ta’ for defici io:

Beginning with the establishment of the Federal Highway Trust Fund in 1956 and
extending through 1990, excise taxes on transportation motor fuels generally were imposed
exclusively to finance Federal trust fund programs, and imposition of the taxes was limited to
beneficiaries of the trust finds. In 1990, and again in 1993, transportation motor fuels tax rates
were increased as a deficit reduction measure, with revenues from the increases being retained in
the General Fund of the Treasury. Unlike the 1990 General Fund tax rate and the various trust
fund rates, the 1993 General Fund rate is permanent.

1993 transportation motor fuels exci: an nsion 90 ti

A 4.3-cents-per-gallon transportation motor fuels excise tax was imposed as a deficit
reduction measure by the Omnibus Budget Reconciliation Act of 1993 (the "1993 Act"). This
excise tax was enacted as an alternative to a broad-based energy ("BTU") tax proposed by
President Clinton. The transportation motor fuels tax applies to fuel used in all domestic
transportation: highway, aviation,’ rail, inland waterway shipping, and recreational boating. The
tax is imposed on all fuels otherwise subject to excise tax (liquid fuels), plus CNG. Statutorily,
the tax is imposed as an add-on to the other excise taxes. Thus, uses of motor fuels that are
wholly exempt from other excise tax (e.g., State and local government and farm use) are exempt
from this tax.

In addition to imposing the 4.3-cents-per-gallon transportation motor fuels excise tax, the
1993 Act extended the 5-cents-per-gallon excise tax imposed on highway transportation in 1990
and the 1990 tax on diesel fuel used in trains (at a reduced rate of 1.25 cents per gallon), both
through September 30, 1999. The 1993 Act provided that revenues from extension of this tax on
highway motor fuels would be deposited in the Federal Highway Trust Fund during the
extension period (October 1, 1995-September 30, 1999). Revenues from the tax on diesel fuel
used in trains continue to go to the General Fund as there is no Federal rail construction trust
fund.

1990 tran: it els exci:
The Omnibus Budget Reconciliation Act of 1990 (the "1990 Act") increased the existing

highway motor fuels taxes by 5 cents per gallon. This tax also was imposed on diesel motor fuel
used in trains at a reduced rate of 2.5 cents per gallon to reflect the General Fund portion of the

> Fuel consumed in commercial aviation was exempt from this tax prior to October 1,
1995,

4.


APPENDIX: History of Federal Excise Tax Rates on Highway Motor Fuels, 1955 - 1996

(rates shown in cents per gallon)

Highway Trust Fund Rate
General Gasoline and special Diesel "LUST" Total Fuels
Year Fund Rate motor fuels fuel Tax Rate! Tax Rate
1955 2 no tax motax eee 2
1956 oenene 3 3 wees 3
19000 eeeee 4 4 ce 4
1983 9 9 9
1985 wane 9 | 9 (gasoline)
15 (diesel)
1987 wee 9 15 0.1 9.1 (gasoline)
15.1 (diesel)
1990 25 115 17.5 01 14.1 (gasoline)
20.1 (diesel)
1993 OB 1S 17.5 0. 18.4 (gasoline)
24.4 (diesel)
1995 43 : 14.0 20.0 0.1 18.4 (gasoline)
24.4 (diesel)
1996 43 140 20.0 no tax 18.3 (gasoline)
24.3 (diesel)

' Tax for the Leaking Underground Storage Tank Trust Fund ("LUST") was applicable 1987-1995.

2 Highway Revenue Act of 1956 established the Highway Trust Fund


I. DESCRIPTION OF PROPOSED REPEAL OF GENERAL FUND
TRANSPORTATION MOTOR FUELS EXCISE TAX
AND EFFECTIVE DATE ISSUES

Description of proposal

On April 26, 1996, Senator Bob Dole proposed repeal of the 4.3-cents-per-gallon General
Fund transportation motor fuels excise tax enacted in 1993. Senator Dole's proposal was
contained in a letter to President Clinton.

On April 30, 1996, Senator Dole and House Speaker Newt Gingrich issued a Joint
Statement amplifying Senator Dole's original proposal. The Joint Statement proposes immediate
repeal of the 4.3-cents-per-gallon transportation motor fuels excise tax through December 31,
1996, with permanent repeal of this tax being considered in the context of Fiscal Year 1997
budget legislation.

Effective date and associated issues

No effective date for repeal was specified in Senator Dole's proposal; however, the
Senator has indicated that early repeal is desired. The tax reduction could be made effective as
early as one to two weeks after enactment of the legislation.

Failure to provide such an early effective date could contribute to consumer-level
shortages if wholesale distributors and retail dealers delayed fuel purchases pending
implementation of the tax reduction. However, because the 4.3-cents-per gallon excise tax
statutorily is imposed at different points in the distribution chain for different transportation
sectors (as an add-on to other motor fuel excises), the degree to which the proposed excise tax
reduction is enjoyed by consumers through price reductions will be dependent on market forces
beyond the purview of the proposed tax legislation. This dependence on market forces is
particularly strong in the case of gasoline and diesel fuel because, as described below, the excise
taxes on these fuels generally are imposed at least two levels in the fuel distribution chain away
from the consumer, and the taxes are not separately stated items on consumer bills.

The points in the fuel distribution chain at which the transportation motor fuels excise tax
is imposed vary by transportation sector. Different points of imposition raise present different
issues on timing of the proposed repeal if Senator Dole's stated goal of consumer price decreases
is to be achieved rapidly. The 4.3-cents-per-gallon excise tax is imposed at the following points
in the distribution chain:

-7-


PRESENT LAW AND BACKGROUND
RELATING TO
FEDERAL EXCISE TAXES IMPOSED ON
TRANSPORTATION MOTOR FUELS

Scheduled for a Hearing
Before the
SENATE COMMITTEE ON FINANCE

on May 3, 1996

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
May 2, 1996

JCX-17-96



-OT-

IV. ESTIMATED REVENUE EFFECTS OF TRANSPORTATION MOTOR FUELS EXCISE TAX REPEAL OPTIONS

Fiscal Years 1996 - 2005

{Millions of Dollars}
Provision Effective 1906 1987 1908 = 1999 2000-2001 «2002-2003 2004 += 2005 «1996-00 1996-02 1906-05
1. Repeal 1993 tax increase of 4.3 cents per

gallon on transportation motor fuels (sunset

AfROL 12/31/96). ccceesctnssmenninnentneee 6/1/96 4655 1,285 26 9 3 1 - ~ - 2903 2,902 —-2,902
2. Repeal 1993 tax increase of 4.3 cents per gallon

on transportation motor fuels:

a. Highway gasoline.. 6/1/96 1,221 -3,848 3,853 3.876 -3,940 -4,035 -4,136 4,239 -4,345 -4,454 -16,738 ~—-24,909-——-37,947

b. Highway diesel fuel 6/1/96 247-772-761 -756 764-781-709 818-837-856 —-3.300 4,880 7,391

¢. Railroad diesel fuel..... 6/1/96 “89° 124-123-123 124-124-128 424-124-428 633 -784 4,153

d. Inland waterway diesel fuel.. 6/1/96 2 18 18 418 9-418-118-1919 49-20 74 WW -169

©. Aviation gasoline....... 6/1/96 3 8 8 8 8 8 8 8 8 8 -35 “51 75

f. Noncommercial jet fuel 6/1/96 8 2 2 2 27 27 28 29 29 © -30 re “166 -254

g. Commercial jot fuel... 6/1/96 135-439 -458_—-474_— 489 504-520-536 553-571-1995 3.019 4,679

Subtotal... “1,655 5,234 5.246 5.281 5,969 5.498 6634 6,773 5916 -6063 -22.785 33,917 51,669
3. Suspend or repeal the remaining 1.25 cents

per gallon tax on railroad diesel fuel:

a. Suspend tax through 12/31/96. 6/196 12 9 - - a _ - ~ - - 24 -2t 24

b. Permanent repeal [1]... 6/196 1200 3600-36-36 ~ ae _ - ~ “424 124 “12t

Cc

Joint Committee on Taxation

NOTE: Details may not add to totals due to rounding

{1] The 1.25 cents per gallon tax on railroad diesel is scheduled to expire on 9/30/99.



effective date of the excise tax reduction may mitigate their ability to charge the cost of these
past taxes to consumers.

Present law includes refund provisions that could assist in rapid delivery to consumers of
price reductions on fuels taxed at the higher, present-law rates. The present-law Highway Trust
Fund gasoline and diesel fuel excise tax rates are scheduled to expire after September 30, 1999.
The Internal Revenue Code provides that persons holding fuel on which those taxes have been
paid for sale on October 1, 1999, can apply to the person who actually paid the tax (e.g., owners
of gasoline and diesel fuel within terminal facilities) for a refund. The actual taxpayers in turn
could apply to the Internal Revenue Service for a refund of amounts they pay to their customers.
No refunds are provided for fuel held at retail or for use by a consumer. The proposal could
make these "floor stocks refund" provisions applicable to repeal of the 4.3-cents-per-gallon
transportation motor fuels excise tax to encourage immediate reductions in fuel tax prices to
consumers.

-9-



Aquatic Resources Trust Fund and Land and Water Conservation Fund

Revenues from the gasoline excise tax imposed on motorboat use are dedicated to the
Aquatic Resources Trust Fund (the "Aquatic Fund") and the Land and Water Conservation Fund.
The Land and Water Conservation Fund receives $1 million per year of these revenues. The
balance of the revenues is allocated between a Boat Safety Account in the Aquatic Fund and a
Sport Fish Account. The Boat Safety Account finances boat safety programs conducted by the
U.S. Coast Guard; the Sport Fish Account funds fish restoration grant programs of the Federal
Government.

A sub-account in the Sport Fish Account separately receives the portion of highway
motor fuel taxes attributable to small engines (e.g., lawnmowers and snowblowers). Amounts in
this sub-account are dedicated to coastal wetlands restoration programs.

irport and Airway Trust Fund

Since establishment of the Airport and Airway Trust Fund (the "Trust Fund") in 1970,
excise taxes on commercial and noncommercial aviation generally have been dedicated to
programs of that Trust Fund. The majority of the revenues for the Trust Fund are produced by
passenger ticket and air cargo taxes imposed on commercial air travel. The noncommercial
aviation sector's contribution to the Trust Fund takes the form of motor fuels excise taxes. From
1970 through 1980, both aviation gasoline and jet fuel were taxed at 7 cents per gallon.
Following a period when rates were temporarily reduced (because of failure to extend scheduled
expirations), the taxes were set at 14 cents per gallon (jet fuel) and 12 cents per gallon (gasoline)
until enactment of the 1990 increase described above.

ing Underground Storage Tank Trust F
A 0.1-cent-per-gallon excise tax was imposed on all otherwise taxable transportation
motor fuels (other than propane) from 1987 through December 31, 1995. Statutorily, this tax
was structured as an add-on rate to the existing taxes. Revenues from the tax were dedicated to
remediation of ground pollution from underground oil storage tanks.
Nati Recreati Trails Trust Fund
Highway motor fuels excise tax revenues attributable to fuel consumed in recreational

trail vehicles are dedicated to the National Recreational Trails Trust Fund to finance Federal
programs promoting recreational trail construction and maintenance.

-6-


I. PRESENT-LAW FEDERAL EXCISE TAXES IMPOSED ON
TRANSPORTATION MOTOR FUELS

Separate Federal excise taxes are imposed on specified transportation motor fuels.
Taxable fuels include gasoline, diesel fuel and special motor fuels used for highway
transportation, gasoline and diesel fuel used in motorboats, diesel fuel used in trains, fuels used
in inland waterway transportation, and aviation fuel (gasoline and jet fuel). Motor fuels used by
all of these transportation sectors are subject to a permanent 4.3-cents-per gallon excise tax,
enacted by the Omnibus Budget Reconciliation Act of 1993. Revenues from this excise tax are
retained in the General Fund of the Treasury.

The aggregate tax rate varies for each transportation sector. For example, diesel fuel
used in trains is subject to an aggregate General Fund tax rate of 5.55 cents per gallon.
Transportation sectors that benefit from Federal public works and environmental programs also
are subject to additional tax rates (beyond the 4.3-cents-per-gallon General Fund rate) to finance
Federal trust funds established as a financing source for those programs. All motor fuels excise
taxes other than the 4.3-cents-per-gallon transportation motor fuels excise tax are temporary (i.e.,
have scheduled expiration dates)

In addition to the taxes imposed on actual transportation motor fuels, excise taxes
formerly were imposed on crude oil (and imported refined petroleum products) to finance the
Federal Hazardous Substance Superfund program (before January 1, 1996) and the Oil Spill
Liability Trust Fund program (before January 1, 1995). A further excise tax on motor fuels, the
Leaking Underground Storage Tank Trust Fund tax, expired after December 31, 1995.

Between 1956 and 1991, motor fuels excise taxes generally were imposed only for
Federal Trust Fund financing. The Omnibus Budget Reconciliation Act of 1990 imposed a
temporary (through September 30, 1995) General Fund motor fuels excise tax of 2.5 cents per
gallon on highway and rail transportation. Table 1, on the following page, summarizes the
present-law Federal excise tax rates on transportation motor fuels, by trust fund and General
Fund components.

-2-


-€T-

#D-96-10

1-May-96
DISTRIBUTIONAL EFFECTS OF A PROPOSAL TO
REPEAL THE 1993 TRANSPORTATION MOTOR
FUELS EXCISE TAX (4.3 CENTS PER GALLON) (1)
Calendar Year 1998
CHANGE IN FEDERAL TAXES (3) FEDERAL TAXES (3) Effective Tax Rate (4)
INCOME FEDERAL UNDER UNDER Present
CATEGORY (2) TAXES (3) PRESENT LAW, PROPOSAL Law Proposal
Millions Percent Billions Percent Billions Percent Percent Percent
Less than $10,000. -$510 -7.5% $7 0.5% $6 0.5% 7.1% 6.6%
-931 +2.6% 35 2.8% 34 2.8% 9.0% 8.7%
-931 1.3% 73 5.8% 72 5.8% 14.1% 13.9%
-1,004 1.0% 103 8.3% 102 8.3% 16.9% 16.7%
-857 -0.8% 107 8.6% 107 8.6% 17.9% 17.8%
1,313 0.5% 251 20.2% 250 20.2% 20.2% 20.1%
-692 0.4% 195 15.6% 194 15.7% 23.1% 23.1%
100,000 to 200,000. -597 0.2% 244 19.6% 243 19.6% 24.7% 24.7%
200,000 and over. e -178 0.1% 231 18.5% 230 18.6% 29.7% 29.7%
Total, All Taxpayers...j _-$7,013 0.6% $1,246 100.0% $1,239 100.0% 20.5% 20.4%

Source: Joint Committee on Taxation
Detail may not add to total due to rounding.

(1) The proposal would be effective July 1, 1996.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life Insurance, [3] employer share of FICA tax, (4] worker's compensation,
{5] nontaxable social security benefits, (6) insurance value of Medicare benefits, [7] altemative minimum tax preference items, and
{8] excluded income of U.S. citizens living abroad. Categories are measured at 1996 levels,

(3) Federal taxes are equal to individual income tax (including the outlay portion of the EIC),
and excise taxes (attributed to consumers). Corporate income tax is not included due t

employment tax (attributed to employees),
lo uncertainty conceming the incidence of the tax.

Individuals who are dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
The indirect effects of excise tax changes are not included.

(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.

Page 3 of 6



#D-96-10

1-May-96
DISTRIBUTIONAL EFFECTS OF A PROPOSAL TO
REPEAL THE 1993 TRANSPORTATION MOTOR
FUELS EXCISE TAX (4.3 CENTS PER GALLON) (1)
Calendar Year 2000
CHANGE IN FEDERAL TAXES (3) FEDERAL TAXES (3) Effective Tax Rate (4)
INCOME FEDERAL UNDER UNDER Present
CATEGORY (2) TAXES (3) PRESENT LAW. PROPOSAL Law Proposal
Millions Percent Billions Percent Billions Percent Percent Percent
Less than $10,000........ ~$524 74% $7 0.5% $7 0.5% 7.3% 6.8%
10,000 to -954 -2.7% 36 2.6% 35 2.5% 8.9% 8.7%
20,000 to -955 1.2% 78 5.7% 7 5.6% 13.9% 13.7%
30,000 to -1,030 -0.9% 112 8.1% WW 8.1% 16.7% 16.5%
40,000 to -879 -0.8% 116 8.4% 115 8.4% 17.6% 17.5%
1,348 -0.5% 271 19.7% 270 19.7% 19.8% 19.7%
711 -0.3% 219 15.9% 218 16.0% 22.9% 22.9%
-615 0.2% 276 20.1% 275 20.1% 24.7% 24.7%
-183 0.1% 259 18.9% 259 19.0% 29.9% 29.9%
Total, All Taxpayers. -$7,200 0.5% $1,373 100.0% $1,366 100.0% 20.5% 20.4%

Source: Joint Committee on Taxation
Detail may not add to total due to rounding.

(1) The proposal would be effective July 1, 1996.
(2) The income concept used to place tax retums into income categories Is adjusted gross income (AGI) plus: [1] tax-exempt
interest, (2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, {4] worker's compensation,
[5] nontaxable social security benefits, [6] Insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
{8] excluded income of U.S. citizens living abroad. Categories are measured at 1996 levels.
(3) Federal taxes are equal to individual Income tax (including the outlay portion of the EIC), employment tax {attributed to employees),

iduals who are dependents of other taxpayers and taxpayers with negative Income are excluded from the analysis.

excise taxes (attributed to consumers). Corporate income tax Is not Included due to uncertainty concerning the incidence of the tax.
inf

The indirect effects of excise tax changes are not included.
(4) Thé effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional

income attributable to the proposal.

Page 5 of 6



INTRODUCTION

The Senate Committee on Finance has scheduled a hearing on May 3, 1996, ona
proposal by Senator Bob Dole to repeal the 4.3-cents-per-gallon General Fund transportation
motor fuels excise tax enacted by the Omnibus Budget Reconciliation Act of 1993. The
proposal was made in a letter to President Clinton on April 26, 1996. This proposal was
amplified in a Joint Statement by Senator Dole and House Speaker Newt Gingrich on April 30,
1996. The Joint Statement proposes immediate repeal of the 4.3-cents-per-gallon transportation
motor fuels excise tax through December 31, 1996, with permanent repeal being considered in
the context of Fiscal Year 1997 budget legislation. The transportation motor fuels excise tax _
applies to motor fuels used in all transportation sectors: highway, aviation, rail, inland waterway
shipping, and recreational boating.

This document,’ prepared by the staff of the Joint Committee on Taxation, provides a
description of the present-law taxes imposed on transportation motor fuels (Part I), background
information on historical use of revenues from these taxes to finance General Fund and Federal
trust fund activities (Part II), a description of Senator Dole's proposal (as amplified by the Joint
Statement) and associated effective date issues (Part III), estimated revenue effects (Part IV), and
distributional effects of the excise tax (Part V).

' This document may be cited as follows: Joint Committee on Taxation, Present Law

and Legislative Background Relating to Federal Excise Taxes Imposed on Transportation Motor

Fuels (JCX-17-96), May 2, 1996.

-1e


CONTENTS

INTRODUCTION ..... 00. e eee

I

Ill.

Iv.

PRESENT-LAW FEDERAL EXCISE TAXES IMPOSED ON
TRANSPORTATION MOTOR FUELS ..........0.0..0 0000202000

LEGISLATIVE BACKGROUND OF TRANSPORTATION MOTOR
FUELS EXCISE TAXES ... 0...

DESCRIPTION OF PROPOSED REPEAL OF GENERAL FUND
TRANSPORTATION MOTOR FUELS EXCISE TAX AND EFFECTIVE
DATE ISSUES .... 0... c enn cee ee

ESTIMATED REVENUE EFFECTS OF TRANSPORTATION MOTOR
FUELS TAX REPEAL OPTIONS ........0 200.0. c eee eee eee

DISTRIBUTIONAL EFFECTS OF A PROPOSAL TO REPEAL THE
1993 TRANSPORTATION MOTOR FUELS EXCISE TAX ............

APPENDIX: HISTORY OF FEDERAL EXCISE TAX RATES ON

HIGHWAY MOTOR FUELS, 1955-1996 2.0.0.0... 0.0.0 2c cece eee

@

10

ll

17


#D-96-10

1-May-96
Y. DISTRIBUTIONAL EFFECTS OF A PROPOSAL TO
REPEAL THE 1993 TRANSPORTATION MOTOR
FUELS EXCISE TAX (4.3 CENTS PER GALLON) (1)
Calendar Year 1996
CHANGE IN FEDERAL TAXES (3) FEDERAL TAXES (3) Effective Tax Rate (4)
INCOME FEDERAL UNDER UNDER Present
CATEGORY (2) TAXES (3) PRESENT LAW. PROPOSAL Law Proposal
Millions Percent, Billions Percent Billions Percent Percent Percent
Less than $10,000. $245 -3.6% $7 0.6% $6 0.6% 6.9% 6.6%
10,000 to 20,000. 448 1.3% 34 3.0% 34 3.0% 9.2% 9.1%
20,000 to 30,000. 447 -0.7% 69 6.0% 68 6.0% 14.3% 14.3%
30,000 to 40,000. -481 -0.5% 96 8.5% 96 8.4% 17.0% 16.9%
40,000 to 50,000. “41 0.4% 99 8.7% 99 8.7% 18.3% 18.3%
50,000 to 75,000. -630 0.3% 234 20.6% 234 20.6% 20.7% 20.6%
75,000 to 100,000. +331 0.2% 173 15.2% 173 15.2% 23.3% 23.3%
100,000 to 200,000. +285 0.1% 215 18.9% 215 18.9% 24.7% 24.7%
200,000 and over. -84 0.0% 212 18.6% 212 18.6% 29.5% 29.5%
Total, All Taxpayers. $3,363 0.3% $1,139 100.0% $1,136 100.0% 20.7% 20.6%

Source: Joint Committee on Taxation
Detail may not add to total due to rounding.

(1) The proposal would be effective July 1, 1996.
(2) The Income concept used to place tax returns into Income categories Is adjusted gross Income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and lite Insurance, (3] employer share of FICA tax, [4] worker's compensation,
{5} nontaxable social security benefits, [6] Insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
{8] excluded income of U.S. citizens living abroad. Categories are measured at 1996 levels.
(3) Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed to employees),

and excise taxes (attributed to consumers). Corporate income tax Is not included due to uncertainty conceming the incidence of the tax.

Individuals who are dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
The indirect effects of excise tax changes are not included.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.

Page 1 of 6



#D-96-10

1-May-96
DISTRIBUTIONAL EFFECTS OF A PROPOSAL TO
REPEAL THE 1993 TRANSPORTATION MOTOR
FUELS EXCISE TAX (4.3 CENTS PER GALLON) (1)
Calendar Year 1999
CHANGE IN FEDERAL TAXES (3) FEDERAL TAXES (3) Effective Tax Rate (4)
INCOME FEDERAL UNDER UNDER Present
CATEGORY (2) TAXES (3) PRESENT LAW PROPOSAL Law Proposal
Millions Percent Billions Percent Billions Percent Percent Percent
Less than $10,000. $515 -74% $7 0.5% $6 0.5% 7.2% 6.7%
10,000 to 20,000. -938 -2.6% 35 2.7% 35 2.7% 8.9% 8.7%
20,000 to -938 1.2% 75 5.8% 74 5.7% 14.0% 13.9%
30,000 to 1,012 0.9% 107 8.2% 106 6.2% 16.8% 16.6%
40,000 to -664 0.8% WwW 85% 110 8.5% 17.7% 17.6%
50,000 to -1,324 -0.5% 261 19.9% 260 19.9% 20.0% 19.9%
75,000 to 100,000. -698 0.3% 207 15.8% 206 15.8% 23.0% 22.9%
100,000 to 200,000....... -603 0.2% 261 19.9% 260 20.0% 24.7% 24.7%
200,000 and over... -180 0.1% 244 18.7% 244 18.7% 29.8% 29.8%
Total, All Taxpayers...{_-$7,071 0.5% $1,308 100.0% $1,301 100.0% 20.5% 20.4%

Source: Joint Committee on Taxation
Detail may not add to total due to rounding.

(1) The proposal would be effective July 1, 1996.
(2) The income concept used to place tax returns into income categories is adjusted gross Income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
[5] nontaxable social security benefits, [6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
{8) excluded income of U.S. citizens living abroad. Categories are measured at 1996 levels.
(3) Federal taxes are equal to individual Income tax (including the outlay portion of the EIC), employment tax (attributed to employees),
and excise taxes (attributed to consumers). Corporate income tax is not included due to uncertainty conceming the incidence of the tax.
Individuals who are dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
The indirect effects of excise tax changes are not included.
(4) The effective tax rate is equal to Federal taxes described in footnote (3) divided by: income described in footnote (2) plus additional
income attributable to the proposal.

Page 4 of 6