Table 6.—Revenue and Outlays for the Mass Transit Account of the Highway Trust Fund, Fiscal Years

1993-2002
[Millions of dollars]
Year 19932 19942 19955 1996 1997> 1998> 19995 2000> 2001» 2002°
Tax Revenue .. 1956 2,016 2,029 2,842 2911 2,963 3,052 38,124 3,198 3,273

Interest Revenue
Total Revenue
New Budget Authority
Outlays
End of Year Fund Balance ..

«Tax revenue is net of refunds.

Data. for 1993-1995 re] actual tax revenues transferred to the Trust Fund as tabulated by the CBO using IRS data. The data for 1993—
1995 also report.actual New Budget Authority and Outlays. However, the 1993-1995 figures reported for interest revenue, total revenue, and
End of Year Fund Balance correspond to CBO projections. As a result, for 1993-1995, the entry for Total Revenue is not the sum of Tax Reve-
nue and Interest Revenue, nor is the End of Year Fund Balance equal to the sum of.the prior year’s fund balance plus tax revenue and interest.
revenue less outlays. Because the IRS must tabulate actual receipts after the close of the fiscal year, actual year end Trust Fund balances are
never reported, rather adjustments are made to future years’ projected Trust Fund balances and interest income. i

>CBO projections based on March 1996 CBO baseline included projected inflation. Tax revenue is net of refunds,

Source: Congressional Budget Office.

743 684 621 657 647 685 736 793 839 901
2,735 2,691 «2,813 3,499 3,558 = 3,648 «8,788 «93,917 4,037 4,174.
2,875 2,975 2,875 2,775 4,800 4,940 5,077 5,220 5,365 5,516
1,916. 3,364. 3,179 3,053 3,069 2,920 2,909 2,993 3,068 3,143

10,617 9,945 9,579 10,024 10,514 11,242 12,121 13,044 14,014 15,044



24
accessories for those vehicles, and a 6-cents-per-gallon excise tax
was imposed on lubricating oil.
Manufacturers’ excise tax on certain tires
Imposition of tax

A graduated excise tax is imposed on the sale by a manufacturer
(or importer) of tires designed for use on heavy highway vehicles
(sec. 4071). The tire tax rates are as follows:

Tire weight Tax rate

Not more than 40 bbs .... . No tax.
More than 40 Ibs., but not more 15 cents/Ib. in excess of 40 Ibs.
than 70 lbs.
More than 70 Ibs., but not more $4.50 plus 30 cents/lb. in excess
than 90 Ibs. of 70 lbs.
More than 90 bbs ...... $11.50 plus 50 cents/lb. in ex-
cess. of 90 lbs.

: No tax is imposed on the recapping of a tire that previously has
been subject to tax. Tires of extruded tiring with internal wire fas-
tening also are exempt.

History of tax .

Before enactment of the 1982 highway legislation, the tire tax
was imposed on all tires, regardless of weight, at a rate of 9.75
cents per pound (4.875 cents per pound on nonhighway tires), and
inner tubes were taxed at 9 cents per pound. The 1982 legislation
also repealed a tax on tread rubber (5 cents per pound on tread
rubber for use in recapping or retreading highway-type tires).

Heavy vehicle annual use tax
Imposition of tax and exemptions

An annual use tax is imposed on highway vehicles having a tax-
able gross weight of 55,000 pounds or more (sec. 4481). The tax
rate is $100 per year, plus $22 for each 1,000 pounds in excess of
55,000 pounds. The maximum tax, imposed on vehicles having a
taxable gross weight over 75,000 pounds, is $550 per year. The tax-
able year for this tax begins on July 1 of each year; the person in
whose name the vehicle is registered under State law is liable for
payment.

ighway authorization’ statutes include provisions to assist in
achieving compliance with this tax. Under those provisions, States
that do not verify tax payment when registering heavy vehicles
may lose a portion of Federal Highway Trust Fund monies other-
wise allocated to them.

Heavy highway vehicles owned and operated by the Federal Gov-
ernment and State and local governments are exempt from the tax.
Private transit buses which satisfy a passenger fare revenue test
also are exempt as are otherwise taxable trucks which are reason-
‘ably expected to be used on the highways for fewer than 5,000
miles (7,500 miles for agricultural vehicles) during a year. A special
25-percent rate reduction is provided for vehicles exclusively used



JOINT COMMITTEE ON TAXATION
104TH ConGREss, 2p SEssION

SENATE HOUSE
WILLIAM V. ROTH, Jr., Delaware, BILL ARCHER, Texas, Vice Chairman
Chairman PHILIP M. CRANE, Illinois
JOHN H. CHAFEE, Rhode Island WILLIAM M. THOMAS, California
ORRIN G. HATCH, Utah SAM M. GIBBONS, Florida

DANIEL PATRICK MOYNIHAN, New York CHARLES B. RANGEL, New York
MAX BAUCUS, Montana
KENNETH J. Kizs, Chief of Staff
Mary M. Scunarrr, Deputy Chief of Staff (Law)
BERNARD A. ScuMIT?, Deputy Chief of Staff (Revenue Analysis)

ab

ey



Figure 3.-- Federal Government Outlays for Transportation, Fiscal 1995
(millions of dollars)

‘Mass transit
34473

Water transportation
$3,843

Railroad
$1,035
TOME] Miscetlancous
$343

Highway transportation
$19,788

‘Air transportation
$10,020

Source: Office of Management and Budget, Budget of the United States Government, Fiscal Year 1997, Analytical Perspectives

9


78

B. Impact of Excise Tax and Expenditure Program
Structure on the Role of Congress Generally and on the
Jurisdiction of Congressional Committees Specifically

In general

As discussed in the preceding parts of this document, most
present Federal transportation expenditure programs are adminis-
tered through Trust Funds to which revenues from excise taxes im-
posed on the transportation sector using the goods and services
provided through the Trust Fund programs are dedicated. Use of
this structure generally can be traced to periods when the affected
industry was at a stage of development which was judged to re-
quire a significant infusion of Federal resources. For example, the
Highway Trust Fund was established in 1956 to promote develop-
ment of an efficient national highway transportation system (e.g.,
the interstate system). Other Trust Fund programs have been es-
tablished because of similar desires to coordinate more closely Fed-
eral spending and expenditure policy for a transportation sector, in
most cases because of a perceived need for an increased infusion
of Federal resources. In general, before these special needs were
identified for a transportation sector, at least some Federal pro-
grams funded with General Fund appropriations existed for the
sector, although in some cases (eg, highway construction and
maintenance) the respective roles of the Federal Government and
State and local governments were considerably different than they
are today.

The various transportation sectors have changed significantly in
many cases from what existed when the Trust Fund/dedicated ex-
cise tax system was adopted. For example, construction of the
Interstate Highway System is now complete, and Highway Trust
Fund expenditure programs focus more on highway maintenance
and alternative transportation means, such as mass transit, which
are seen as reducing highway use burdens and addressing environ-
mental concerns or broader societal needs (e.g., transportation for
lower-income urban residents). Similarly, the Airport Trust Fund
was created in 1970 when air travel equipment, facilities, and serv-
ices, as well as the degree and type of Government regulation of
that sector, were very different than they are today.

In addition to changes in the transportation sectors benefiting
from these Federal programs, the Federal budgetary situation has
changed during in recent years. Since 1982, Federal Government
deficit spending has become a major concern. Attempts to control
deficit spending have led to the enactment of laws that have af-
fected in major ways the operation and funding of transportation
Trust Funds created before these deficit concerns arose. While the
Trust Fund structure and revenue dedication remain in place, the
deficit control measures that have been enacted have resulted in
the transportation Trust Funds becoming in budgetary substance,
if not in legal form, more similar to General Fund expenditure pro-
grams. Sector-specific excise taxes continue to be imposed with the
revenues being dedicated to Trust Funds, and program expendi-
tures from the Trust Funds are authorized, but overall Federal def-
icit reduction spending targets set actual transportation expendi-
ture levels through the budget process. Stated differently, Trust



14

establishment of the Airport Trust Fund in 1970, a 5-percent tax
rate was imposed beginning in 1960, with revenues going to the
General Fund. (Federal aviation expenditures were financed en-
tirely from the General Fund during that period.)

International air passenger departure tax

Imposition and tax base

A $6 per passenger excise tax is imposed on international air
transportation which begins in the United States (sec. 4261(c)). The
$6 tax applies to commercial air passenger transportation from the
United States which is exempt from all or a part of the 10-percent
domestic air passenger excise tax. Thus, transportation between
the continental United States and Alaska or Hawaii and between
Alaska and Hawaii is subject to this tax (because the international
portion of the flight is exempt from the 10-percent tax) as is trans-
portation from the United States to a foreign country. This tax ap-
plies regardless of whether the transportation is purchased within
the United States (ie., the tax applies to a return segment from
the United States of “round trip” travel originatirig and énding in
a foreign country even if payment occurs within the foreign coun-
try).

History of tax

The international air passenger transportation tax was first im-
posed, at a $3 per passenger rate, by the 1970 legislation that es-
tablished the Airport Trust Fund. Except for the period from Octo-
ber 1, 1980 through August 31, 1982, when the tax expired, the tax
rate was not changed until 1989, when it was increased to $6 per
passenger beginning on January 1, 1990. This tax expired after De-
cember 31, 1995, and was reinstated by the 1996 Act for the period
August 27, 1996, through December 31, 1996.

Domestic air transportation freight excise tax

Imposition and tax base

A 6.25-percent excise tax is imposed on air transportation of
freight within the United States (sec. 4271). Like the domestic air
passenger transportation excise tax, this tax applies regardless of
whether payment for the transportation is made within the United
States; however, the tax does not apply unless the transportation
both begins and ends within the United States. Transportation is
treated as beginning and ending within the United States if both
the point of origination and the final destination point are within
the United States (i.e., layover time outside the United States and
movement of aircraft in deadhead service are treated as part of
taxable transportation).

Air freight transportation between the continental United States
and Alaska or Hawaii and between Alaska and Hawaii is partially
exempt from this tax under special rules similar to those that
apply under the domestic air passenger transportation excise tax.
Transportation of freight within either Alaska or Hawaii is fully
taxable, even when a portion of the transportation occurs over
international waters or Canada.



73

Significant contract research was conducted 3
areas: ~ mars . -

1. Estimate the travel and operating weight distributi
different vehicle classes; bole

2. Improve pavement cost allocation methods to better reflect
the “contribution. of di i 2 i i
ferent weights to pavement deterioration;

“Life-cycle cost analysis for pavement cost allocation and
the implications for highway cost responsibility of improved in-
vestment decisions based upon life cycle cost analysis;

4, Improvements to bridge cost allocation methods;

5. Allocation of costs for various highway design features;

6. Research on external and other non-agency costs for high-
way cost allocation including air pollution, safety, congestion,
and noise; .

7. Multimodal cost allocation techniques including the devel-
opment of a philosophy and procedures to allocate transit costs
among different highway users;

8. Highway cost allocation/pricing for all levels of govern-
ment; - _

9. Policy framework for cost allocation.

Previous Federal and State highway cost allocation studies have
focused considerable attention on analyzing the responsibility of
different vehicle classes for pavement, bridge, and other infrastruc-
ture-related costs borne by highway agencies. Methods for attrib-
uting costs to different vehicle classes have evolved over time, but
generally have followed a “cost-occasioned” philosophy. Engineering
and economic studies have been conducted to estimate the extent
to which various vehicle classes contribute to highway costs be-
cause of their weight, axle loadings, width, length, or other phys-
ical or operational characteristics. For instance, a vast body of re-
search has demonstrated the relationship between axle loads and
pavement wear. Heavy axle loadings contribute significantly to
costs for rehabilitating and reconstructing pavements, and antici-
pated axle loadings also are major factors influencing the design
thickness of new pavements. Likewise, research has been con-
ducted to allow costs for other types of highway improvements to
be assigned to different vehicle classes based on characteristics of
each vehicle class that influence costs.

The current HCAS will continue to use a cost-occasioned ap-
proach in analyzing highway agency costs. Federal costs will con-
sist of obligations from both the Highway and Mass Transit Ac-
counts of the Highway Trust Fund, which are supported by Federal
highway user fees including (1) fuel taxes; (2) a 12% vehicle excise
tax on the sale of new trucks over certain weights, (3) a Federal
tire tax at various rates graduated by tire weight, and (4) an an-
nual Heavy Vehicle Use Tax on vehicles with registered weights of
55,000 pounds or more. Improvements are being made to many of
the specific procedures used in the 1982 study to take advantage
of improved data on characteristics of travel by different vehicle
classes and improved understanding of factors responsible for dif-
ferent highway improvement costs.

An important new element of the current cost allocation study is
the allocation of mass transit costs paid from the Highway Trust



31

D. Rail Transportation Excise Tax

There is no Federal rail transportation trust fund. Instead, rail-
roads generally ‘construct and maintain railways using their own
capital. Thus, there are no Federal rail transportation trust fund
excise taxes. Diesel motor fuel used i subject, however,
to a General Fund excise ‘tax of 5.55 ce pe allon (sec. 4041).
After September 30, 1999, this rate is sche ruled to decline to 4.3
cents per gallon. The 4.3-cents-per-gallon rate is permanent.

Rail diesel fuel first became subject to tax in 1990 budget rec-
onciliation legislation. The 1990 rail diesel fuel excise tax was im-
posed as part of a broader imposition of a 2.5-cents-per-gallon defi-

. cit reduction rate that also. applied to highway transportation
motor fuels. When enacted, the 1990 deficit’ reduction rate was
scheduled to expire after September 30, 1995. In 1993 budget rec-
onciliation legislation, the 1990 rate on rail diesel fuel was ex:
tended from 1995 through September 80, 1999, at a reduced rate
of 1.25 cents per gallon.

The permanent 4.3-cents-per-gallon rate also was imposed in
1993 as part of a broader General Fund transportation motor fuels
excise tax applicable on a permanent basis to all transportation
sectors: rail, highway, aviation, inland and intracoastal waterway,
and recreational motorboat.

4°This tax, as applied to highway transportation fuels, also was extended through September
30, 1999, in'the same legislation. In the case of highway transportation motor fuels, the full
2.5-cents-per-gallon rate continues to be imposed throughout the extension period, but revenues
from the tax are dedicated to the Highway Trust Fund.



avy

108

have been some minor changes in the fee structure listed in the
GAO study, especially in regard to some Coast Guard fees.

Aviation ®

The majority of federal aviation activities are funded through the
airport and airway trust fund. Consequently, most of the taxes im-
posed on the aviation sector are related to the trust fund. There are
a number of additional fees and taxes on this sector that could
meet your criteria:

Immigration and Naturalization Service (INS) user fee. Air-
line passengers traveling between the United States and other
nations are subject to a $6.00 fee for INS services at airports.
The fee is levied as part of each international airline ticket, In
1994, this fee raised $261.0 million.

Customs user fee. Airline passengers traveling between the
United States and other nations are subject to a $6.50 fee for
customs services. The fee is levied as part of each international
airline ticket. In 1994, this fee raised $281.0 million. _

Animal and Plant Health Inspection (APHIS) user fee. Air-
line passengers traveling between the United States and other
nations are subject to a $1.45 fee for APHIS. The inspection is
carried out by the USDA. The fee is levied as part of each
international airline ticket. In 1994, this fee raised $59.0 mil-
on,

The largest fee levied in aviation, not associated with the trust
fund, is the passenger facility charge (PFC). PFCs, formerly re-
ferred to as airport head taxes, are levied on airline passengers for
the use of domestic airports. Passengers can be charged up to $3.00
for the use of each airport per visit. The PFC is included as part
of an airline ticket. On trips with multiple stops, passengers can
be charged a maximum of $12.00 per round trip ticket. PFCs are
not a federal tax. An exception to existing Federal law was re-
quired, however, to allow airports to charge PFCs. The funds col-
lected are disbursed to the charging airport and airports are typi-
cally state, local, or regional entities. Fe: eral aj proval, by the FAA,
is required before an airport can levy a PFC. In 1994, PFCs raised
a total of $852.0 million.

The Federal Aviation Administration (FAA) imposes fees for ac-
tivities such as aircraft registration. A registration certificate costs
no more than $10.00 irrespective of the type of aircraft involved.
As a result, this type of fee could be viewed as administrative in
nature and might not fit your definition.

The air package express industry, e.g. Federal Express, UPS, pay
a special “merchandise processing fee (MPF)” to the Customs Serv-
ice to pay for dedicated staff at airports used by these firms sorting
facilities. This fee structure, negotiated by Customs and the pack-
age express industry in the late 1980s, provides the agency with re-
imbursement for Customs inspectors working the peak overnight
periods when the package express carriers perform most of their
Rackage sorting and trans-shipment. Customs inspectors workin;

luring a normal workday are typically provided to air cargo and

For additional information on this subject contact John W. Fischer at 77766. Much of the
discussion in this section is based on information provided by the Air Transport Association
(ATA) and the Aircraft Owners and Pilots Association (AOPA).



38

C. Water Transportation Trust Funds

1. Inland Waterways Trust Fund

The Inland Waterways Trust Fund was established in 1978 to
provide a dedicated funding source for navigation construction and
rehabilitation expenditures on a designated system of inland and
intracoastal waterways, including the Mississippi River upstream
from Baton Rouge, the Mississippi River’s tributaries, the Gulf of
Mexico and Atlantic Intracoastal Waterways, and pursuant to later
legislation, the Tennessee-Tombigbee Waterway.5!

In specified cases, 50 percent of the costs of certain projects must
be paid from the General Fund. These are construction of locks and
dams listed in the Water Resources Development Act of 1986, in-
cluding the inland navigation portion of the Mississippi River-Gulf
Outlet project (canal lock and connecting channels).

2. Harbor Maintenance Trust Fund

The Harbor Maintenance Trust Fund (the “Harbor Trust Fund”)
was established in the Water Resources Development Act of 1986,
effective on April 1, 1987 (Code sec. 9505). The most recent amend-
ments to the Harbor Trust Fund were enacted in the Water Re-
sources Development Act of 1996,52 which reauthorized, and slight-
ly expanded, the expenditure programs of the Trust Fund. In addi-
tion to revenues equivalent to the harbor maintenance excise tax,
the Harbor Trust Fund receives revenues from the United States
portion of any Saint Lawrence Seaway tolls that may be imposed.

Authorized Harbor Trust Fund expenditure programs are:

(1) The commercial navigation share of operation and main-
tenance costs of all harbors and inland harbors within the
United States; 58

(2) Costs attributable to the portions of the Saint Lawrence
Seaway that are operated and maintained by the Saint Law-
rence way Development Corporation;

(3) Payments of rebates and tolls or charges of the United
States portion of the Saint Lawrence Seaway to payors thereof;

ani

(4) Up to $5 million per fiscal year of Harbor Trust Fund tax
administrative costs incurred by the Department of the Treas-
ury, the Army Corps of Engineers, and the Department of
Commerce.

Examples of approved navigation operation and maintenance ex-
penses include harbor dredging, hazardous waste removal, con-
struction and operation and maintenance of storage facilities for
dredged materials, and restoration of adjacent land areas affected
by waterway operation and maintenance activities.

3. Aquatic Resources Trust Fund

The Aquatic Resources Trust Fund (the “Aquatic Trust Fund”) is
a dedicated funding source for Federal-State boating safety, sport

51The Inland Waterways Trust Fund statute was placed in the internal Revenue Code in
1986 legislation, effective on January 1, 1987 (Code sec. 9506).

S2P.L. 104-303, si on October 12, 1996.

53 As enacted in 1986, there was a limit of 40 percent of such costs allowed from the Harbor
‘Trust Fund. Ned changed to 100 percent in 1990 (sec. 316 of the Water Resources Develop-
‘ment .



Table 9.—Revenue and Outlays for the Aquatic Resources Trust Fund, Fiscal Years 1996-2002

[Millions of dollars]*
Year 1996 1997 1998 1989 2000 2001 2002

‘Tax Revenue:
Motor fuels 214 220 226 232 238 244 251
Sport fishing equipment 101 104 107 110 113 116 120
Import duties .... 27 28 30 31 33 35 36
Total Tax Revenue 342 352 363 373 384 395 407
Budget Authority . 344 383 390 408 418 432 447
Outlays From Prior Years’ Budget Authority 176 187 218 259 271 277 288
Total Outlays .... 281 312 339 383 398 418 427

*CBO projections based on March 1996 CBO baseline including projected inflation. Actual revenue for fiscal year 1996 is to be reported No-

vember 15, 1996.
Source: Congressional Budget Office.


34

of land for, or work necessary to construct, pads suitable
for aircraft deicing (subject to certain limitations).

(e) Airport-related equipment—Airport security equip-
ment required by Department of Transportation regula-
tions, snow removal equipment, noise suppressing equip-
ment, navigation aids, and safety equipment required for
airport certification; also includes construction or purchase
of capital equipment necessary for compliance by an air-
port with the Americans with Disabilities Act, the Clean
Air Act, or the Federal Water Pollution Control Act, other
than capital equipment which would primarily benefit a
revenue-producing area of the airport used by a nonaero-
nautical business.

(f) Airport noise compatibility programs Includes
sound-proofing of public ‘Suildings; local governmental
units are eligible for project grants as well as airports.

(2) Facilities and Equipment Program (“F&E”).—Costs of ac-
quiring, establishing, and improving air navigation facilities.

(3) Research, Engineering, Development, and Demonstration
Program (“R&D”).—Projects in connection with FAA research
and development activities.

(4) Operations and Maintenance Programs (“O&M”).—Ex-
penses of flight checks and operations and maintenance of air
navigation facilities, including air traffic control; services pro-
vided under international agreements relating to the U.S.
share of joint provision of air navigation services; weather re-
porting services provided to the FAA by the National Oceanic
and Atmospheric Administration.

(5) Small Community Air Service Program.—Contract au-
thority for payments to ensure that eligible localities receiving
airline service at the time of deregulation continue to have air-
line service.

(6) Vocational Technical Institutions —Grants to up to four
vocational technical institutions for the acquisition of facilities
for the advanced training of maintenance technicians for air
carrier aircraft.

(1) Airway Science Curriculum Grants.—Grants for higher
education airway science study programs, including equipment,
buildings, and associated facilities.

(8) Civil Aircraft Security Research and Development.—
Grants relating to technologies and procedures to counteract
terrorist activities against civil aviation.



66

F. Total Federal Transportation-Related Outlays Compared
to Trust Fund Outlays

In fiscal year 1995, Federal outlays for transportation, both out-
lays charged to a Trust Fund and those outlays charged to the
General Fund, totaled $39.4 billion.67 Figure 3 shows the distribu-
tion of those outlays by type of transportation.6§ Figure 3 shows
that approximately 50 percent of Federal transportation outlays go
to highway transportation, 25 percent to air transportation, 11 per-
cent to mass transit, 10 percent to water transportation, and three
percent to rail transportation. Figure 3 may understate Federal
outlays related to water transportation. Figure 3 is based on the
outlays reported by the Office of Management and Budget (“OMB”)
by function.6° The OMB reports under a different function certain
expenditures of the Army Corps of Engineers. Some of these ex-
penditures may serve multiple purposes. For example, improve-
ments to locks and dams may improve both flood control and in-
land waterway shipping.7°

As reported in Tables 4-8, in Fiscal Year 1995, Federal outlays
for transportation from Trust Funds totaled $30.6 billion. Figure 4
shows the distribution of those outlays by type of transportation.
Figure 4 shows that approximately 64 percent of Trust Fund out-
lays go to highway transportation, 24 percent to air transportation,
10 percent to mass transit, and two percent to water transpor-
tation. Approximately 78 percent of total Federal transportation
outlays in Fiscal Year 1995 were Trust Fund related. However, the
distribution of Trust Fund based outlays.as a percentage of total
outlays differs by transportation sector. Figure 5 compares total
outlays to Trust Fund outlays for each mode of transportation. Fig-
ure 5 shows that for Fiscal Year 1995, 98 percent of highway out-
lays were outlays from the Highway Trust Fund; 74 percent of air
transportation outlays were from the Airport and Always Trust
Fund; 71 percent of mass transit outlays were from the Highway
Trust Fund; and 16 percent of water transportation outlays were
from the Harbor Maintenance and Inland Waterways Trust Funds.

$7 Office of Management and Budget, Executive Office of the President, Budget of the United
States Government, Fiscal Year 1997, Analytical Perspectives, p. 246.

© [bid., pp. 245-246. In constructing Figure 3, certain outlays and offsetting receipts are not
reported. In particular, the Figure does not allocate either the $37 million in outlays charged
to regulation of “ground transportation” or the $36 million in offsetting receipts collected from
“ground transportation” against any of the highway, mass transit, or railroad categories. Nor
does the Figure include the $47 million in receipts net of outlays of the Panama Canal Commis-
sion, the $64 million in water transportation offsetting receipts, or the $42 million in miscellane-
ous offsetting receipts.

69'Transportation is Function Code 400.

70The U.S. Army Corps of Engineers (“USACE”) estimates that, in, fiscal 1995, the USACE
spent $87 million on inland waterways construction projects out of the USACE Construction,
General Account; $277 million on navigation construction projects out the USACE Construction,
General Account; and $490 million on operating and maintaining inland waterways out of the
USACE Operations and Maintenance Account.



104

other transportation activities without additional charges. As part
of the original agreement the package express carriers agreed to
pay 100% of the inspectors wages, 30% of their fringe benefits, and
15% of the Customs Service administrative/overhead costs attrib-
utable to the inspectors. In addition, the carriers pay a fee on the
number and value of items subject to customs inspection.

The 5 largest package express carriers believe that this special
situation costs them an additional $10.0 million a year. A fee not
paid by their daytime competitors. They are also concerned that
Customs now views the MPF as something of a “cash cow,” and
that it has no incentive to control its own costs relative to this ac-
tivity, in part because Treasury removed the original cap on MPF
contributions during a year. Finally, the package express carriers
are concerned that their major competitor, the U.S. Postal Service
(USPS), is not subject to the same cost structure, for a variety of
reasons.

Additional Issues”

All DOT agencies charge some fee for administrative activities,
i.e. copies of licenses and freedom of information (FOI) requests.
For the most part these fees are relatively small. There are in-
stances, however, where the cumulative effect of multiple small
fees on something like a large FOI request can become quite sig-
nificant. It should also be noted that these administrative fees are
not typically set at full cost recovery levels. Hence, the provision
of administrative assistance tends to add costs to the affected agen-

cy.

Almost every group contacted as part of this request alluded to
the isstie of costs borne by transportation operators as part of com-
pliance with U.S. Department of Transportation regulations. For
example, the FAA does not impose any direct fees for aircraft safe-
ty and pilot licensing activities, Aviation system users, however,
are required to keep detailed aircraft maintenance and personnel
qualification records and can be fined heavily for failure to comply
with these requirements. Many of these issues would come under
the heading of regulatory reform. Regulatory reform was a major
issue in the 104th Congress, as you are well aware. The one area
in which this discussion may fit your criteria is on the issue of
fines. Several observers have suggested that fines, levied in the ad-
ministrative context, could be viewed as proxies for user fees in
some instances. The rationale behind this argument alludes to the
ability of the respective agencies to impose a wide range of pen-
alties and a sense that the penalty does not always fit the offense.

In our discussions with various transportation groups a number
of special taxation issues dealing with various provisions of the IRS
Code were raised. It is our sense that these are outside the criteria
of this memorandum. Should you desire further information about
these issues or any other issue raised in this memorandum, please
contact us at 77766.

7For additional information on this section contact John W. Fischer at 77766.



44

B. Budget Act Scorekeeping Rules for Transportation Excise
Taxes and Trust Fund Expenditures

The Budget Enforcement Act of 1990 and related legislation (col-
lectively the “1990 Budget Act”) include two provisions that are
central to the operation of the Federal transportation Trust Fund
programs: an assumption that dedicated excise taxes are imposed
permanently (even if statutorily they are scheduled to expire) and
classification of Trust Fund spending as discretionary spending
subject to aggregate annual caps that apply to all discretionary
spending (both for transportation and other programs).

The effect of these rules is that under the 1990 Budget Act, there
is no budget scorekeeping link between the revenues raised by the
transportation excise taxes and the spending from the transpor-
tation Trust Funds. The Trust Fund balances similarly have no ef-
fect in a broader budgetary sense on the amount that can be obli-
gated for transportation program expenditures.® If Trust Fund ex-
cise taxes and programs are extended and reauthorized before expi-
ration of. the taxes, generally there is neither a revenue nor a
spending budget score from the legislation. Further, because trans-
portation Trust Fund spending is classified as discretionary spend-
ing, if a dedicated excise tax is reimposed after the tax has expired
(and has been removed from the CBO revenue baseline), the result-
ing revenue increases may be scored under the Budget Act to offset
the revenue loss from enactment of other tax or direct spending
provisions without affecting the Trust Fund to which the revenues
are dedicated.

Treatment of dedicated excise taxes under CBO revenue base-
line

The 1990 Budget Act provides that excise taxes that are dedi-
cated to Trust Funds are assumed permanent for budget
scorekeeping purposes. This means that revenues from the excise
taxes are automatically included each year in the Congressional
Budget Office (“CBO”) and Office of Management and Budget fore-
cast of Government receipts (the “revenue baseline”), even though
the taxes may be scheduled to expire before the end of the baseline
period. The CBO issues this annual baseline as part of its overall
economic forecast each February; the forecast is used in developing
the Congressional budget resolution. Both revenue and spending
estimates are determined relative to that forecast (and the budget
resolution) throughout the year.®4 As a result of their inclusion in
the revenue baseline, extensions of Trust Fund excise taxes gen-
erally are not scored as raising revenues when the extensions are
enacted. On the other hand, reductions in those excise taxes (even
as part of an extension of the taxes), are scored as losing revenue.

The following examples illustrate the operation of these budget
scorekeeping rules.

68 Unrelated to this general budgetary result, some transportation Trust Funds have internal
anti-deficit provisions that limit amounts that can be authorized and appropriated from the
Trust Funds.

The CBO typically issues an update of its February forecast in August; however, because
the budget resolution is based on the February baseline, revenue estimates continue to be deter-
mined by reference to the February baseline throughout the year.



86

makers should look at short-run marginal costs or long-run mar-
ginal costs. Generally, short-run marginal costs would reflect re-
source costs when investment is fixed and long-run marginal costs
would reflect resource costs assuming the level of capital invest-
ment can vary. That is, in the case of highways, short-run marginal
costs would involve the costs of maintenance of an existing high-
way (e.g., resurfacing an existing road surface that has deterio-
rated from use), while long-run resource costs would involve costs
such as those associated with adding an additional lane to the
highway.

Marginal costs often will vary by taxpayers. For example, certain
harbors may be more costly to dredge and maintain than others.
Imposing a tax to recoup marginal costs would imply differential
taxes for different harbor users. Such a tax may Wolate the uni-
formity clause of the Constitution, but, even if it did not, a tax sys-
tem with different rates of tax for many different users would be
more complex and more costly to administer than the current
transportation excise taxes. In practice, it may be difficult to dis-
cern marginal costs. Moreover, some might argue that such taxes
are unfair, in that they impose different burdens on otherwise simi-
larly situated taxpayers. Modifications to address concerns of ad-
ministrability and fairness may dilute the gains of economic effi-
ciency that economists argue flow from marginal cost pricing. If a
modification took the form of charging all air passengers the aver-
age cost of providing air traffic control services, some taxpayers
might pay a tax greater than their marginal cost (implying ineffi-
cient underutilization of resources) and other taxpayers may pay a
tax less than their marginal cost (implying inefficient overutiliza-
tion of resources). Design of transportation excise taxes to incor-
porate the efficiency properties of marginal cost pricing involves
pradeotts between the goals of efficiency, equity, and administra-

ility.

Cost allocation and transportation excise tax efficiency

Cost allocation as a basis of transportation excise tax design also
may create an economically inefficient tax structure. The provision
of transportation services often requires substantial capital invest-
ments. Fixed costs tend to be large compared with marginal costs.
For example, the construction oF a bridge across the Mississippi
River requires a substantial fixed capital investment. The addi-
tional resource costs (wear and tear) imposed by one additional
automobile on an uncongested bridge, once the bridge has been
built, is quite small in comparison. This means that the provision
of many transportation services is often characterized by “econo-
mies of scale.” Provision of a good or service is said to be character-
ized by economies of scale when the average cost of providing the
good or service exceeds the marginal cost of providing that good or
service. When this occurs, the average cost of providing the good
or service is falling with each additional unit of the good or service
provided. As discussed above, economists proffer setting prices or
taxes equal to marginal cost to obtain economically efficient out-
comes. However, in the presence of substantial economies of scale,
the marginal cost is less than the average cost of providing the
transportation service and the revenues collected from equating



7

subject to aggregate annual caps that apply to all discretionary
spending (both for transportation and other programs).

The effect of these rules is that under the 1990 Budget Act, there
is no budget scorekeeping link between the revenues raised by the
transportation excise taxes and the spending from the transpor-
tation Trust Funds. The Trust Fund balances similarly have no ef-
fect in a broader budgetary sense on the amount that can be obli-
gated for transportation program expenditures. If Trust Fund ex-
cise taxes and programs are extended and reauthorized before expi-
ration of the taxes, there is neither a revenue nor a spending budg-
et score from the legislation. Further, because transportation Trust
Fund spending is classified as discretionary spending, if a dedi-
cated excise tax is reimposed after the tax has expired (and has
been removed from the CBO revenue baseline), the resulting reve-
nue increases may be scored under the Budget Act to offset the rev-
enue loss from enactment of other tax provisions without affecting
the Trust Fund to which the revenues are dedicated. senceageks

C. Status of Current Department of Transportation Aviation
and Highway Cost Allocation Studies

The goods or services subject to excise tax and rates of certain
transportation excise taxes historically have been baséd in part on
the findings of cost allocation studies by the Department of Trans-

ortation (“DOT”). Past studies have reviewed the costs expected to

e associated with expenditure programs of a transportation Trust
Fund administered by the Department and have assigned those
costs (pursuant to methodology developed by DOT) to different seg-
ments (eg, automobiles v. trucks) of the transportation sector that
will benefit from the Trust Fund programs.

The DOT last issued comprehensive cost allocation studies in
1992 (aviation) and 1982 (highway). During the past year, DOT has
been engaged in updates of the 1992 and 1982 studies. To date,
neither of the updated studies has been issued. Further, work has
been suspended on the aviation cost allocation study as of this date
because of a provision of the Federal Aviation Reauthorization Act
of 1996 which mandates the appointment of an independent com-
mission | to review both expenditure needs and funding sources for

e . :

D. Issues Relating to Transportation Excise Taxes and the
Funding of Federal Transportation Trust Fund Programs

Effect on Congressional oversight and Committee roles

Since 1956 (for highways) and 1970 (for aviation), Federal trans-
portation spending fand the financing therefor) has been provided
through Trust Funds financed with dedicated excise taxes. Pre-
viously, General Fund financing and appropriated expenditures
were used to deliver the Federal contribution. Currently, and in
large part because of spending constraints related to Congressional
budgetary decisions to.reduce Federal deficits, numerous proposals
have been advanced to modify this structure: (1) privatizing Fed-

®Unrelated to this general budgetary result, some transportation Trust Funds have internal
gnti-defiit, provisions that limit amounts that can be authorized and appropriated from the



©

v

D. Effects of Transportation Excise Taxes on the
Market for Transportation Services

Appendix A.—Present-Law Federal Trust Fund
and General. Fund Motor Fuels Excise Tax
Rates on Various Transportation Sectors (as
of November 1, 1996) .. +

Appendix B.—Present-Law Non-Motor Fuels Fed-
eral Transportation Excise Tax x Rates Gs of
November 1, 1996) ose.

Appendix C.—Certain Non-Tax Federal Fees Im-
posed on Transportation Providers (Prepared
yy the Congressional Research Service) ...........

Appendix D.—Certain Correspondence Related to
Preparation of Materials by the Staff of the
Joint Committee on Taxation one

91
97

97

98

100

105



IV. BUDGETARY TREATMENT OF ‘TRANSPORTATION
EXCISE TAX REVENUES AND TRUST FUND ~
EXPENDITURES

A. Roles of Different Congressional Committees in
Transportation Excise Taxes and Trust Fund Programs

Because most transportation excise taxes are dedicated to Trust
Fund programs, extensions and modifications of the taxes fre-
quently have been considered in conjunction with extensions and
revisions of Trust Fund expenditure programs. Viewed in their to-
tality, the excise taxes and programmatic expenditures require. ap-
proval of at least three legislative components, by at least three
committees in each House of Congress—the tax-writing committee,
one or more authorizing committees, and the appropriations com-
mittee. The tax-writing committees ensuré adequate revenues and
review Trust Fund expenditure purposes; the authorizing commit-
tees consider competing transportation needs on a detailed level;
and, the appropriations committees reconcile transportation spend-
ing needs with all other Federal spending needs. Historically, tax
provisions and expenditure authorizations generally have been en-
acted as separate titles of a single Act;57 appropriations generally
have been enacted separately as part of the annual Congressional
appropriations process.

Raising revenues

Imposition of excise taxes and other “revenue measures” is with-
in the exclusive jurisdiction of the House Committee on Ways and
Means (and the Senate Committee on Finance). Extension or, modi-
fication of existing taxes, reinstatement of expired excise taxes, and
imposition of fees and other measures which constitute revenue
measures are included within this jurisdiction. (See, Rule 1(s)(3) of
the rules of the House of Representatives.) :

Authorizing committees may impose, or may authorize executive
agencies to impose, non-tax, or true, user fees that agencies may
charge for specific services they provide. There are often disagree-
ments as to whether certain charges constitute “fees” or “taxes.”
These disagreements generally arise in one of three contexts: (1)

* determining whether there has been an unconstitutional delegation

of the taxing power;5® (2) determining whether legislation con-
stitutes a revenue measure that must originate in the House of

57The 1995 extension of the Airport Trust Fund excise taxes as part of the Balanced Budget
Act of 1995 (vetoed by President Clinton) and the temporary reimposition of those taxes as part
of the Small wee Job Protection Act of 1996 were contained in separate legislation, in part
because of the budget georekeeping rules described in Part IV.B.
58 Article I, Section 8 of the Constitution includes among the enumerated Powers of Con-
gress the “. . . Power To lay and collect Taxes, Duties, Imiposts, and Excises. . . .” Congress
is limited in its ability to delegate legislative authority to the Executive Branch.

(4)



72

B. Highway Trust Fund

The following progress report on its cost allocation work was re-
ceived from the FHwA on November 4, 1996.

STATUS OF FEDERAL HIGHWAY COST ALLOCATION STUDY

Background

The Federal Highway Administration (FHwA) is conducting a
highway cost allocation study (HCAS) to evaluate the responsibility
of different highway users for highway-related costs and assess the
extent to which fees paid by those users cover costs they occasion.
It has been 14 years since the last Federal highway cost allocation
study. A Notice published in the Federal Register on February 10,
1995 summarized the highway cost allocation study work plan and
requested comments on the study.

The HCAS is being done in conjunction with a ‘comprehensive
truck size and weight study that FHwA is conducting in coopera-
tion with other agencies within the Department of Transportation.
The cost allocation study is an essential complement to the truck
size and weight study and information developed for the cost allo-
cation study will be directly used in assessing impacts of truck size
and weight policy options. Infrastructure impacts and potential
user fee implications of truck size and weight policy options will be
estimated using analytical tools developed for the highway cost al-
location study. Estimates of external costs associated with truck
size and weight policy options will also be based on cost allocation
study results.

Study Issues

Important highway cost allocation study issues include (1) the re-
sponsibility of different vehicle classes for highway program costs
paid from the Highway Trust Fund; (2) the incidence and mag-
nitude of external costs of highway use and operation; (3) the eq-
uity of the Federal highway user fee structure; (4) allocation of
multimodal investment costs to highway users; (5) marginal costs
of highway use; (6) potential ways to improve the equity and eco-
nomic efficiency of highway user fees, and (7) highway user fee eq-
uity for all levels of government.

Activities to Date

Two workshops have been conducted in connection with the high-
way cost allocation study. A workshop in October 1994 discussed
emerging issues that should be analyzed in the highway cost allo-
cation study. Another workshop held in December 1995 reported on
the study’s status and provided an opportunity for interested
groups to comment on study issues.

The Transportation Research Board (TRB) has formed a peer re-
view committee to evaluate the technical approach being used to
address various study issues. The peer review committee, which is
made up of State transportation agency officials, academics, and
other private sector experts, has held four meetings to date. Tech-
nical subcommittees have been established to review in detail re-
search being conducted in key study areas.



81

revenues raised by the Trust Fund excise taxes, such a reclassifica-
tion of transportation program spending would raise important is-
sues related to levels of spending for other direct spending pro-
grams within the jurisdiction of the tax-writing committees (e.g.,
social security old age benefits and Medicare expenditures).

Alternatively, taking the transportation Trust Fund expenditure
programs off-budget would significantly reduce the role of the ap-
propriations committees by curtailing the requirement that they
reconcile transportation spending néeds with needs of other Fed-
eral programs, all within an aggregate permitted spending level.
Similarly, if the transportation excise tax revenues were taken off-
budget, stated deficits would increase, requiring either that the
budget committees recommend to the Congress adoption of higher
permitted deficit levels, imposition of increased taxes, or reductions
in other Federal spending

While reducing the roles of some committees, proposed changes
such as these could increase the responsibility and control over pro-
grams of other committees. For example, a Federal transportation
program provided through Federal direct (or off-budget) spending
and financed entirely with true user fees could consolidate all Con-
gressional committee oversight of the program into the current au-
thorizing committees.

Modify financing structure

A financing change from excise taxes to non-tax, or true, user
fees could eliminate the role of the House Committee on Ways and
Means and the Senate Committee on Finance in overseeing trans-
portation programs. A suggestion of such a result is seen in a June
1996 aviation funding proposal by a group of seven major commer-
cial air carriers. That proposal would have converted the present
ad valorem domestic air passenger transportation excise tax to a
system of three “user fees” imposed by the FAA in conjunction with
the Congressional authorizing committees, thereby eliminating the
role of the tax-writing committees in setting funding levels and ex-
penditure purposes for Federal aviation programs.78 If such a pro-
posal were adopted and these proposed fees were found to be true
user fees, the oversight roles of both the appropriations and tax-
writing committees could be eliminated, with the result that all
Congressional committee oversight would be vested in the authoriz-
ing committees.

This “user fee” proposal illustrates some of the complexity of the
legal and jurisdictional issues that arise when proposals are ad-
vanced to impose “fees” which in substance are tax or revenue
measures. As described above, taxes and other revenue measures
are within the exclusive jurisdiction of the tax-writing committees
and imposition of such measures must be contained in legislation
that originates in the House of Representatives. One the three pro-
posed airline “fees” was a per-mile charge set by reference to miles
that would have been flown had a passenger traveled directly from
his or her origination point to the final destination point shown on
the passenger's ticket, regardless of the actual flight route taken.

78See, “Air Traffic Control User Fees, A Proposal by the Coalition for Fair FAA Funding.”
June 7, 1996.



oe

[JOINT COMMITTEE PRINT]

PRESENT LAW AND BACKGROUND
INFORMATION ON FEDERAL
TRANSPORTATION EXCISE TAXES AND
TRUST FUND EXPENDITURE PROGRAMS
PREPARED FOR THE USE

OF THE

HOUSE COMMITTEE ON WAYS AND MEANS

By THE STAFF
of the

JOINT COMMITTEE ON TAXATION

NOVEMBER 14, 1996

U.S. GOVERNMENT PRINTING OFFICE
35-400 WASHINGTON : 1996 ICS-10-96

For sale by the U.S, Government Printing Office
‘Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-053774-6



108

4. Letter from Kenneth J. Kies to. Honorable Doris M.
Meissner, Commissioner, Immigration and Naturalization
Service, October 24, 1996

CONGRESS OF THE UNITED STATES,
JOINT COMMITTEE ON TAXATION,
Washington, DC, October 24, 1996.
Hon. Doris M. MEISSNER,
Commissioner, Immigration and Naturalization Service,
Chester A. Arthur Building, Room 7100,
425 Eye Street, N.W.,
Washington, DC.

Dear Ms. MEISSNER: Chairman Bill Archer of the House Com-
mittee on Ways and Means has appointed a bipartisan task force
of Members of that Committee to review and advise him’on excise
tax issues affecting all transportation sectors—air, highway, water,
and rail. As you may be aware, both the highway and aviation
trust fund excise taxes or programs are scheduled to expire within
the next year; future funding of the programs financed with these
taxes is dependent on action by the Committee on Ways and Means
early in the next Congress. Further, an appeal is pending of a court
decision that the harbor maintenance excise tax in part is unconsti-
tutional. By letter of October 2, 1996, Chairman Archer requested
the staff of the Joint Committee on Taxation to develop a number
of materials for use by the task force. I enclose a copy of that letter.
The Joint Committee staff has been directed to report to the Chair-
man by early November.

We are informed that the Federal Government imposes a variety
of non-tax, user fees (e.g., immigration inspection fees) on transpor-
tation providers to offset the costs of certain services provided to
them. In order to evaluate the overall Federal financial burden im-
posed on transportation providers, the Chairman has asked us to
provide a list of all such fees. We request that you supply us with
a list of all such fees imposed by your agency on transportation
providers by November 8, 1996.

Should you have questions, or desire to schedule any meetings
with my staff, you may contact H. B. Hartley at 225-7377. I appre-
ciate your cooperation in this matter.

Sincerely,
KENNETH J. KIEs.

Enclosure: Letter from Chairman Archer.



Iv

IV. BUDGETARY TREATMENT OF TRANSPORTATION EXCISE
Tax REVENUES AND TRUST FUND EXPENDITURES .....

A. Roles of Different Congressional Committees
in Transportation Excise Taxes and Trust
Fund Programs sseeeeseessaeeneaneee

B. Budget Act Scorekeeping Rules for Transpor-
tation Excise Taxes and Trust Fund Expendi-
tures ......

V. DATA ON FEDERAL TRANSPORTATION TRUST FUND
AND GENERAL FUND EXPENDITURES AND TRANSPOR-
TATION EXCISE TAX REVENUES ...........

A. Revenue from Transportation Excise Taxes ......

B. Airport and Airway Trust Fund

C. Highway Trust Fund ........cccsessessesessesseenee

D. Inland Waterways Trust Fund, Harbor Main-
tenance Trust Fund, and Aquatic Resources
Trust Fund . ae +

E. National Railroad Passenger Corporation (AM-

F. Total Federal Transportation-Related Outlays
Compared to Trust Fund Outlays ............

VI. StaTus OF CURRENT DEPARTMENT OF TRANSPOR-
TATION AVIATION AND HiGHWAY CosT ALLOCATION
STUDIES .. sussencnesnnensenseanecnsensstscsursssensesessoessceseeses

A. Airport and Airway Trust Fund .........ccssssssee
B. Highway Trust Fund ou...

VII. IssuES RELATING TO TRANSPORTATION EXCISE TAXES
AND THE PROVISION OF TRANSPORTATION SERVICES

A. Overview ..

B. Impact of Excise Tax and Expenditure &
gram Structure on the Role of Con; ngress Ge
erally and on the Jurisdiction o Congres-
sional Committees Specifically eee

C. Issues Arising in the Design of Excise Taxes
Dedicated to Trust Funds: Efficiency, Equity
and Administrability

41

Al

aT

AT

54

56

60

64

66

70

70
72

15
15

78



109

5. Letter from Kenneth J. Kies to Lieutenant General Joe N.
Ballard, Chief of Engineers, U.S. Army Corps of Engineers,
October 24, 1996

CONGRESS OF THE UNITED STATES,
JOINT COMMITTEE ON TAXATION,
Washington, DC, October 24, 1996.
Lt. Gen. JoE N. BALLARD,
Chief of Engineers, U.S. Army Corps of Engineers,
Washington, DC.

DEAR GENERAL BALLARD: Chairman Bill Archer of the House
Committee on Ways and Means has appointed a bipartisan task
force of Members of that Committee to review and advise him on
excise tax issues affecting all transportation sectors—air, highway,
water, and rail. As you are aware, both the highway and aviation
trust fund excise taxes or programs are scheduled to expire within
the next year; future funding of the programs financed with these
taxes is dependent on action by the Committee on Ways and Means
early in the next Congress. Further, an appeal is pending of a court
decision that the harbor maintenance excise tax in part is unconsti-
tutional. By letter of October 2, 1996, Chairman Archer requested
the staff of. the Joint Committee on Taxation to develop a number
of materials for use by the task force. I enclose a copy of that letter.
The Joint Committee staff has been directed to report to the Chair-
man by early November.

We are informed that the Federal Government imposes a variety
of non-tax, user fees on transportation providers to offset the costs
of certain services provided to them. In order to evaluate the over-
all Federal financial burden imposed on transportation providers,
the Chairman has asked us to provide a list of all such fees. We
request that you supply us with a list of all such fees imposed by
the forps of Engineers on transportation providers by November 8,
Should you have questions, or desire to schedule any meetings
with my staff, you may contact H.B. Hartley at 225-7377. I appre-
ciate your cooperation in this matter.

Sincerely,
KENNETH J. Kgs.

Enclosure: Letter from Chairman Archer.

ce)



29

History of taxes

Recreational motorboat diesel fuel was subject to tax from 1993
until enactment of the Small Business Job Protection Act of 1996.
The tax rates were enacted as part of 1993 budget reconciliation
legislation as a revenue offset for repeal of the excise tax on luxury
boats. The temporary suspension was enacted in response to re-
ports that marine fuels dealers were declining to stock undyed (tax-
able) diesel fuel in many instances because the predominate cus-
tomer demand was in commercial shipping. Diesel fuel used in
commercial shipping is not subject to tax; thus, most commercial
boats use dyed diesel fuel. That 1996 legislation requested the
Treasury Department to study alternative methods of imposing the
recreational motorboat diesel fuel excise tax (while still achieving
substantial compliance) and to report to Congress April 1, 1997.42

5. Water transportation passenger excise tax

A $3 per passenger retail excise tax is imposed on “covered voy-
ages” of commercial vessels (sec. 4471). A covered voyage is defined
generally as any voyage during which passengers embark or dis-
embark the vessel in the United States and (1) which extends for
one or more nights on a passenger vessel having berth or stateroom
accommodations for more than 16 passengers, or (2) on which pas-
sengers may engage in gambling aboard the vessel while beyond
the territorial waters of the United States. Voyages between two
United States ports that last fewer than 12 hours are exempt from
the tax. The transportation provider is liable for payment of the
tax.

The water transportation passenger excise tax was enacted in
1989 and is permanent. Revenues from the tax are retained in the
General Fund. .

6. General Fund water transportation motor fuels excise tax

Like motor fuels used in highway, air, and rail transportation,
fuels used in water transportation that is subject to another fuels
excise tax generally are subject to an “add-on” 4.3-cents-per-gallon
permanent General Fund transportation motor fuels excise tax
(secs. 4041, 4042, and 4081). The 4.3-cents-per-gallon excise tax is -
imposed and collected in the same manner as the underlying fuels
tax to which it is added.

Table 2, below, summarizes the tax rates applicable to water
transportation fuels.

“2A complete discussion of the rules governing imposition and collection of the gasoline and
diesel fuel excise taxes is contained in Part IIB. on the highway transportation excise taxes.



88

in the provision of transportation services. For example, by increas-
ing motor fuels taxes to reflect the negative externalities of conges-
tion and pollution, the price of motor faels would rise, discouraging
some automobile use or encouraging the purchase of more fuel-effi-
cient automobiles. The reduction in automobile use would reduce
pollution and congestion, which could create a more socially ‘effi-
cient outcome.

As was discussed in the case of efficiency, in the absence of
externalities, fully efficient taxes that attempt to recoup external
social costs may differ by region. For example, congestion of air
traffic facilities is more acute along some air corridors and at some
airports than at others. Highway congestion generally is an urban
problem not a rural problem, nor is it equally severe in all urban
areas. The theoretically exact tax would have to determine dif-
ferent external costs for different regions. A tax that precisely at-
tempts to recoup such differences will be more costly to administer
than a uniform tax and could raise Constitutional issues under the
uniformity clause. As noted above, concerns about administrative
costs and fairness may require tradeoffs with an efficiency goal
that incorporates external costs.

Equity and transportation excise taxes

Equity involves an assessment of the “fairness” of a tax. To de-
termine fairness it is necessary to look beyond the statutory inci-
dence of a tax to its economic incidence, or market effect. Gen-
erally, two standards are applied: horizontal equity and vertical eq-
uity. In addition, some suggest that the benefit principle as an eq-
uitable basis of taxation and others suggest cost recovery or cost
allocation as an equitable basis of taxation.

Horizontal equity and transportation excise taxes

Horizontal equity looks to whether equivalently situated individ-
uals are treated equivalently. An issue in applying the notion of
horizontal equity in the context of transportation excise taxes is
how broadly to interpret the concept of “equivalently situated indi-
viduals.” For example, one could argue that the current highway
diesel fuel excise tax is horizontally equitable because all providers
of truck transportation pay the same rate of tax per gallon of diesel
fuel. Alternatively, one might argue that the current excise tax is
horizontally inequitable because those taxpayers providing truck
transportation services with modern, more fuel efficient equipment
pay less tax per mile of highway service provided than do those
taxpayers providing truck transportation services with less fuel ef-
ficient equipment. In addition, one might ask whether in applying
the standard of horizontal equity one should confine the analysis
to truck transport providers or look more broadly at all shippers of
freight and include rail, barge, and air freight services as well.

Vertical equity and transportation excise taxes

Vertical equity involves the extent to which individuals in dif-
ferent economic circumstances, frequently measured by reference to
individuals’ incomes or other measures of economic well-being, are
treated differently. It may not be appropriate to place undue em-
phasis on the vertical equity of any one tax or group of taxes that



83

C. Issues Arising in the Design of Excise Taxes Dedicated to
Trust Funds: Efficiency, Equity, and Administrability

Criteria for assessing transportation excise taxes

As described above, cost allocation or recovery of costs is one fac-
tor that policymakers examine when determining the merits of un-
dertaking certain transportation infrastructure projects or when
contemplating imposing excise taxes on the transportation’ indus-
try. Analysts generally judge a tax more‘ broadly in terms of effi-
ciency, equity, and administrability. Efficiency involves an assess-
ment regarding the benefit or well-being received from the utiliza-
tion of its scarce resources. Policies that distort. consumer choice
generally are said to reduce society's well-being. Equity involves an
assessment of the “fairness” of a tax. Generally two standards are
applied: horizontal equity and vertical equity. Horizontal equity in-
volves whether equivalently situated individuals are treated
equivalently. Vertical equity involves the extent to which individ-
uals in different economic. circumstances, generally measured in
terms of individual well-being, are treated differently. Administra-
bility involves an assessment of the expense. to the Government
and the taxpayer of collecting the tax imposed. In evaluating tax
proposals, tradeoffs must be made among the three goals. Rarely
is a tax that is deemed most equitable the most efficient or most
administrable tax. Likewise the most administrable tax may not be
the most efficient or most equitable. The discussion below sepa-
rately considers general issues of efficiency and equity that may be
relevant in analyzing transportation excise taxes. While issues of
administrability cannot adequately be addressed in the absence of
a specific proposals, some general comments on administrability
will be included in both the discussions of efficiency and equity.

Efficiency and transportation excise taxes

Economists generally conclude that private market outcomes con-
stitute efficient outcomes—that is, private market outcomes create
the greatest amount of benefit compared to the resources used.75
This conclusion may be described briefly as follows. In a free mar-
ket, individuals will seek to purchase those goods that they value
most highly. But, they will purchase any given good only if they
think the benefit the good will produce for them equals or exceeds
the price they must pay to obtain the good. Likewise, suppliers of
goods will supply goods as long as the price received from the
buyer equals or exceeds the cost of supplying an addition unit of
the good. Thus, those goods purchased represent the bundle” of
goods producing the greatest benefit relative to the costs expended
to produce the goods. Following this line of reasoning, economists
argue that efficiency is always increased as long as the price paid
(or benefit received) for an additional unit of a good exceeds the in-
cremental, or marginal, résource cost of producing the good. Con-
versely, efficiency is decreased whenever the price paid (or benefit

75For an exception of this general conclusion, see the discussion of external costs, stich as pol-
lution, below.

35-400 96-4



I. PRESENT LAW AND BACKGROUND OF FEDERAL
TRANSPORTATION EXCISE TAXES

A. Air Transportation Excise Taxes
1. In general

Excise taxes are imposed on commercial air apassenger and
freight transportation and on fuels used in general aviation (ie.,
transportation that is not for hire) to fund the Airport Trust Fund.
In addition, like other transportation sectors, the aviation sector
generally is subject to a 4.3-cents-per-gallon excise tax on fuel used
in aviation, revenues from which are retained in the General Fund
for deficit reduction.? The Aimport Trust Fund was established in
1970 to finance a portion of the costs of FAA services and grant

rograms for airports. Before establishment of the Airport ist

‘und, Federal aviation expenditures were financed from general
revenues; General Fund domestic air passenger and fuels taxes
were imposed during this period. The structure of the Airport Trust
Fund excise taxes has remained generally unchanged, except for
rates, since 1970.

The current Airport Trust Fund excise taxes include three taxes
on commercial air transportation:

(1) a 10-percent excise tax on domestic air passenger trans-
portation;

(2) a $6-per-person tax on international air passenger depar-
tures; and

(3) a 6.25-percent tax on domestic air freight.

General aviation (e.g., corporate aircraft) is subject to Airport
Trust Fund excise taxes on the fuels it uses rather than to the com-
mercial aviation passenger ticket and freight excise taxes.8 The
Airport Trust Fund rates for these excise taxes are 17.5 cents per
gallon for jet fuel and 15 cents per gallon for aviation gasoline.

The Airport Trust Fund excise taxes are scheduled to expire after
December 31, 1996; the 4.3-cents-per-gallon General Fund trans-

ortation motor fuels excise tax is permanent. Each of these taxes
is described in more detail below. Current Airport Trust Fund pro-

In addition to the motor fuels excise taxes currently impoced on the transportation industry,
Superfund excise taxes were imposed before 1996 and Oil Spill Trust Fund excise taxes wer
imposed before 1995, both on crude oil received at U.S. refineries and on imported refined petro.
leum products. These expired excise taxes are not discussed in this document because they were
not imposed directly on transportation providers.

7 Fuels used in commercial aviation were exempt from this tax for a period of approximately
two years (through September 30, 1995) when the tax initially was imposed.

Sift is possible for specific aircraft to be used in both commercial and general aviation, For
example, a private corporate aircraft is treated as engaged in commercial aviation (and subject °
to the commercial passenger and freight taxes) when it transports for compensation persons
other than employees of the corporation owning the aircraft. When the same aircraft transports
only employees of the owner corporation, it is treated as engaged in general aviation (and sub-
Ject to the Airport Trust Fund fuels taxes, described below). A similar flight-by-flight determina-
tion regarding taxation is made with respect to aircraft owned by affiliated groups of corpora:
tions.

(ay



E. Aquatic Resources Taxes
1. Aquatic Resources Trust Fund
Tax:
Motorboats and small-engine .
gasoline .. 194 196 200 213 220 225 232, - 238 244 250
Fishing rods, reels, etc 84 86 90 101 104 107 110 113 116 120

Total Aquatic Re-
sources Trust Fund
Taxes ... oo

2. General Fund Aquatic Taxes:
Motorboat gasoline ...

278 282 290 314 324 332 342 351 360 370

© ©) © ©) @) @) ® () © )

F. Other General Fund Transpor-
tation Taxes.

Water transportation tax on ship
passengers . 17 17 17 29 31 34 38 41 46 50
Motorboat diesel () ) ® 41 42 43 “4 17 8 8

No revenues are projected currently for the Airport Trust Fund taxes, since these taxes are scheduled to expire after December 31, 1996.
These taxes were expired for the period January 1, 1996-August 26, 1996.

» Detailed breakdown of forecast unavailable for CBO March 1996 baseline.

No revenues have been transferred from the Highway Trust Fund to the National Recreational Trails Trust Fund because no appropriations
have yet been made for the recreational trails program. Revenues related to nonhighway recreational vehicle fuels are ineluded in the Highway
Trust Fund revenues reported above.

4 Information unavailable.

Exact liability information is not available to the IRS. Historical and forecast amounts are included in Highway and Rail taxes for the Gen-
eral Fund (B.3., above).

Source: Congressional Budget Office, using IRS data and CBO March 1996 baseline projections.

sg


95

taxes, but the three additional excise taxes permit policymakers to
distinguish between heavy cross-country vehicles that burn diesel
fuel and smaller, lighter local delivery vehicles that also burn die-
sel fuel. Given this apparent goal, the annual use tax reflects fur-
ther compromise with the goal of administrability. The annuai use
tax is the same dollar amount whether the truck drives 5,001 miles
or 100,000 miles in the year. Collecting a tax based on actual miles
driven. would be more precise, but potentially difficult to admin-
ister.

The extent to which the current highway transportation excise
taxes promote the efficient use of highway system depends upon
the extent to which these taxes approximate the incremental cost
of the Government’s provision of the highway services. As noted
above, because these taxes are set at average rates to apply nation-
ally, the taxes can never be fully efficient. It is more costly to build
and maintain roads in some geographic locations than in others.
For example, it is less expensive to build highways across flat rural
areas than through mountains or in urban areas. Similarly, the tax
and expenditure policy is unlikely to follow cost or tax burdens im-
posed exactly. The excise taxes generally apply to all motor fuel
purchased, while the expenditures (benefits) are provided only to
the users of certain highways.

Past DOT cost allocation studies have concluded that heavy
trucking services impose greater average costs on the nation’s high-
ways than is reflected in the current highway excise tax structure.
As a result, some have suggested that a “weight-distance” tax (as
in effect in several States) might reflect the more equitably the
costs allocated to heavy trucking services. Taxes requiring more ve-
hicle-specific monitoring, however, could require more administra-
tive resources (and be more prone to evasion) than the current
highway excise tax system. Increasing taxes on heavy trucking
services may not improve the efficient allocation of resources. As
discussed above, in the presence of economies of scale, increasing
taxes to reflect average costs better may move the tax (price) fur-
ther away from marginal costs, thereby decreasing efficiency. On
the other hand, if an increase in taxes on heavy trucking services
coincides with a decrease in taxes on automobile use, the tax reduc-
tion may move the tax (price) on automobile use closer to the mar-
ginal cost of automobile use, thereby increasing efficiency. Any
such change in the taxes assessed on different highway users may
be expected to change the pattern of use of the highways by the
different users.

88'The tax on certain vehicle purchases and on tire bears some relation to use as new vehicles
and tires often are purchased as replacements for worn out older equipment.



74

Fund. Inconsequential amounts of Highway Trust Funds were used
for transit purposes in 1982 and mass transit costs were not ana-
lyzed separately in the 1982 study. Currently the equivalent of 2
cents per gallon of Federal fuel taxes is deposited in the Mass
Transit Account of the Highway Trust Fund for use on transit im-
provements, and substantial sums from the Highway Account are
also expended for mass transit purposes. These mass transit ex-
penditures are included in the highway cost allocation study and
techniques have been developed to allocate them to various high-
way users.

Examination of environmental and other costs that are not borne
by highway agencies is another important part of the study. Total
highway-related costs for safety, air pollution, congestion, and noise
are estimated along with the marginal costs of highway use by dif-
ferent configurations. These costs are used along with allocations
of agency costs to evaluate both the equity and efficiency of high-
way user fees.

Preliminary results of the cost allocation study are being re-
viewed and the final report is being prepared. After the study re-
port has been released, highway cost allocation data and methods
.for use by the States will be developed based upon Federal highway
cost allocation methods. This effort will be coordinated through
committees of the American Association of State Highway and
Transportation Officials.



a

35

2. General Fund air transportation expenditures

Under the FAA Act of 1996, spending from the Airport Trust
Fund for FAA operations and maintenance for fiscal years 1997
and 1998 may not exceed the lesser of (1) 50 percent of the
amounts appropriated for airport grants, airway facilities and
equipment, and research and development or (2) (a) 72.5 percent
(as compared to 70 percent for fiscal years 1994-1996) of total FAA
expenses minus (b) expenses under (1).47 The balance of those ex-

enses, principally a portion of FAA operations and maintenance
e.g., air traffic control expenses), is finaniced fi general reve-
muee: Pac neretitis -pemmcehertanhd

47 See section 48104, 49 U.S.C.



V. DATA ON FEDERAL TRANSPORTATION TRUST FUND |
TRANSPORTATION EXCISE TAX REVENUES

A. Revenue from Transportation Excise Taxes

As discussed in Part II, some of the revenues from transportation
excise taxes go the General Fund of the Treasury, while most of the
revenues from these taxes go to specified Trust Funds. In the case
of motor fuels taxes, the same fuel generally is subject to tax both
for purposes of funding a Trust Fund and for General Fund pur-
poses. Figure 1 shows which receipts derived from the taxation of
motor fuels flow to the General Fund and which receipts derived
from the taxation of those fuels flow to specified Trust Funds.

(47)



Table 3.—Federal Transportation Trust Fund and General Fund Excise Tax Revenues, Fiscal Years

1993-2002—Continued
[Millions of dollars}
Tax 1993 1994 = 1995 1996 1997 1998 1999-2000 2001 2002
3. Highway and Rail Taxes for
the General Fund:
Gasoline 2,630 7,301 7,345 ) @) (%) &) ) 0) )
Highway diesel fuel 548 1,782 1,876 @) (») io) @) e ©) )
Rail diesel fuel o1 193 209 ) @) @) % ) ) ®)
Other .... 319 125 870 @) &) (e) e° 6) @) @)
Diesel fuel, bus use 0 1 “1 10} (&) ) io) @) 12) ()
Gasohol 282 682 854 ®) (0) ) (%) @) @) @)
Special motor fuels 7 16 18 e) 0) tO) C) ® e) Oo
Mise. floor stock taxes .:.... 30 25 3 e () (e) ) @) (*) eo
Compressed natural gas ... 0 1 1 @) e) &) ) (0) (%) *)

Total Highway Taxes
to the General \
Fund .... 3,588 10,001 10,300 6,153 6,292 6,440 6,588 6,740 6,890 7,051

C. Inland Waterways Fuels Taxes

1. Trust Fund Tax 79 113 129 116 117 119 120 123 125 127
2. General Fund Tax (9) 10) @) 27 27 27 28 28 29 29

D. Harbor Maintenance Trust
Fund Tax .... 588 621 697 746 784 826 873 922 972 1,025,


Fig. 1. Flow of Funds from Transportation Fuels Taxes

Treasury Account Taxed Fuel reasury Account

Highway Gasoline and
ighway Special Motor Fuels,
except Compressed Natural Gas

ighway Diesel <———~

a
Compressed Natural Gas ~~

: Lo Vehicle Gasolina Be
a ~

Motorboat, Gasoline
($1 mil/year to Land and Water
~~~. Conservation fund)

“~_Off- Highway Small Engine,

Gasoline
*\.otorboat, Diese!

(after 12/31/97)
Intand Waterway Fuels

“Railroad Diesel

Non-Commercial Aviation,
Gas and Jet Fuel___

Commercial Aviation, Gas and Jet Fuel

8h


«

17

present-law tax. However, depending on how the tax factors (e.g.,
mileage) were measured, the system might more appropriately as-
sign costs of FAA services to air travelers if it more closel; approxi:
mated the marginal costs of services provided by the FAA. The tax
burden across different segments of the flying public would change,
however, if the excise tax system wereé'changed.



87

taxes to marginal costs would not cover the full expenditure re-
quired to provide the service. That is, provision of the service: may
require a subsidy beyond the revenues provided by the economi-
cally efficient tax.8° : :
On the other hand, advocates of cost allocation would set the
price or taxes for transportation services at rates equal to the aver-
age cost of services. In the presence of substantial economics of
scale, average cost pricing implies that consumers are being
prices in excess of marginal resource costs and that less
than the economically efficient level of transportation services are
provided. Indeed, an expansion of services would lead to a decline
in the average cost of the service to each user. If each user could
be charged that lower average price, the price paid would still ex-
ceed the marginal cost of the provision of the service, all costs
would be recovered and net economic well-being (efficiency) would
increase. Thus, the principle of cost allocation involves a trade-off
between economic efficiency and cost recovery.81

Externalities, social costs, transportation excise taxes, and
economic efficiency ~~

Some economic activities have adverse effects on the environ-
ment or health of the population at large. The true cost to society
of such activities includes not only the producer’s internal costs for
labor, raw materials, etc., but also the additional social costs. For
example, an additional automobile on a crowded highway imposes
costs of delay on other motorists. Motor vehicles emit pollutants
that make the air less healthy for motorists and nonmotorists
alike. Aircraft noise detracts from the quality of life of people who
live or work under flight paths near major airports. Users will take
private costs into account when deciding whether to use the roads
or airways, but they generally will ignore such external costs as
pollution and noise. Such costs to society are called “negative
externalities.”

If the direct consumers of transportation services that produce
negative externalities are not required to compensate those that
suffer these added costs, the total social cost may exceed the pri-
vate cost to individual consumers of transportation services. In this
situation, it is natural to expect that too much of the externality
creating activity will occur. The incremental cost (private and so-
cial added together) of providing transportation services will exceed
the benefits produced (private only) and the resulting outcome will
not be economically efficient. In the example of automobile use,
there may be too much automobile use creating too much conges-
tion and too much pollution. Thus, some argue that transportation
excise taxes could Rromote economic efficiency if the taxes incor-
porate the marginal external costs such as the costs of pollution,
congestion, etc., in addition to the private marginal costs that arise

8©Some argue that the presence of economies of scale justify Government involvement in cer-
tain infrastructure investments. They argue that when the economies of scale are great, the po-
tential for cost, recovery and profit from market prices may be insufficient for private providers
to undertake the investment, even though provision of the service would create marginal bene-
fits that exceed marginal costs.

81For a discussion of ways of decreasing the inefficiencies that arise from diverging from mar-
inal cost pricing while raising revenue to cover substantial fixed costs, see CBO, Paying for
fighways, Airways and Waterways: How Can Users Be Charged?



42

Representatives; 5° or (3).determining the committee assignment
(including sequential committee referral) for a particular bill.6°

In general, a true fee is a charge levied on a class that directly
avails itself of a governmental program, and is used solely to fi-
nance that program rather than to finance the costs of Government
generally. The amount of the fee charged to any payor generally
may not exceed the costs of providing the services with respect to
which the fee is charged. Fees are not imposed on the general pub-
lic; there must be a reasonable connection between the payors of
the fee and the agency or function receiving the fee.61 Those paying
a fee have the choice of not utilizing the governmental service or
avoiding the regulated activity and thereby avoiding the charge. In
other words, the fee can be viewed as a payment for a special privi-
lege, as opposed to a mandatory charge (or tax) imposed on the
public at large for general or specified (e.g., Trust Fund) govern-
mental purposes.

Establishment of trust funds; dedication of excise tax reve-
nues and authorization of expenditures

Transportation Trust Funds are governed by parallel provisions
of the United States Code. First, the Internal Revenue Code (Title
26, sec. 9501 et. seq.) contains the operative provisions for all Fed-
eral Trust Funds to which specific excise tax revenues are dedi-
cated. These Code provisions provide for the transfer of specified
revenues to the Trust Fund, include administrative provisions for
management of Trust Fund monies, and provide general or specific
purposes for which Trust Fund e: ditures may be made. These
Trust Fund provisions are within the jurisdiction of the Committee
on Ways and Means and the Committee on Finance. Amendments
to these provisions generally are contained in revenue titles of com-
bined authorization and revenue legislation.

Generally, the Trust Fund expenditure purposes included in the
Code approve general expenditure purposes and cross-reference au-
thorizing Acts which contain specific program expenditure details.
On occasion, however, the tax-writing committees have addressed
(either with approval or disapproval) specific expenditure purposes
contemplated by authorizing legislation. Trust Fund monies may
not be spent for a purpose that is not approved in the relevant
Code Trust Fund provisions.

The Code transfers amounts equivalent to “gross receipts” raised
by the transportation excise taxes, rather than the “net revenues”

'@Article I, Section 7 of the U.S. Constitution (commonly referred to as the “Origination
Clause”) provides that “[aJll Bills for raising Revenue [must] originate in the House of Rep:
resentatives. . . .” This prerogative of the House is enforced by a privileged motion available
to any Member, commonly referred to as a “blue slip” motion.

See, e.g., 137 Cong. . H501 (Jam 15, 1991) (statement of the Speaker of the House
Providing guidance for the application of House Rule XX1, Clause 5b), regarding the referral
of bills,

®1S¢e, e.g., the Statement of Managers on the Federal Aviation Reauthorization Act of 1996,

ifying that certain fees which the PAA is authorized to charge for overflght services pro-
vided to aircraft that neither take-off nor land within the United States may “not exceed the
ate annual direct costs incurred by the FAA in providing air traffic services to such
fens” (H. Rept. 104-848, p. 110) Also, the report of the House Committee on Transportation
and Infrastructure on that same legislation, to the effect that these user fees may not be based
on “any non-cost based determination of the ‘value’ of the service provided. For example, assum-
ing similar cost of serving different carrier and aircraft types, the FAA user fees should not vary
based on factors such as aircraft seating capacity or revenues derived from passenger fares.”
(H. Rept. 104-714, Part 1, p. 50).



CONTENTS

I. OVERVIEW, OF FEDERAL TRANSPORTATION EXCISE
TAXES AND TRUST FUNDS anes

A. Excise Taxes Imposed on and Trust Funds
Benefiting the Transportation Industry, by
ee

B. Budgetary Treatment of Transportation Excise
Tax Revenues and Trust Fund Expenditures .

C. Status of Current Highway of Transpor-
tation Aviation and ighway Cost Allocation
Studies ..... sacsenepessncesacoeeaienteecessesaesneossoesoey pees

D. Issues Relating to Transportation Excise Taxes
and the Provision of Transportation Services .

Il. PRESENT LAW. AND BACKGROUND OF FEDERAL T TRANS:
PORTATION EXCISE TAXES ..

A. Air Transportation Excise Taxes .
B. Highway Transportation Excise Taxes

C. Water Transportation Excise Taxes
D. Rail Transportation Excise Taxes .............

III. FEDERAL TRANSPORTATION TRUST FUND AND GEN-
ERAL FUND TRANSPORTATION EXPENDITURE PRO-
GRAMS ......s000e sesseseeese

A. Airport and Airway Trust Fund...
B. Highway Trust Fund ..........sccsesseeeeseeneseeeeseneee
C. Water Transportation Trust Funds .........0sc0

D. Rail Transportation Expenditures .........0

di)

Page
1

11
11
18
26
31

32
32
36
38
40



106

2. Letter from Kenneth J. Kies to Honorable Federico Pena,
Secretary of Transportation, October 24, 1996

CONGRESS OF THE UNITED STATES,
JOINT COMMITTEE ON TAXATION,
Washington, DC, October 24, 1996.

Hon. FEDERICO PENA,
Secretary of Transportation,
Washington, DC.

-DEaR Mr. Secretary: Chairman Bill Archer of the House Com-
mittee on Ways and Means has appointed a bipartisan task force
of Members of that Committee to review and advise him on excise
tax issues affecting all transportation sectors—air, highway, water,
and rail. As you are aware, both the highway and aviation trust
fund ‘excise taxes or programs are scheduled to expire within the
next year; future funding of the programs financed with these
taxes is dependent on action by the Committee on Ways and Means
early in the next Congress. Further, an appeal is pending of a court
decision that the harbor maintenance excise tax in part is unconsti-
tutional. By letter of October 2, 1996, Chairman Archer requested
the staff of the Joint Committee on Taxation to develop a number
of materials for use by the task force. I enclose a copy of that letter.
The Joint Committee staff has been directed to report to the Chair-
man by early November.

Our work for the task force requires that we review the extent
to which the current highway, aviation, and waterway excise taxes
accurately reflect the traditional user pa) principles underlying
these trust fund programs. We understand that your Department
has underway cost allocation studies for the Federal highway and
aviation programs. We request that you supply us with copies of
these studies and of any work you have done with regard to the
inland waterway or harbor maintenance tax programs, and that
you assist us in arranging any needed staff briefings so we can
meet the Chairman’s deadline.

We also are informed that the Federal Government imposes a va-
riety of non-tax, user fees on transportation providers to offset the
costs of certain services provided to them. In order to evaluate the
overall Federal financial burden imposed on transportation provid-
ers, the Chairman has asked us to provide a list of all such fees.
We request that you supply us with a list of all such fees imposed
by your Department on transportation providers by November 8,
1996.

Should you have questions, or desire to schedule any meetings
with my staff, you may contact H.B. Hartley at 225-7377. I appre-
ciate your cooperation in this matter.

Sincerely,
KENNETH J. KIES.

Enclosure: Letter from Chairman Archer.



Table 10.—Budget Authority and Outlays Related to the National Railroad Passenger Corporation

(AMTRAK), Fiscal Years 1996-2002

{Millions of dollars]
Year 19962 19972 1998" 1999  2000e 20012 = 2002+

Grants for Operations:

Budget Authority 305 314 323 332 342 351 361

Total Outlays .. 305 314 323 332 342 351 361
Appropriations for Capital Expenditure:

Budget Authority 215 221 228 234 244 247 255

Total Outlays 220 251 224 230 238 243 251
Other Appropriations:>

Budget Authority 115 “118 122 125 129 132 136

Total Outlays ... 83 106 121 124 127 132 185
Totals:

Budget Authority 635, 653 673 691 712 730 152

Total Outlays ... 608 671 668 686 ‘707 726 TAT

“CBO projections based on March 1996 CBO baseline including projected inflation.
bIncludes transfers to AMTRAK from other accounts and special transition assistance.

Source: Congressional Budget Office.

g9


B. Highway and Rail Taxes
1. Highway Trust Fund taxes:
Fuels taxes
Gasoline .. 11,799 = 12,050 12,114 @) e) @) @) %) ©) >)
Diesel . 3,833 4,587 4,829 @) (*) (*) (*) () . @) @)
Other 592 622 765 (>) ) ) *) (°) ) (»)
Diesel fuel, bus use... 3 1 -1 >) *) @) (*) °) ) ()
Gasohol ... 526 562 144 (>) @) @) *) @) (*) @)
Special motor fuels ... 33 28 21 e ) (°) () @) (%) @)
Mise, floor stock taxes 30 31 1 (O) e) 0) ©) ©) (*) ()
Compressed natural gas
CCNG’ ... 0 0 0 @ ) e) ©) >) @) ©
Subtotal, fuels taxes 16,224 17,259 17,708 21,879 22,155 22,698 25,220 23,766 24,291 24,856
Non-fuels taxes
Trucks and trailers .. 1,313 1,636 2,040 1,596 1,670 1,751 1,837 1,926 2,020 2,119
Tires .... 319 358 390 363 365 372 381 389 397 406
Highway use tax... 617 647 695 617 683 698 712 727 743, 758
Subtotal, non-fuels
taxes ... 2,249 2,641 3,125 2,636 2,718 2,821 2,930 3,042 3,160 3,283
Total Highway
Trust Fund Re-
funds .. (625) (711) (1,019) (852) (866) (886) (906) (927) (946) (968)
Net Highway Trust
Fund Taxes . 17,948 19,189 19,814 23,663 «24,007 24,628 98 25,253 25,881 26,505 27,171
2. National Recreational Trails
Trust Fund Taxes:
Nonhighway _ recreational
FUCTS FAK sscssesssersscsersnnnsesese 0 0 0 0 0 0 0 0 0 0


101
Rail?

There are a number of peculiarities in the federal treatment of
the railroad industry, based primarily on historical factors, that
makes it unique among transportation modes. The principal dis-
tinction is that the federal government operates the railroad retire-
ment system and provides the industry with an unemployment in-
surance structure that differs from the structure covering other pri-
vate sector workers. They collections for these activities may, or
may not, fall within your definition of federal taxes and fees. They
are nonetheless significant in their cost. In 1995, the Class I rail-
roads (the largest U.S. railroads) paid approximately $486.0 million
into tier I railroad retirement and $1,133.0 million into tier II rail-
road retirement. An additional $94.0 million was collected for “sup-
plemental annuities” and $20.0 million was collected for the feder-
ally operated unemployment insurance system.

The taxes and fees that more clearly fit your definitional struc-
ture are as follows:

A 5.55 cents per gallon tax on fuel. These funds are collected
for deficit reduction. In 1995, this tax provided the U.S. Treas-
ury with approximately $227.0 million in general fund reve-
nues.

The Federal Railroad Administration (FRA) special safety
tax. This tax pays for FRA safety activities. The tax is assessed
on a formula basis that computes the share of the total federal
tax attributable to each railroad. The special safety tax pro-
vided $40.0 million in 1995.

U.S. Customs inspection tax. Railroads pay a fee of $7.50 for
customs inspection of each “loaded” freight car entering the
United States from either Canada or Mexico. Approximately
$6.0 million in taxes were collected from U.S. railroads in 1995
for this activity.

U.S. Department of Agriculture (USDA) animal/plant health
inspection tax. Railroads pay a fee of $7.50 for USDA inspec-
tion of each “loaded” freight car entering the United States
from Mexico. Collections for this tax amounted to approxi-
mately $0.8 million in 1995.

Trucking?

The vast majority of federal fees and taxes levied on the trucking
industry are associated with the highway trust fund and, therefore,
fall outside the focus of this discussion. Additional fees on this
transportation sector appear to be quite limited in number. There
are no separate safety charges. The only fee that seems to meet
your definition is as follows:

U.S..Customs and USDA fees are charged only for truck
crossings between the United States and Mexico. ‘Truckers ei-
ther buy a one trip permit for $7.00 per truck ($5.00 for cus-
toms and $2.00 for USDA) or can buy an annual permit (decal)
for $250.00 per truck.

1For further information on this subject contact Stephen J. Thompson at 77771. Information
in this section was provided primarily by the Association of American Railroads (AAR).

For further information on this subject contact Stephen J. Thompson at 77771. Information
in this section was provided primarily by the American Trucking Association (ATA).



“a

25
in logging operations and for vehicles whose base plate registration
is in Canada or Mexico.

History of tax

Prior to the 1982 highway legislation, the annual highway use
tax was $3 per 1,000 pounds of taxable gross weight in excess of
26,000 pounds. The 1982 legislation imposed a graduated use tax
on heavy vehicles that is higher than the present-law rates. The
use tax rates were changed to the current rate schedule in 1984
legislation which also increased the diesel fuel excise tax rate as
a revenue offset to the reduced use tax rate schedule.



21

tax credit and does not qualify for any exemption when blended
with gasoline or diesel fuel. This 7-cents-per-gallon reduced excise
tax rate is based on that methanol’s lower Btu content relative to
gasoline. Almost all commercially marketed methanol is derived
from natural gas.

Administration of highway motor fuels excise taxes

The gasoline and diesel fuel excise ‘taxes are imposed on removal
of the fuel from a refinery or on importation, unless the fuel is
transferred by pipeline or barge to a registered terminal facility. In
such as case, tax is imposed on removal of the fuel from the termi-
nal facility (i.e., at the “terminal rack”).28 A large majority of the
taxes imposed on gasoline and diesel fuel is imposed at the termi-
nal rack. The special motor fuels tax, which accounts for a rel-
atively small portion of motor fuels tax revenues, is imposed at the
retail level.

Present law imposes tax on all gasoline and diesel fuel that is
removed from a terminal facility, except diesel fuel that is destined
for nontaxable use (including a partially taxable use in an intercity
bus or a train) and that is indelibly dyed in accordance with Treas-
ury Department regulations.29 The person holding an inventory po-
sition in the terminal at the time the fuel is removed from that fa-
cility (the “position holder”) is liable for payment of the tax. The
current points at which these taxes are imposed were established
between 1986 and 1993 in response to reports of extensive tax eva-
sion occurring at points of taxation established when the tax rates
were substantially lower than those in effect since 1983.30 Termi-
nal racks represent a point in the distribution chain of gasoline and
diesel fuel that commonly is at least two parties removed from de-
livery of the fuel to the ultimate consumer.?! Thus, absent markin;
or dyeing of fuel (as is permitted with diesel motor fuel destin
for nontaxable use), it cannot be determined with certainty what
the ultimate use of the fuel will be at the point where tax is im-

posed.

To effect the tax exemptions provided by law while preventing
tax evasion, present law generally provides that exemptions are re-
alized through refunds of tax paid by a previous party in the fuel
distribution chain. In the case of gasoline, all exemptions are real-
ized through refunds to ultimate users, except in the case of gaso-
line sold to State and local governments, nonprofit educational or-
ganizations, the U.S. military for aircraft use, or for export where
refunds can be made to wholesale distributors (if the distributors

Gasoline and diesel motor fuel may be removed from a refinery without payment of tax only
if the party removing the fuel and all subsequent partics before ite removal irom & tornoed
facility are registered with the Internal Revenue Service. If fuel is sold to an unregistered party
before leaving the terminal facility, tax immediately is imposed, This tax does not affect imposi
tion of a second tax at the terminal rack; however, the second tax may be refunded upon Te-
quest. This dual tax regime was enacted in 1990 in response to reports that fuel was being re-
moved from terminals upon a claim that tax had already been paid, when in fact it had not

paid.

2Persons selling or using dyed diesel fuel in a taxable use (other than in an intercity bus
or.a train) are subject to a penalty equal to the greater of $1,000 or $10 per gallon of fuel.

20As described more fully below, the gasoline and diesel motor fuel tax rates were 4 cents
per alton from 1959 until 1983, at which time they were increased to 9 cents per gallon,

Following production at a refinery, gasoline and diesel motor fuel typically travel by pil
line or barge to a terminal facility. Upon removal from the terminal facili fuels typically
travel by truck either to retail outlets, to smaller wholesale storage facilities, or to ultimate
users that purchase fuel in bulk quantities.



a

APPENDIX D. CERTAIN CORRESPONDENCE RELATED TO
PREPARATION OF MATERIALS BY THE STAFF OF THE
JOINT COMMITTEE ON TAXATION

1. Letter from Chairman Bill Archer to Kenneth J. Kies,
Chief of Staff, Joint Committee on Taxation, October 2, 1996

House OF REPRESENTATIVES,
COMMITTEE ON Ways AND MEANS,
Washington, DC, October 2, 1996.
Mr. KENNETH J. KrEs, : ” a —_
Chief of Staff, Joint Committee on Taxation, 1015 Longworth House
Office Building, Washington, DC. “Py

Dear KEN: As you are aware, I am appointing a bipartisan task
force of Members of the Committee on Ways and Means to advise
me on transportation excise tax issues. I believe that the structure
of the transportation excise taxes (both their Trust Fund and Gen-
eral Fund components) and the reasons for the current tax struc-
ture should be examined systematically before the Committee takes
any future action on these taxes and programs. Further, the input
of this task force will help me to evaluate more generally the ap-
propriate role of transportation excise taxes in a restructured tax
system.

I am requesting the Joint Committee staff, in coordination with
Ways and Means staff, to assist the task force on a continuing
basis by developing information needed for the task force’s work.
I anticipate that this assistance will involve not only your own ex-
pertise in the rationale, legal structure, and administrative aspects
of these taxes, but also will involve your staff coordinating with
other groups such as the Department of Transportation, General
Accounting Office, and Congressional Budget. Office to secure the
best available information on the costs of and benefits derived from
the various Federal public works transportation programs financed
by these taxes.

As a first step, I request that you review the history and current
structure of the transportation excise taxes so that the task force
be briefed on that background when it commences work. Your ini-
tial work should also include development of a preliminary list of
other information, such as cost allocation studies and relative sec-
toral (and vehicular) tax burden/Federal program benefits analysis,
that I will need to secure from other groups.

Sincerely,
BILL ARCHER, Chairman.

(105)



33

(1) obligations incurred under provisions of aviation author-
izing Acts enacted since 1970, as those provisions were in ef-
fect on the date of enactment of the FAA Act of 1996; 46

(2) obligations incurred under part A of subtitle VII of Title
49, United States Code (generally, FAA programmatic provi-
sions), which are attributable to planning, ‘research and devel-
opment, construction, or operation and maintenance of—

(a) air traffic control,

(b) air navigation,

(c) communications, or

(d) supporting services for the airway system; and

(3) obligations incurred for administrative expenses of
the Department of Transportation which are attributable
to activities described in items (1) and (2).

Because the expenditure purposes are set in the law as of the
date of enactment of the FAA Act of 1996 (October 9, 1996), the
authorizing and appropriations committees of Congress cannot ac-
complish expenditure of Trust Fund monies for any new purposes
without an amendment (2p) roved by the tax-writing committees) to
the Internal Revenue Code. No expenditures are permitted to be
made from the Airport Trust Fund after September 30, 1998.

Specific Airport Trust Fund expenditure programs

Authorized expenditures for the following airport and airway pro-
grams are included under the general purposes, described above.
(1) Airport Improvement Program (“AIP”).—

(a) Airport planning—Planning for airport systems; also,
airport noise compatibility planning for air carrier airports
eligible for terminal development costs.

6) Aimport construction—Construction, improvement or
repair of public airports (includes removal of airport haz-
ards and construction of physical barriers and landscaping
to diminish noise). . .

(c) Airport terminal facilities— Non-revenue-producing
public-use areas which are directly related to movement.of

assengers and baggage at certified air carrier airports

aving required safety and security equipment (including
baggage facilities and passenger-moving equipment); also,
development of revenue-producing areas and construction
of non-revenue-producing parking lots for nonhub airports
(subject to certification that the grant will not defer need-
ea evelopment with respect to safety, security, or capac-
ity).

(d) Land acquisition—Includes land or property interests
for airport noise control purposes; also includes acquisition

4° The Acts (or provisions of Acts) pursuant to which Airport Trust Fund expenditures are al-
lowed are Title I of the Airport and Airway Development Act of 1970; the Airport and Airws
Development Act Amendments of 1976; the Aviation Safety and Noise Abatement Act. of 1975;
the Fiscal Year 1981 Airport Development Authorization Act; the Airport and Airway Improve-
ment Act of 1982; the Airport and Airway Safety and Capacity Expansion Act of 1987; the Fed-
eral Aviation Administration Research, Engineering, and Development Authorization Act of
1090; the Aviation Safety and Capacity Expansion Att of 1090; the Airport and Airway Safety,
Capacity, Noise Improvement, and Intermodal Transportation Act of 1902; the Airport Improve-
ment Program Temporary Extension Act of 1994; the Federal Aviation Administration Author-
ization Act of 1994; and, the Federal Aviation Reauthorization Act of 1996.



Table 5.Revenues and Outlays for the Highway Account of the Highway Trust Fund, Fiscal Year
1993-2002

{Millions of dollars]

Year 1993" 19942 1995" 1996> 19975 19987 19995 2000 20015 2002>

Tax Revenue ....
Interest Revenue

15,991 17,171 17,774 20,821 21,096 21,665 22,200 22,757 23,308 23,899
817 754 547 677 723 826 968 1,148 1,330 1,549

Total Revenue . 16,864 15,414 20,967 21,498 21,819 22,491 23,168 23,905 24,638 25,448
New Budget Authority .. 21,477 22,499 21,429 18,362 22,610 23,364 23,695 24,155 24,632 25,112
Outlays .. 16,641 19,011 19,472 20,123 20,448 20,599 20,646 20,832 21,248 21,753

End of Year Fund Balance

*Tax revenue is net of refunds.

Data for 1993-1995 report actual tax revenues transferred to the Trust Fund as tabulated by the CBO using IRS data. The data for 1993—
1996 also report actual New Budget Authority and Outlays, However, the 1993-1995 figures reported for interest revenue, total revenue, and
End of Year Fund Balance correspond to CBO projections. As a result, for 1993-1995, the entry for Total Revenue is not the sum of Tax Reve-
aue and Interest Revenue, nor is the End of Year Fund Balance equal to the sum of the of the prior year’s fund balance plus tax revenue and
interest revenue less outlays. Because the IRS must tabulate actual receipts after the close of the fiscal year,-actual year end Trust Fund bal-
ances are never reported, rather adjustments are made to future years’ projected Trust Fund balances and interest income.

®CBO projections based on March 1996 CBO baseline including projected inflation, Tax revenue is net of refunds.

Source: Congressional Budget Office.

11,523 7,927 9,421 10,796 12,167 14,059 16,682 19,754 23,144 26,839

Lg


VII. ISSUES RELATING TO TRANSPORTATION EXCIs
TAXES AND THE PROVISION OF TRANSPORTATION —

A. Overview

Effect on Congressional oversight and Committee roles

Since 1956 (for highways) and 1970 (for aviation), Federal trans-
portation spending (and the financing therefor) has been provided
largely through Trust Funds financed with dedicated excise taxes.
Previously, General Fund financing and appropriated expenditures
were used to deliver the Federal contribution to these programs.
Currently, and in large part because of spending constraints relat-
ed to Congressional budgetary decisions to reduce Federal deficits,
numerous proposals have been advanced to modify this structure:
(1) privatizing Federal transportation programs (and funding for
those programs) in Federally chartered entities; (2) returning some
or all of the expenditure program (and required financing) respon-
sibility to the States; (3) reclassifying current Federal spending
from discretionary spending to direct (entitlement) spending, or (4)
removing Trust Fund spending from budget deficit calculations
(i.e., taking the Trust Funds “off budget”).

As described in Part IV.A., the present system of financing trans-
portation programs and delivering services requires action by at
least three Congressional committees in each of the House and
Senate. Each of the committees that currently has oversight re-
sponsibility has a distinct role in ensuring the effectiveness of these
Federal programs. The oversight roles of these respective commit-
tees are affected significantly by the various proposals to change ei-
ther the financing of or spending for these programs.

Tax design

In current discussions of transportation excise taxes and the pro-
vision of transportation services, much emphasis is placed on “cost.
allocation.” Cost allocation refers to attempts to divide the total
Government costs incurred in the provision of a service across all
beneficiaries of that service. Thus, cost allocation is a method of de-
ciding how Government cost recovery will be obtained. Recovery of
costs is one factor that policy makers examine when determining
the merits of undertaking certain transportation infrastructure
projects or when contemplating imposing excise taxes on the trans-
portation industry.

Tax proposals generally are judged in terms of efficiency, equity,
and administrability. An outcome is considered economically ef,
cient. if it produces the greatest benefit from a given amount of re-
sources. When a tax is used in lieu of price in the provision of a
service, efficient use of resources is assured if the tax is equal to
the incremental, or marginal, cost of providing the service. Equity

(75)



27

in governmental business and for fuels used by LASH and SEA-
BEE oceangoing barges released by their ocean-going carriers sole-
ly to pick up or deliver international cargoes.

History of tax

The inland waterways excise tax was enacted in 1978 legislation;
the Inland Waterways Trust Fund was established in the same leg-
islation. The tax rate initially was 4 cents per gallon, effective Oc-
tober 1, 1980, with scheduled increases to 10 cents per gallon. In
1986, additional phased increases to the current 20-cents-per-gallon
rate were enacted.

3. Harbor maintenance excise tax
Imposition of tax

A permanent 0.125-percent harbor maintenance excise tax is im-
josed with respect to cargo and/or ship Passengers loaded or un-
loaded at United Statesports;%5 this tax is collected by the U.S.

Customs Service (sec. 4461). The harbor maintenance excise tax a
lies to ship passengers as well as to shipments of property. The
Base to which the tax rate is applied is the value of the cargo, or
in the case of passenger loading and unloading, the actual charge
paid for transportation. The tax is imposed on all cargo or pas-
sengers loaded or unloaded at U.S. ports, defined as any channel
or harbor in the United States which is open to public navigation
and is not part of the system of waterways with respect to which
the inland waterways fuels excise tax is imposed. Shippers, import-
ers, and exporters are liable for the tax.36 &
Exemptions life “rane ses

Exemptions are provided for ferry transportation of passengers
(and their vehicles) within the United States and ‘between the
United States and Canada or Mexico. Several special rules apply
to shipments between the continental United States and ‘Aleck
Hawaii, and U.S. possessions if the ultimate use of the cargo will
occur in the location where landed. In general, cargo shipments be-
tween these locations, and shipments within Alaska, Hawaii, or a
USS. possession, are exempt from tax. The tax also does not apply
to certain passenger cruises within Alaska and Hawaii which also
include travel in international waters, if the cruises do-not include
any stops at ports of call located outside the State from which the
cruise began.

The Treasury Department is authorized to waive the tax on ship-
ments to Canada or Mexico if Treasury determines that the rel-
evant country imposes a substantially equivalent tax and that fail-
ure to waive the tax would result in significant economic loss to the
affected United States port (but would not result in diversion of
shipments from other U.S. ports). Finally, the tax does not apply

98No tax is imposed on cargo movements within a United States port.

*6On October 25, 1995, the United States Court of International Trade in United States’ Sh
Corp. v. United States granted a summary judgment motion finding the maintenance ex-
cise tax a8 applied to exports unconstitutional under the Export Clause of the Constitution, and
enjoined the U.S, Customs Service from collecting the tax. , a motion to stay the deci-
sion pending appeal was granted. Until a decision is rendered in the appellate process, the har-
bor maintenance excise tax continues to be imposed.

35-400 96-2



93

Structure of the tax system and competition within transpor-
tation sectors ~~ a pene en

In general

Just as a transportation excise tax system may affect the scope
and structure of the transportation industry as a whole, the taxes
affecting one sector may affect the scope and structure of that spe-
cific sector. The price of gasoline, inclusive of motor fuels excise
taxes, is one factor that affects the demand for different models of
automobiles and individuals’ decisions regarding travel. Likewise,
the available road system is another factor that affects the demand
for different models of automobiles and individuals’ decisions  re-
garding travel. Changes in either the level of motor fuels excise
taxes or in the provision of the highway system may be expected
to alter the type of travel that individuals undertake by automobile
and the type of automobiles in which they choose to travel. The fol-
lowing discussion uses two specific examples of potential changes
in the existing transportation excise tax system to illustrate how
tax changes may affect a specific sector of the transportation indus-
try.

Air passenger industry

The current domestic air transportation excise tax is imposed on
the value of the ticket. As a consequence of this excise tax design,
a traveler flying first class will pay more in tax than a traveler fly-
ing coach on the same flight, despite the fact that both the front
and the back of the plane receive the same services from the FAA.
Likewise, on a comparable flight, customers of a discount air car-
rier will pay less tax than customers of a higher-fare air carrier.
Again, for a comparable flight, comparable FAA services would be
rendered to each passenger. The current excise tax system might
be viewed as inefficient, in that the marginal cost of providing air
traffic control and other airway services is the same in this exam-
ple for a discount air carrier and a higher-fare carrier, or for a first
class seat and a coach seat, yet different taxes are imposed to cover
the cost of the service. Nor, in this example, would it obviously be
the case that the discount carrier’s flight pays less for air traffic
services than does the higher fare carrier’s flight. A discount. car-
rier flight with all seats occupied might produce more tax revenue
than a partially occupied flight of a higher fare carrier. The prin-
ciples discussed in Part VII.B might suggest that there may be an
inefficient allocation of resources between discount carriers (or
coach seats) and other carriers (or first class seats). In addition,
such an outcome also might be viewed as inequitable across travel-
ers. .

Evaluating changes to the present excise tax structure, however,
requires an analysis of the questions of efficiency, equity, and ad-
ministrability. For example, as described above, a recent. proposal
by a group of seven of major commercial air carriers would sub-
stitute taxes imposed at flat rates on each of three factors: revenue
passengers, seats filled, and mileage, for the current 10-percent ad
valorem tax. Such a change would involve substantially greater ad-
ministrative cost for the airlines and the IRS than does the current
tax structure. However, if the proposed excise tax rates more close-



8

eral transportation programs (and funding for those programs) in
Federally chartered entities; (2) returning some or all of the ex-
penditure program (and required financing) responsibility to the

tates; (3) reclassifying current Federal spending from discre-
tionary spending to direct (entitlement) spending, or (4) removing
Trust Fund spending from budget deficit calculations (i.e., taking
the Trust Funds “off budget”).

As described above, the present system of financing transpor-
tation programs and delivering services requires action by at least
three Congressional committees in each of the House and Senate.
Each of the committees that currently has oversight responsibility
has a distinct role in ensuring the effectiveness of these Federal
programs. The oversight roles of these respective committees are
affected significantly by the various proposals to change either the
financing of or spending for these programs. For example, complete

rivatization, or return to the States, of a program and associated
financing would eliminate (or significantly reduce) the roles not
only of the committees that currently oversee the programs, but of
the Congress as a whole. Maintaining the current program and ex-
cise tax structure while reclassifying trunsportation spending as di-
rect spending under the Budget Act would eliminate the current
role of the appropriations committees. A financing change from ex-
cise taxes to non-tax, or true, user fees could eliminate the role of
the House Committee on Ways and Means and the Senate Commit-
tee on Finance.

While reducing the roles of some committees, certain proposed
changes could increase the responsibility for and control over pro-
grams by other committees. For example, a Federal transportation
program provided through Federal direct (or off-budget) spending
and financed entirely with true user fees could consolidate all Con-
gressional committee oversight of the program into the current au-
thorizing committees. (If user fees were determined to be “revenue
measures,” the tax-writing committees would retain jurisdiction
under current House and Senate rules.)

Tax design

In current discussions of transportation excise taxes and the pro-
vision of transportation services, much emphasis is placed on “cost
allocation.” Cost allocation refers to attempts to divide the total
Government costs incurred in the provision of a service across all
the beneficiaries of that service. Thus, cost allocation is a method
to obtain Government cost recovery. Recovery of costs is one factor
that policy makers examine when determining the merits of under-
taking certain transportation infrastructure projects or when con-
templating imposing taxes that might fall on the transportation in-

lustry.

Tax proposals generally are judged in terms of efficiency, equity,
and administrability. An outcome is considered economically effi-
cient if it produces the greatest benefit from a given amount of re-
sources. Taxes can be designed to promote efficient use of re-
sources: When a tax is used in lieu of price in the provision of a
service, efficient use of resources is assured if the tax is equal to
the incremental, or marginal, cost of providing the service. Equity
involves an assessment of the “fairness” of a tax. To determine fair-



16

involves an assessment of the “fairness” of a tax. To determine fair-
ness it is necessary to look beyond the statutory incidence of a tax
to its economic incidence, or market effect. When analyzing taxes
earmarked for specific Government expenditures, some suggest
that the benefit principle is an equitable basis of taxation and oth-
ers suggest cost recovery or cost allocation is an equitable basis of
taxation. Administrability involves an assessment of the expense to
the Government and the taxpayer of collecting the tax imposed. In
assessing a tax, tradeoffs must be made among the three goals.
Rarely is a tax that is deemed most equitable the most efficient or
most administrable tax. Likewise, the most administrable tax may
not be the most efficient or most equitable.

Effect of transportation excise taxes on the market for trans-
portation services

The design of a system of transportation excise taxes can be ex-
pected to affect the market for transportation. The present-law
transportation excise taxes generally are imposed on the inputs of
transportation service providers (e.g., taxes on fuels or equipment)
or are imposed on the purchase of the transportation service (e.g.,
the air transportation excise taxes). In either case, it generally is
assumed that market forces will cause the burden of these excise
taxes to flow through to consumers. Thus, the present-law excise
taxes may be expected to alter the prices that individuals pay for
transportation services.

The tax burdens imposed may cause consumers to choose one
mode of transportation over another mode. Thus, if an excise tax
is imposed on one sector of the transportation industry (e.g., high-
way) at a higher rate than on another sector with which that sector
competes (e.g., rail or aviation), consumers may find it more cost
effective to ship by rail than by truck or travel by airplane rather
than by rail, automobile, or bus. The analysis is complicated by
present-law expenditure policy that ties the Federal Government’s
provision of certain services (e.g., highway maintenance) to specific
taxes collected. For example, under present law, the highway
transportation excise taxes generally are dedicated to road con-
struction and maintenance, services that are used by highway
users, while rail transportation, which is subject to lower transpor-
tation excise taxes, receives relatively few Government-provided
services.

Similar questions arise within an industry sector. For example,
the current domestic air passenger transportation excise tax is im-
posed on the value of the ticket. The revenues from this excise tax
generally are used to fund FAA operations, airport grants and air-
way facilities, and equipment. As a consequence of the ad valorem
character of the tax, a traveler flying first class will pay more in
tax than a traveler flying coach on the same flight, despite the fact
that all travelers on a plane receive the same services from the
FAA. A recent proposal by a group of seven major commercial air
carriers would convert the present-law ad valorem air passen;
transportation excise tax into three taxes with rates set at flat
amounts based on three factors: revenue passengers, seats filled,
and mileage. Such a change would involve substantially greater ad-
ministrative cost for the airlines and the IRS than does the



82

That calculation would ignore the additional costs imposed on the
air traffic control system by multiple take-offs and landings for one
flight in the case of so-called hub-and-spoke airlines.

mn the other hand, passengers whose travel arrangements in-
cluded a stop between travel segments and passengers traveling on
“point-to-point” airlines (which require separate ticketing for each
segment of a flight) and would be required to pay for each take-
off and landing they actually made. The resulting different fees for
the same services, costing the Government the same amount to
provide, as well as a number of other features of the overall pro-
posal cause these proposed “fees” to be viewed more properly as
‘taxes” or “revenue measures” when judged by established stand-
ards. If such a system of “fees” were adopted by a House authoriz-
ing committee, the House Committee on Ways and Means could as-
sert jurisdiction over the measure. If the “fees” originated in Senate
authorizing legislation, not only could the Senate Committee on Fi-
nance assert its jurisdiction, but the House, when the legislation
was returned to it (e.g., with a request for conference), could “blue
slip,” or reject, the Jegislation as an unconstitutional infringement
of the prerogative of the House to originate revenue measures.74

74The proponents of the proposal since have agreed informally to modify the “fee” system into
a proposal for an alternative method of calculating the excise tax on domestic air passenger
transportation.



4

taxes and transportation Trust Fund programs. Appendix C pro-
vides a summary of various non-tax Federal fees-for-service im-
posed on the transportation industry.

Viewed from a revenue perspective, excise taxes on motor fuels
are the dominant source of transportation excise taxation for all
transportation sectors except aviation and international shipping.
Aviation user excise taxes imposed on passenger tickets and freight
waybills comprise the primary funding source for the Airport and
Airway Trust Fund (the “Airport Trust Fund”). An ad valorem ex-
cise tax on the value of cargo (and passenger fares) processed
through United States harbors is the primary revenue source for
the Harbor Maintenance Trust Fund. The following discussion
summarizes the excise taxes imposed on the transportation indus-
try, by sector.

1, Air transportation excise taxes

Excise taxes are imposed on commercial air passenger and
freight transportation and on fuels used in general aviation (e.g.,
corporate aircraft) to fund the Airport Trust Fund. In addition, like
other transportation sectors, the aviation sector is subject to a 4.3-
cents-per-gallon excise tax on aviation fuel, revenues from which
are retained in the General Fund for deficit reduction.2 The Airport
Trust Fund was established in 1970 to finance a portion of the
costs of Federal Aviation Administration (“FAA”) services and
grant programs for airports. Before establishment of the Airport
Trust Fund, Federal aviation expenditures were financed from gen-
eral revenues; General Fund domestic air passenger and fuels
taxes were imposed during this period. The structure of the Airport
Trust Fund excise taxes has remained generally unchanged, except
for rates, since 1970.

The current Airport Trust Fund excise taxes include three taxes
on commercial air transportation:

(1) a 10-percent tax on domestic air passenger transpor-
tation;

(2) a $6-per-person tax on international air passenger depar-
tures; an

(3) a 6.25-percent tax on domestic air freight.

General aviation is subject to Airport Trust Fund excise taxes on
the fuels it uses rather than to the commercial aviation passenger
ticket and freight excise taxes. The Airport Trust Fund rates for
these excise taxes are 17.5 cents per gallon for jet fuel and 15 cents
per gallon for aviation gasoline.

The Airport Trust Fund excise taxes are scheduled to expire after
December 31, 1996; the 4.3-cents-per-gallon General Fund trans-
portation motor fuels excise tax is permanent. Current Airport
Trust Fund program expenditure authority is scheduled to expire
after September 30, 1998.

2The 4.3-cents-per-gallon transportation motor fuels excise tax was enacted by the Omnibus
Budget Reconciliation Act of 1993 (the “1993 Act”). Fuels used in commercial aviation were ex-
empt for a period of approximately two years (through September 30, 1995) when the tax ini-
tially was imposed.



80

vanced in conjunction with several of the proposals to restructure
the transportation expenditure programs. Most of these proposals
are intended to increase transportation spending. Any of these op-
tions could be combined with at least a partial return to General
Fund financing and program management in lieu of some or all of
the current Trust Fund and dedicated tax structure.

As described in Part IV.A., the current system of financing and
administering transportation programs requires action by at least
three Congressional committees in each of the House and Senate.
Each of the committees that currently has oversight responsibility
has a distinct role in ensuring the effectiveness of these Federal
programs. The current oversight roles of Congressional committees
are affected significantly by the various proposals to change either
the financing of, or spending for, these programs.

Privatization :

Complete privatization of a program would eliminate (or signifi-
cantly reduce) the roles not only of the committees that currently
oversee the programs, but also that of the Congress as a whole. For
example, some have suggested that the FAA be converted into a
private entity similar to the Postal Service. As a private corpora-
tion, the FAA could be exempt from procurement and employment
rules unique to the Federal Government and could price and sell
its services like other private businesses. Such a restructuring
would eliminate the current aviation oversight role of the tax-writ-
ing committees and (assuming no Federal General Fund monies
were appropriated to subsidize FAA operations) the role of the ap-
propriations committees as well. The only remaining committee
oversight responsibility would be that of the authorizing commit-
tees, reduced to reflect any decreased Federal involvement in the
management and operation of the private corporation. A truly pri-
vate entity would eliminate even this committee oversight role.

Return responsibilities to the States

Proposals have been made in both Houses of Congress to return
substantial components of highway transportation responsibility to
the States.72 These proposals would retain Federal responsibility
for limited “core functions” that would be financed with the current
fuels excise taxes, imposed at reduced rates. Enactment of a pro-
posal similar to this would retain the division of oversight and
funding responsibilities among Congressional committees and that
of the Congress as a whole, but the scope of those responsibilities
would be reduced to reflect the reduced Federal role in providing
highway transportation services.

Modify Budget Act treatment of programs

Maintaining the current transportation Trust Fund program and
excise tax structure while reclassifying transportation spending as
direct spending under the Budget Act would eliminate the current
role of the appropriations committees. Further, unless the amount
of the new direct spending were restricted to the amount of net

728¢e, e.g., H.R. 3840 (Mr. Kasich and others) and S, 1971 (Senator Mack and others), both
introduced in the 104th Congress.



107

3. Letter from Kenneth J. Kies to Honorable Dan Glickman,
Secretary of Agriculture, October 24, 1996

CONGRESS OF THE UNITED STATES,
JOINT COMMITTEE ON TAXATION,
Washington, DC, October 24, 1996.

Hon. DAN GLICKMAN,
Secretary of Agriculture,
Washington, DC.

Dear Mr. SECRETARY: Chairman Bill Archer of the House Com-
mittee on Ways and Means has appointed a bipartisan task force
of Members of that Committee to review and advise him on excise
tax issues affecting all transportation sectors—air, highway, water,
and rail. As you may be aware, both the highway and aviation
trust fund excise taxes or programs are scheduled to expire within
the next year; future funding of the programs financed with these
taxes is dependent on action by the Committee on Ways and Means
early in the next Congress. Further, an appeal is pending of a court
decision that the harbor maintenance excise tax in part is unconsti-
tutional. By letter of October 2, 1996, Chairman Archer requested
the staff of the Joint Committee on Taxation to develop a number
of materials for use by the task force. I enclose a copy of that letter.
The Joint Committee staff has been directed to report to the Chair-
man by early November.

We are informed that the Federal Government imposes a variety
of non-tax, user fees on transportation providers to offset the costs
of certain services provided to them. In order to evaluate the over-
all Federal financial burden imposed on transportation providers,
the Chairman has asked us to provide a list of all such fees. We
request that you supply us with a list of all such fees imposed by
your Department on transportation providers by November 8, 1996.

Should you have questions, or desire to schedule any meetings
with my staff, you may contact H. B. Hartley at 225-7377. I appre-
ciate your cooperation in this matter. .

Sincerely,
KENNETH J. KIEs.

Enclosure: Letter from Chairman Archer.



91

D. Effects of Transportation Excise Taxes on the Market for
‘ansportation Services

Structure of the tax system and competition between trans-
portation sectors

The design of a transportation excise tax system can be expected
to affect the market for transportation. As stated above, the cur-
rent transportation excise taxes generally are assessed on the in-
puts of transportation service providers (eg., taxes on fuels or
equipment) or are assessed on the purchase of the transportation
service (e.g., air transportation excise taxes). In either case, it is
generally assumed that market forces will cause the burden of
these excise taxes to flow through to consumers. In the case where
taxes are assessed on the inputs of service providers, the tax be-
comes part of the cost of doing business. In a market economy, for
a firm to continue producing goods or providing services, it must
recover its costs of doing business. Thus, excise taxes on inputs
generally will be borne by the consuming public in the form of

igher prices for transportation services. In the case where the tax ©
is assessed on the provision of the service, the effect on the price
paid by the consuming public is more obvious. Thus, the current
excise taxes may be expected to alter the prices paid for transpor-
tation services. _ . .

Through their effect on market prices, changes in transportation
excise taxes can be expected to affect the aggregate. scope of the
transportation industry in the United States. For example, if all
United States transportation excise taxes were increased (lowered),
the higher (lower) resulting prices to consumers would be expected
to expand (contract) the total amount of transportation services

rrovided. Likewise, through their effect on prices, the excise tax

yurdens imposed by various transportation excise taxes may cause
consumers to choose one mode of transportation over another mode.
Thus, if an excise tax is imposed on one sector of the transportation
industry (e.g., highway users) at a higher rate than on another sec-
tor with which that sector competes (og. rail users), consumers
may find it more cost effective to ship by rail than by highway.
Similarly, a recent proposal to exempt the special motor fuel LNG
from the highway spécial motor fuels excise tax could reduce costs
to certain heavier highway vehicles, thereby encouraging truck
shipping (using governmentally financed infrastructure instead of
rail shipping (using privately financed infrastructure). That is, the
structure of the tax system may affect the structure of the United
States transportation industry. .

The structure of the tax system also may affect the structure of
the United States transportation industry vis a vis potential com-
petitive shippers along the nation’s Northern and Southern bor-
ders. The harbor maintenance excise tax is a cost of doing business
that affects the price of shipping through United States’s ports. If
the price of shipping through Canadian ports is lower than that of
shipping through United States ports, the ports of Seattle and Ta-
coma, Washington, for example, may lose business to the port of
Vancouver, Canada.

The analysis is complicated by current expenditure policy that
ties the Federal Government’s provision of certain services (e.g.,



€-96 O0P-SE

Figure 2.- Comparison of Projected Unfunded Budget Authority and Cash
Balances of the Highway Account, Selected Years (in billions)
“$338 $33.7

$316

$26.8

9167 [Cash Balance
sUnfunded Authority

, 8108

Source: CBO 1996 Baseline Projections

6g


Table 4.—Revenues and Outlays for the Airport and Airway Trust Fund, Fiscal Year 1993-2002

{Millions of dollars]
Year 1993" 19942 1995 1996 1997>  1998% 1999% 2000> 2001° 2002>
Tax Revenue .. 4,944 5,489 5,726 1,383 0 oO 0 oO 0 0
Interest Revenue 1,040 837 157 622 267 -120 ~534 ~978 — 1,439 1,961
Total Revenue ... °4,302 6,082 6,291 2,000 267 -120 ~ 534 —978 ~ 1,439 - 1,961
New Budget Authority 6,980 7,574 6,176 6,897 6,792 7,004 7,220 TA43 7872 7,907
Outlays 6,655 6,547 7,384 6,165 6,193 6,244 6,227 6,363 6,609 6,815

End of Year Fund Balance . 12,850 12,386 11,365 7,199 1,274 -5,090 -11,851 19,192 ~27,240 -36,015

*Data for 1993-1995 report, actual tax revenues transferred to the Trust Fund as tabulated by the IRS. The data for 1993-1995 also report
actual New Budget Authority and Outlays, However, the 1993-1990 figures reported for interest revenue, total revenue, budget authority, out-
lays, and End of Year Fund Balance are from the Office of Management and Budget as reported in past-budget documents. As a result, for oy
1993-1995, the entry for Total Revenue is not the sum of Tax Revenue and Interest Revenue, nor is the End of Year Fund Balance equal to the Ot
gum of the prior years fund balance plus tax revenue and interest revenue less outlays. Because the IRS must tabulate actual receipts
the close of the fiscal year, actual year end Fund balances are never reported, rather adjustments are made to future year’s projected trust
Fund balances and interest income.

°CRO projections based on March 1996 CBO baseline including projected inflation. However, there will be some additional Trust Fund reve-
nues for 1996 and 1997 due to the temporary extension of the Trust.Fund taxes (August 27, 1996-December 31, 1996) in the Small Business
Job Protection Act of 1996.

©P.L, 102-681 transferred $1,795 million from the Airport and Airway Trust Fund to the General Fund. Hence, reported revenue for 1993 is
less than the sum of tax revenue and interest. See also note (a) above.

Source: Congressional Budget Office.



17

4. General Fund transportation motor fuels excise tax

Imposition of tax and exemptions

The 1993 Act imposed a permanent, General Fund excise tax on
transportation motor fuels for deficit reduction (secs. 4081 and
4091). The tax rate is 4.3 cents per gallon. The tax applies gen-
erally to motor fuels used in all transportation sectors, including
aviation. Fuels used in commercial aviation were’ exempt during
the period through September 30, 1995.

This General Fund motor fuels excise tax rate is administered as
an “add-on” to existing Trust Fund excise taxes. Thus, the tax on
aviation jet fuel is imposed (along with any applicable Airport
Trust Fund excise tax) on the sale of the fuel by a producer (typi-
cally, a wholesale distributor); aviation gasoline is taxed upon re-
moval of the fuel from registered terminal facilities.

Fuels used in a use that is exempt from all Trust Fund excise
taxation similarly is exempt from the General Fund transportation
motor fuels excise tax.20

History of tax

The Omnibus Budget Reconciliation Act of 1990 represented the
first time that transportation motor fuels excise taxes had been
used for General Fund purposes since enactment of the various
Federal Trust Fund pro; 8 (e.g., aviation in 1970). The 1990
General Fund “deficit reduction” tax of 2.5 cents per gallon applied
only to highway and rail transportation fuels and was scheduled to
expire after September 30, 1995. The Omnibus Budget Reconcili-
ation Act of 1993 expanded uj the 1990 Act, adding an addi-
tional 4.3-cents-per gallon to the existing General Fund tax rate,
and expanding the transportation sectors subject to this additional
tax rate to include aviation (commercial aviation after September
30, 1995) and inland waterway fuels.2! The 1993 tax is permanent.

5. Repealed or expired aviation excise taxes

Two additional excise taxes previously were imposed on air
transportation. First, an annual civil aircraft use tax was imposed
from 1971 to 1980. The tax rate was $25 plus 3.5 cents per pound
of the maximum certificated takeoff weight for turbine aircraft or
2 cents per pound of maximum certificated takeoff weight in excess
of 2,500 pounds for other aircraft (jet aircraft).

Second, before 1984, aircraft tires and tubes were subject to tax
as part of a general tire and tube excise tax that also applied to
highway vehicles.

Revenues from the annual aircraft use tax and the tax on air-
graft fires ‘and tubes (after 1970) were dedicated to the Airport

ist Fund.

20The tax base established in 1993 for this tax generally paralleled that of the Leaking Un-
derground Storage Tank Trust (‘LUST’) Fund fuels excise tax. The LUST tax rate of 0.1 cents
per gallon applied to aviation (both commercial and general), highway, rail, inland and intra~
coastal waterway, and recreational motorboat (gasoline). Revenues from the LUST excise tax,
which expired after December 31, 1995, were used to finance clean up of pollution from leaking
underground petroleum storage tanks. Because it has expired, the LUST excise tax is not die,
cussed further in this document.

2See the discussion in Parts ILB. and D. for 1993 changes to the 1990 2.5-cents-per-gallon
General Fund transportation motor fuels tax.



46

ing a revenue loss because the CBO revenue baseline assumes the
present-law taxes to be permanent. (Note that as shown by Exam-
ple (4), extension of the underlying excise taxes provides no reve-
nue increase to offset this loss.)

Trust Fund expenditures as discretionary spending

The 1990 Act divides non-defense Federal Government spending
into two major categories: direct spending and discretionary spend-
ing. Direct spending is spending for which no appropriation is ‘re-
quired (e.g., entitlements such as social security old’ age benefits).
Discretionary spending may occur only when funds are appro-
priated. All discretionary spending programs must compete for a
fixed pool of dollars under aggregate’ annual caps imposed on Fed-
eral discretionary spending. As described above, spending for the
Federal transportation Trust Fund programs is classified as_discre-
tionary spending. When authorizing legislation is enacted, gen-
erally, it is not considered to be an increase in Federal spending.
Rather, that spending is scored when the funds are appropriated,
which occurs after competing demands of transportation and other
discretionary spending programs have been reconciled within the
annual caps. This spending reconciliation is independent of issues
related to imposition or revenue scoring of dedicated Trust Fund
excise taxes.

As described above, amounts equivalent to gross receipts from
the transportation excise taxes generally are dedicated to the
transportation Trust Funds under present law. Amounts in excess
of net revenues produced by the transportation excise taxes may be
dedicated to these Trust Funds without a budgetary effect because,
as described above, there is no budget scorekeeping link between
revenues raised and Trust Fund expenditures: the Trust Funds are
included within the unified Federal budget, and expenditures from
the Trust funds are classified by the Budget Act as discretionary
spending, subject to aggregate annual caps on all such spending. If,
however, expenditures from the Trust Funds were reclassified as
direct spending which occurs automatically without appropriation,
a budgetary shortfall could result if the amount of direct spending
exceeded net revenues raised by the transportation excise taxes
(e.g., was based on gross receipts from the taxes). Similarly, if the
transportation Trust Funds were removed from the unified budget,
an increase ‘in stated deficits could occur because actual outlay pat-
terns from those Trust Funds typically lag behind excise tax collec-
tions. Under present law, amounts in excess of those to be spent
during the current budget period (even though the amounts may be
obligated for future transportation expenditures) act to reduce stat-
ed deficits. -

5Under the budget rules, new direct spending may be offset by new revenues or reductions
in existing direct spending programs, If the transportation Trust Funds were reclassified as di-
rect spending, and received amounts equal to gross receipts from the excise taxes, a direct
spending budgetary shortfall could occur if Trust Fund spending exceeded those net revenues,
in which case an entitlement sequester would occur.



Table 3.—Federa!l Transportation Trust Fund and. General Fund Excise Tax Revenues, Fiscal Years

1993-2002
[Millions of dollars]
Tax 1998 1994-1995 «199619871998 )=— 1998 »=— 200020012002
A. Airport and Airway Taxes
1, Airport Trust Fund Taxes:

Air passenger ticket tax... 4,816 4,748 4,928-=—«1,189 ® ) ) ® © 0)
International departure tax 224 225 256 64 ® © ) @) ) )
Domestic air cargo tax 238 330 335 87 O) © © 0) ) CS)

Noncommercial aviation,
gasoline we 21 27 30 3 ) @ © ) C) )

Noncommercial aviation,
other fuel .. 145 159 wT 40 ) ) 0) © ro) ©

Total Airport. Trust
Fund taxes . | 4044 5489-5726 1,883 ® ) « ) ) O)

2. General Fund Aviation Taxes:

Noncommercial aviation gas-
line .. 4 15 16 © ©) O) 0) O) (O) 0)

Commercial aviation gaso-
line and jet fuel ... 0 0 0 ) ) (C) ) ) (0) 0)

Total General Fund:
Aviation .. 4 15 16 595 617 644 665 700 708 729



79

Fund expenditures are not automatic or linked to the dedicated ex-
cise taxes, but are subject to the same appropriations process as
other Federal discretionary spending.

Some proponents of higher transportation spending levels have
argued that the deficit reduction spending targets have caused sur-
pluses to accumulate in the Trust Funds. These persons suggest
that because the Trust Funds are financed with dedicated sector-
specific excise taxes, expenditure levels should be determined based
on the amount of revenues collected without regard to overall Fed-
eral budget deficit concerns. Discussions of Trust Fund surpluses
commonly surface, for example, when the tax-writing committees
review the adequacy of Trust Fund revenues as part of extending
Trust Fund excise tax rates that are scheduled to expire or when
authorizing committees seek higher expenditure levels than the ap-
propriations committees are willing to approve. Claims regarding
Trust Fund surpluses generally fail to take into account two impor-
tant factors. First, actual transportation expenditures lag behind
obligations for such spending. Whether a Trust Fund has a surplus
should be measured by reference to total obligated spending be-
cause ultimately amounts will need to be disbursed to satisfy those
obligations. For example, as noted in Part V.C., the CBO estimates
that at the end of fiscal year 1996, outstanding Highway Trust
Fund obligations totaled $36 billion, or almost two times the size
of the estimated end-of-year cash balance of $19 billion.71 Further,
the CBO estimates that the excess of obligations over cash balances
will continue throughout the next six years. Thus, claimed sur-
pluses could be viewed as representing cash held in reserve for fu-
ture satisfaction of existing obligations. Second, as described in
Part IV.A., gross receipts from the transportation excise taxes,
rather than net revenues, generally are dedicated to the Trust
Funds. Even if Trust Fund balances were to exceed future obliga-
tions, the surplus might be viewed as an amount attributable to re-
duced general income tax revenues instead of sector-specific user
taxes.

Approaches to modify Federal transportation spending and
financing : a eannnnnntas

The combined effect of changes in the transportation industry
since the Trust Fund structure was enacted, the Federal budget
rules designed to reduce deficit spending, and claims of Trust Fund
surpluses, have led to numerous proposals for modifications to or
elimination of the ‘current structure of Trust Fund programs and
excise taxes. The following are examples of the proposals that have
been discussed to modify the way in which the Federal role in
transportation spending is managed: (1) privatizing the programs
in Federally chartered entities; (2) returning some or all of the ex-
penditure program responsibility to the States; (3) reclassifying
current Federal spending from discretionary ‘spending to direct
spending, or (4) removing Trust Fund spending from budget deficit
calculations (ie., taking the Trust Funds “off budget”). Proposals to
restructure the current excise taxes, or to substitute either pri-
vately or Federally imposed “fees” for those taxes, have been ad-

71See footnote 66, supra.



12

gram expenditure authority is scheduled to expire after September
), 1

2. Airport Trust Fund excise taxes imposed on commercial
transportation

The three Airport Trust Fund excise taxes imposed on commer-
cial aviation are retail excise taxes. The structure of these excise
taxes is unchanged since the period when airline fares were regu-
lated by the Federal Government. That is, ultimate liability for
payment of tax is imposed on the person purchasing the transpor-
tation, not on the transportation provider.® Transportation provid-
ers may be subject to penalties, however, if they fail to make rea-
sonable efforts to collect the tax. Air transportation providers are
required to state separately the domestic air transportation excise
tax on passenger tickets.

The three Airport Trust Fund commercial air transportation ex-
cise taxes currently are scheduled to expire after December 31,
1996. Previously, the taxes expired during the period January 1,
1996 through August 26, 1996.

Domestic air passenger excise tax
Imposition and tax base

The 10-percent air passenger tax generally applies only to
amounts paid for domestic air transportation (Code sec. 4261).10 In
the case of domestic air transportation for which payment is made
outside the United States, the tax applies only if the transportation
both begins and ends within the United States. Domestic transpor-
tation is defined generally to include travel between two points
within the United States or travel to or from a point within the
continental United States 11 and a point within the “225 mile zone.”
The 225-mile zone includes the portions of Canada and Mexico
which are not more than 225 miles from the nearest point in the
continental United States.12

Special rules apply to air transportation between the continental
United States and Alaska or Hawaii and between Alaska and Ha-
waii. The portion of such transportation which is not within the
United States (e.g., the portion over thé Pacific Ocean between the
continental West Coast or Alaska and Hawaii) is not subject to the

_10-percent domestic air passenger excise tax.15 The 10-percent ex-
cise tax applies in full, however, to air transportation within the
States of Alaska and Hawaii.

® Structured in this manner, the excise taxes were not a factor in ratemaking decisions by reg-
ulatory bodies. The only other example of a “collected” Federal excise tax is the telephone excise
tax, which also originally was imposed only on activities subject to governmental rate regula-
tion.
Because the tax applies to “amounts paid” for air transportation, no tax is imposed on
transportation under airline frequent flyer programs for which no charge is made, Similarly, no-
charge transportation provided to irline employees as a fringe benefits not subject to tas tax
is imposed (determined by reference to actual amounts pal ) for reduced-ate travel available
under ‘equent flyer programs and airline employee and family fringe benefit programs.

‘Wtne term “lontinental United States” excludes Alacka and Hawaii.

12The Treasury Department is authorized to enter into agreements with Canada and Mexico
excluding specified areas that geographically fall within 225 miles of the United States from the
taxable zone if the Treasury determines that Canada or Mexico, respectively, imposes an appro-
priate air transportation tax on flights from such locations.

i8The $6 per passenger international air passenger departure excise tax, described below,
does apply to this transportation.



54

B. Airport and Airway Trust Fund

Table 4 presents data on Trust Fund revenues and expenditures
for the Airport Trust Fund. The table réports actual revenues and
expenditures for Fiscal Years 1993-1995 and Projected revenues
and expenditures for Fiscal Years 1996-2002. The table also re-
ports actual and projected end-of-year cash balances for the Trust
Fund. Because of long construction periods involved with the cap-
ital expenditures financed from the Airport Trust Fund, end-of-year
balances do not measure unobligated funds available for future
spending. The CBO estimates that.the Airport Trust Fund closed
the 1996 Fiscal Year with nearly $6 billion in unpaid commit-
ments. Table 4 reflects the scheduled December 31, 1996 expiration
of the aviation excise taxes. As a consequence, assuming continued
authorizations and outlays, the CBO projects that the Airport
Trust Fund balance will reach zero early in the 1998 Fiscal’ Year.

Table 4 reports past and projected “budget authority.” Budget
authority is authority provided by Federal law to incur financial
obligations that will result in outlays. Specific forms of budget au-
thority include appropriations, borrowing authority, contract au-
thority, and spending authority from offsetting collections. Contract
authority is important in transportation spending as contract au-
thority permits obligations to be incurred in advance of appropria-
tions or receipts. Contract authority, therefore, may be unfunded.
In recent years, the appropriations committees have imposed obli-
gation limitations that limit the amount of contract authority that
agencies would otherwise be able to initiate.



INTRODUCTION

Chairman Bill Archer of the House Committee on Ways and
Means has appointed a bipartisan task force of Members of that
Committee to advise him on transportation excise tax issues. The
task force will focus on the current structure of Federal excise
taxes imposed on all transportation sectors—aviation, highway,
water, and rail—and the reasons for that structure. Both the high-
way and aviation Trust Fund excise taxes or programs are sched-
uled to expire within the next year; future funding of the Trust
Fund programs financed with the excise taxes is dependent on ac-
tion by the Committee on Ways and Means within that period. Fur-
ther, an appeal is pending of a decision of the United States Court
of International Trade that the harbor maintenance excise tax is
unconstitutional as a plied to exports. If that decision is upheld on
appeal, funds availabl le to the Harbor Maintenance Trust Fund
could be reduced significantly.

By letter of October 2, 1996 (included in Appendix D), Chairman
Archer requested the staff of the Joint Committee on Taxation to
assist the task force on a continuing basis by developing informa-
tion needed for the task force’s work. This document} provides an
initial response to Chairman Archer's request for continuing assist-
ance to the task force. Part I of the document is an overview of the
current transportation excise taxes and Trust Funds, the budget
scorekeeping rules governing those taxes and Trust Fund expendi-
ture programs, and of general issues that arise in structuring dedi-
cated excised taxes to reflect the benefits received from programs
financed with those revenues. Part II provides more detailed back-

und information on the structure and history of the present-law

‘ederal transportation excise taxes. Part III provides information
on the expenditure purposes of the transportation Trust Funds and
certain General Fund transportation programs. Part IV discusses
the budget scorekeeping rules generally applicable to dedicated ex-
cise taxes and Trust Funds and the jurisdictional issues presented
by enactment of dedicated excise tax and Trust Fund expenditure
legislation. Part V provides background data on current transpor-
tation excise tax revenues and transportation Trust Fund expendi-
tures and balances. Part VI provides a status report on current cost
allocation studies of the Federal aviation and highway programs
being developed by the Department of Transportation. Part VII dis-
cusses general issues involved in structuring dedicated excise taxes
to allocate the burdens of the Trust Fund excise taxes among the
beneficiaries of the programs financed with the dedicated taxes,
and the effect that different structures may have on the role of

This document may be cited as follows: Joint Committee on Taxation, Present Law and Back-
ground Information on Federal Transportation Excise Taxes and Trust Fund Expenditure Pro-
grams (JCS-10-96), November 14, 1996.

())



71

users. An initial assignment of total annual FAA cost was to be
made to each of the lines of business, incremental costs of services
were to be estimated, and incremental cost plus a share of common
and fixed cost were to be allocated to user categories. The FAA re-
ceived draft material from the contractor during 1995 and 1996,
which has never been formally approved or fully reviewed by senior
management.

As the FY95CAS was being completed in the late summer of
1996, Congress passed the Federal Aviation Authorization Act of
1996 and it was signed into law by President Clinton on October
8. Section 274 of the 1996 authorization act directs the FAA to
“contract with an entity independent of the Administration...to con-
duct a complete independent assessment of the financial require-
ments of the Administration...” and ...“also assess“the costs to the
Administration occasioned by the provision of services to each seg-
ment of the aviation system.” Instructions in related committee and
conference reports suggest that the FAA should not employ any
company with which it has current contracts to conduct these as-
sessments. Instead, the law requires a new contract to be awarded
30 days after enactment and the studies to be completed in 90 days
after contract award. Thus, Congress has issued a specific require-
ment for preparation of a new aviation cost allocation study and
the almost complete FY95CAS does not fulfill these requirements.

Some of the significant issues involved in developing a cost allo-
cation include:

1. Determination of public benefit—prior cost allocations
have generally attributed costs entirely to aviation users;

2. Methodology or economic assumptions for distribution of
fixed/common costs to users;

3. Whether costs should be limited only to services the FAA
provides, excluding services provided to civil aviation users or
other government agencies including DOD;

4. How to account for F&E obligations in cost allocation—ex-
Pensed ¥ versus capitalized and depreciated; and

Whether cost responsibility should be based ona historical
or 4 projected basis.

The “independent” cost allocation required by the n new FAA au-
thority law will be underway in early November with results avail-
able by mid February 1997. Given that results from this congres-
sionally-directed study will be available relatively soon, I suggest
that these results be used by the Committee on Ways and Means
and the Joint Tax Committee in evaluating the requirements for
future aviation taxes or user charges.

In the meantime, we would be happy to discuss prior cost alloca-
tions and some of the significant issues involved in allocating costs
of services to users. We are also providing you with a study on cur-
rent fees collected by the agency. We look forward to working with
you on this project which is critical to aviation safety and effi-
ciency.



26

C. Water Transportation Excise Taxes

1. In general

Six excise taxes are imposed on four segments of the water trans-
portation sector: shipping on designated inland and intracoastal
waterways, domestic and international shipping through United
States ports, recreational motorboat transportation, and certain
commercial passenger water trarisportation. In the case of the first
three segments, at least a portion of the taxes imposed is dedicated
to financing Federal Trust Fund programs benefiting of the trans-
portation segments subject to tax. The tax on commercial pas-
senger water transportation is exclusively a General Fund tax.

e water transportation excise taxes, and the Trust Funds, if
any, to which the revenues are dedicated, consist of:

(1) a permanent 20-cents-per-gallon excise tax on fuels used
on commercial cargo vessels traveling on a designated system
of United States inland and intracoastal waterways, revenues
from which are dedicated to the Inland Waterways Trust Fund;

(2) a permanent harbor maintenance excise tax imposed on
the loading and unloading of commercial cargo and passengers
at all publicly navigable U.S. ports (other than ports that are
part of the inland or intracoastal waterway system, above),
revenues from which are dedicated to the Harbor Maintenance
Trust Fund;

(3) through September 30, 1999, a 14-cents-per-gallon excise
tax imposed on gasoline used in recreational motorboats, reve-
nues from 11.5 cents of which are dedicated to the Aquatic Re-
sources Trust Fund and the Land and Water Conservation
Fund ($1 million per year);

(4). after Dece: rr 31, 1997 and through December 31, 1999,
a 24.3-cents-per-gallon General Fund excise tax on diesel fuel
used in recreational motorboats; and

(5) a permanent $3 General Fund excise tax imposed on pas-
sengers traveling on commercial vessel voyages extending for
one or more nights, or on voyages on which gambling occurs
beyond the territorial waters of the United States; and

(6) a permanent 4.3-cents-per-gallon General Fund transpor-
tation fuels excise tax imposed on inland and intracoastal wa-
terway and motorboat gasoline.

2. Inland and intracoastal waterways excise tax
Imposition of tax and exemptions

A permanent 20-cents-per-gallon excise tax is imposed on fuel
used in powering commercial cargo vessels on a designated system
of 27 inland and intracoastal waterways, including the Mississippi
River upstream from Baton Rouge, the Mississippi River’s tribu-
taries, the Gulf of Mexico and Atlantic Intracoastal Waterways,
and the Tennessee-Tombigbee Waterway (sec. 4042). The inland
waterways excise tax is a use tax, im) josed on the boat operator.

The excise tax does not apply to fuel for vessels primarily used
for passenger transportation nor does it apply to fuel used in deep-
draft ocean going vessels. Additional exemptions are provided for
fuels used by State and local governments in transporting property



Figure 5.--Total Federal Transportation Outlays and Trust Fund Outlays by
Function, Fiscal Years 1995 (millions of dollars) °

$19,788 $19,472

$10,020 [Total Outlays
‘rust Fund Outlays

s7.384
$4,473 Z a
$3,843
$3,179
$1,035 : soi. * gyas ve
ft
Highways. ‘Mass Transit Railroads Air Transportation — Water Transportation Miscellaneous.

Source: See Tables 4-8 and Figure3. < >

69


Table 8.—Revenue and Outlays for the Harbor Maintenance Trust Fund, Fiscal Years 1993-2002
[Millions of dollars]

Year 1993" 19942 1995" 1996 1997> 1998> 1989> 2000 2001 2002»

Tax Revenue ..
Budget Authority .
Outlays From Prior Years’ Budget Authority
Total Outlays ....

588 621 697 746 ‘784 826 873 922 972 = 1,025
466 447 521 500 517 584 652 570 588 608

0 0 0 0 0 0 0 0. 0 0
446 447 521 500 517 534 552 570 588 608

@Data for 1993-1995 report actual tax revenues transferred to the Trust Fund as tabulated by the CBO using IRS data. ‘The data for 1993-
1995 also report actual New Budget Authority and Outlays.

CBO projections based on March 1996 CBO baseline including projected inflation. Actual revenue for fiscal year 1996 is to be reported No-
vember 15, 1996.

Source: Congressional Budget Office.

zo


19

fuels is comprised of a Trust Fund rate and a permanent General
Fund rate. CNG is subject only to the permanent General Fund
rate. Other special motor fuels include liquefied natural gas
(“LNG”), benzol, naphtha, liquefied petroleum gas (e.g., propane),
natural gasoline, and any other liquid (e.g., ethanol and me ol)
other than gasoline and diesel fuel.

Table 1, below, provides a summary of the current highway
motor fuels tax rates.24

Table 1.—Current Federal Highway Motor Fuels Tax Rates

[Rates shown in cents per gallon]

Trust
General gate

Fuel Fund
ue Rato Fund Rate “ine ;
Gasoline . 14.0 43 18.3
Diesel fuel . . 20.0 43 24.3

Special motor fuels (other than

CNG) . 14.0 . 43 18.3
CNG ... 0 143 48

1The statutory rate is 48.54 cents per thousand cubic feet (“MCF”), which is
equivalent on an energy (Btu) basis to the 4.3-cents-per-gallon General Fund por-
tion of the tax rate imposed on propane. In general, the motor fuels tax rates are
not determined by Btu equivalency. Thus, fuels with fewer Btus per gallon (e.g.,
Propane) may be taxed somewhat higher per Btu than fuels having a higher en.
ergy content per gallon (e.g., diesel fuel).

Exemptions .
Exempt highway uses.—Present law includes numerous exemp-
tions (including partial exemptions) for specified uses of taxable
fuels or for specified fuels. Because the gasoline and diesel fuel
taxes generally are imposed before the end use of the fuel is
known, many of these exemptions are realized through refunds to
end users of tax paid bye party that processed the fuel earlier in
the distribution chain. se exempt uses and fuels include:
(1) use in State and local government and nonprofit edu-
cational organization highway vehicles;
(2) use in buses engaged in transporting students and em-
ployees of schools;
(8) use in private local mass transit buses having a seating
capacity of at least 20 adults (not including the driver) when
the buses operate under contract with (or are subsidized by) a
State or local governmental unit to furnish the transportation;
an

(4) use in private intercity buses serving the general public
along scheduled routes. (Such use is totally exempt from the
gasoline excise tax and is exempt from 17 cents per gallon of
the diesel fuel tax.)

Before January 1, 1996, each of the rates shown, with the exception of the rates on liquefied

troleum gas (propane) and CNG, included an additional 0.1 cent per gallon to finance the
Peaking Underground Storage Tank Trust Fund program. (See also Appendix A for a listing of
motor fuels excise tax rates by transportation sector.)



36

B. Highway Trust Fund
1. In general

The Highway Trust Fund was established in 1956 to coordinate
the Federal role in highway construction and maintenance activi-
ties, including the development of the then-new Interstate Highway
System. Prior to that time, General Fund excise taxes had been im-
posed on highway transportation, and Federal funding for these ac-
tivities came from general revenues. Since 1982, the operative
Highway Trust Fund provisions have been contained in the Inter-
nal Revenue Code and, the Highway Trust Fund has been divided
into two accounts, a Highway Account and a Mass Transit Account,
each of which is the funding source for specific programs.4®

Highway and Mass Transit Account expenditure purposes have
been revised with passage of each authorization Act enacted since
establishment of the Highway Trust Fund in 1956. In general, ex-
penditures authorized under those Acts (as the Acts were in effect
on the date of enactment of the most recent such authorizing Act)
are approved Highway Trust Fund expenditure purposes.*? Author-
ity to make expenditures from the Highway Trust Fund is sched-
uled to expire after September 30, 1997. Thus, as with Airport
Trust Fund expenditures, no Highway Trust Fund monies may be
spent for a purpose not approved by the tax-writing committees of
Congress. Further, no Highway Trust Fund expenditures may
occur after September 30, 1997, without such approval.

Highway Trust Fund spending further is limited by two, internal
to the Trust Fund, anti-deficit provisions. The first of these provi-
sions limits Highway Account obligations in any year to amounts
not exceeding revenues projected to be raised for that Account by
the dedicated excise taxes during the two following years (the so-
called “Byrd Rule”). The second anti-deficit provision similarly lim-
its Mass Transit Account obligations to revenues projected to be
raised for that Account by the dedicated excise taxes during the
next year (the so-called “Rostenkowski Rule”). Because of these two
rules, the highway transportation excise taxes typically are sched-
uled to expire at least two years after current authorizing Acts.5°
If either of these rules is violated, spending for specified programs
funded by the relevant Trust Fund Account is to be reduced propor-
tionately, in much the same manner as would occur under a gen-
eral Budget Act sequester.

2. Highway Account

The Highway Trust Fund’s Highway Account receives revenues
from all non-fuel highway transportation excise taxes and revenues
from all but 2 cents per gallon of the highway motor fuels excise

“The Highway Trust Fund statutory provisions were placed in the Internal Revenue Code
in 1982 (Ce sec, 9503).

©The authorizing Acts which are currently referenced in the Highway Trust Fund are the
Highway Revenue Act of 1956, Titles I and II of the Surface Transportation Assistance Act of
1982, the Surface Transportation and Uniform Relocation Act of 1987, and the Intermodal Sur-
face Transportation Efficiency Act of 1991,

50 1993 projections of a revenue shortfall in the Highway Account during the later years of
the current authorizing Act led Congress in 1998 to extend the 1990 2.5-cents-per-gallon Gen-
eral Fund motor fuels excise taxes on highway transportation through 1999 and to dedicate
those revenues to the Highway Trust Fund beginning after September 30, 1995.



x 56

C. Highway Trust Fund

Tables 5 and 6 present data on Trust Fund revenues and expend-
itures for the Highway Account and the Mass Transit Account of
the Highway Trust Fund. The tables report actual revenues and
expenditures for Fiscal Years 1993-1995 and projected revenues
and expenditures for Fiscal Years 1996-2002. Phe tables also re-
port actual and projected end-of-year cash balances for the two Ac-
counts.

Tables 5 and 6 report past and projected “budget authority.”
Budget authority is authority provided by Federal law to incur fi-
nancial obligations that will result in outlays. Specific forms of
budget authority include appropriations, borrowing authority, con-
tract authority, and spending authority from offsetting collections.
Contract authority is important in transportation spending as con-
tract authority permits obligations to be incurred in advance of ap-
propriations or receipts. Contract authority, therefore, may be un-
funded. In recent years, the appropriations committees have im-
posed obligation limitations that limit the amount of contract au-
thority that agencies would otherwise be able to initiate.

As is the case for the Airport Trust Fund, it is important to rec-
ognize that because of long construction periods involved with the
capital expenditures financed from these accounts that the unex-
pended end-of-year cash balances do not measure the amount of
unobligated funds available for future spending on highway and
transit projects. On the contrary, existing obligations far exceed the
amounts currently in the Trust Funds. For example, CBO esti-
mates that at the end of Fiscal Year 1996, outstanding obligations
of the Highway Trust Fund totaled $36 billion, roughly twice the
size of the estimated Fiscal Year 1996 end-of-year cash balance of
$19 billion.6¢

The level of future obligations compared to future cash balances
will depend on actions taken by authorizing and appropriations
committees. Limits on spending may continue to cause certain
highway authorizations to go unobligated. The CBO projection of
unfunded budget authority is the sum of unpaid balances on con-
tracts outstanding and other budget authority that has pone unob-
ligated due to annual obligation limitations. Unfunded budget au-
thority represents future claims against the Trust Fund. The CBO
projects that the difference between unfunded budget authority and
cash balances will narrow over the next six years. Nevertheless,
the CBO projects that unfunded budget authority will continue to

outstrip cash balances by several billion dollars in Fiscal Year —

2002. (See Figure 2.)

United States Congress, Congressional Budget Office, “Statement of Robert A. Sunshine,
Deputy Assistant Director for Budget Analysis, Congressional Budget Office on The Highway
Trust Fund,” Subcommittee on ce Transportation, Committee on Transportation and Infra-
structure, U.S. House of Representatives, May 16, 1996.

w



22

elect) or to the persons that actually paid the tax upon removal of
the gasoline from a terminal. In the case of diesel fuel, all exemp-
tions are realized either through refunds or through the removal of
dyed fuel (on which no tax is paid).82 Like gasoline refunds, diesel
fuel tax refunds generally are made only to ultimate users of the
fuel. An exception provides that these refunds are made only to ul-
timate vendors of fuel to State and local governments:and farmers,
thereby allowing tax-free pricing on sales to these users.

History of highway motor fuels excise tax rates

Before establishment of the Highway Trust Fund in 1956, the
Federal Government’s role in highway construction and mainte-
nance was funded through general revenues. Excise taxes at a rate
of 1 cent per gallon were imposed on gasoline, diesel fuel, and spe-
cial motor fuels from 1932 to 1940; a 1.5-cents-per-gallon tax was
imposed from 1940 to 1951; and a 2-cents-per-gallon tax was im-
posed from 1951 to 1956. When the Highway Trust Fund was es-
tablished in 1956, the motor fuels tax rates were increased initially
to 3 cents per gallon. Subsequent increases in the highway motor
fuels excise tax rates were enacted in 1959 (to 4 cents per gallon),
in 1982 (to 9 cents per gallon), in 1984 (diesel fuel to 15 cents per
gallon to offset revenue lost by a reduction in the heavy vehicle an-
nual use tax), in 1990 (to 14 cents per gallon (gasoline and special
motor fuels) and 20 cents per gallon (diesel fuel), and 1993 (to 18.3
cents per gallon (gasoline and special motor fuels) and 24.3 cents
per gallon (diesel fuel)).

Before 1990, the highway transportation motor fuels taxes gen-
erally were scheduled to expire in concert with expiration of au-
thorizing highway legislation.33 Beginning with enactment of the
Omnibus Budget Reconciliation Act of 1990 use of a portion of the
highway motor fuels tax revenues for General Fund deficit reduc-.
tion, however, that link was broken—the 1990 rate increases were
effective through September 30, 1995, and were subsequently ex-
tended through September 30, 1999 in the 1993 legislation). The
1998 General Fund rate increase was permanent.

3. Non-fuel Highway Trust Fund excise taxes

In addition to highway motor fuels excise tax revenues, the High-
way Trust Fund receives revenues produced by three excise taxes
imposed exclusively on heavy highway vehicles or tires. These
taxes are imposed only on heavy highway vehicles to achieve a bet-
ter matching of Federal highway program costs with excise taxes,
based on findings of past DOT highway cost allocation studies that
heavier vehicles disproportionately contribute to deterioration of
the highways. Unlike the highway motor fuels excise taxes, there

%2TThe diesel fuel dyeing regime allows, for example, #2 fuel oil (diesel fuel) to be sold as heat-
ing oil without ent of tax, thereby eliminating the need for homeowners to purchase high-
er-priced, tax-paid fuel and apply for refunds,

Anti-deficit provisions ofthe Highway Trust Fund (Code sec. 9503) limit new expenditure
obligation authority to projected revenues for the upcoming two years (Highway Account) or one
year (Mass Transit Account), A projected shortfall would result in across-the-board (pro rata)
Feductions in certain program expenditure levels. As a result, scheduled Highway Trust Fund
tax expirations generally lag two years behind authorizing legislation expirations. Current. au-
thorizing legislation expires after September 20, 1997; current Highway Fund excise tax
rates expire after September 30, 1999.



89

are part of a larger tax system. The importance of the vertical eq-
uity of any specific tax is by that tax’s marginal effect on the verti-
cal equity of the entire tax system. Because the use of transpor-
tation services generally is a larger share of the consumption ex-
penditures of lower-income individuals than of higher-income ex-
penditures, the franspertation excise taxes, which tend to be pro-
portional to the use of transportation services, are considered to be
regressive. That is, while the total amount of transportation taxes
paid may rise as individuals’ incomes rise, the taxes as a propor-
tion of income fall.82

While it is possible to conceive of a system of transportation
taxes in which the tax burden does not decline as income increases,
such a system generally would require more information than is
needed under the current tax collection system at the point of im-
position. Any system that relies on characteristics of individual tax-
payers generally will be administratively more complex and prone
to evasion than one that treats all purchasers identically regardless -
of individual characteristics.

The benefit principle and transportation excise tax equity

According to the benefit principle, an equitable tax system is one
under which each taxpayer contributes commensurately with the
benefits which he or she receives from the public services provided.
Unlike the principles of horizontal equity or vertical equity, but
like the notion of cost allocation discussed below, the benefit prin-
ciple directly links tax and expenditure policy in an assessment of
equity. Many analysts see several of the current Trust Fund excise
taxes as examples of the benefit principle. However, they only sat-
isfy the benefit principle notion of equity in a rough way. For ex-
ample, while gasoline use depends on distances driven, generally
each mile ‘driven does not result in the same benefit, nor the same
benefit for each driver. The Washington, D.C., Beltway may have
a greater benefit for a driver attempting to get to work during
workweek morning hours than for the same driver doing errands
on the weekend, while the tax paid would depend upon the vehicle
driven and the driving conditions encountered. Moreover, expendi-
ture decisions are made for specific outlays, while taxes are paid
independently of particular services provided, so there may be no
direct linkage between the specific benefit received and the tax im-
posed. For example, all air travelers would pay taxes that finance
an upgrade of air traffic control facilities in the Northeast, even
though many air travelers fly only within West Coast air corridors.
Attempts to apply the benefit principle to taxation in a more pre-
cise fashion ofen would involve creating a more complex adminis-
trative structure in a attempt to account for benefit differences
across individual taxpayers. The benefit principle may be more
readily applied with respect to project-specific fees.

Cost allocation and transportation excise taxes
Some analysts suggest that when looking at a joint financing and
expenditure program a fair way to assess the financing burden is

82See, for example, Joint Committee on Taxation, Met! and Issues in Measuring
Changes in the Distribution of Tax Burdens (JCS-7-93), June 14, 1993, p. 66.



43

produced by those taxes, to the transportation Trust Funds. Net
revenues equal approximately 75 percent of gross receipts. The con-
cept of net revenues reflects budget scorekeeping conventions that
discount excise tax revenues by the amount that income tax re-
ceipts are expected to decrease as a result of monies being removed
from the private economy for payment of excise taxes.6?

Trust Fund expenditure (but not revenue dedication) provisions
also are contained in transportation titles of the United States
Code. These provisions generally authorize specifically identified
expenditure purposes, with accompanying dollar amounts that are
authorized to be spent therefor. These provisions are within the ju-
risdiction of the authorizing committees: in the House, generally,
the Committees on Transportation and Infrastructure, Commerce,
and Science and Technology; and in the Senate, erally, the
Committee on Environment and Public Works and the Committee
on Commerce, Science, and Technology.

Unused cash balances in the transportation Trust Funds earn in-
terest on investments in Government securities (Code sec. 9602).
These earnings are available, as are the dedicated excise tax reve-
nues, for expenditure from the respective Trust Funds.
Expenditure appropriations

The transportation Trust Funds provide that monies in the Trust
Funds may be spent only when they are appropriated. The opera-
tive Trust Fund provisions may provide for expenditures pursuant,
to advance appropriations, or pursuant to authority granted to the
Executive Branch to enter into contracts obligating the United
States to spend amounts not exceeding legislatively prescribed
maximums with actual appropriations followin . Monies generally
are appropriated and levels of annual permitted contract authority
are established as part of the Congressional appropriations process.

See, Joint Committee on Taxation, Discussion of Revenue Estimation Methodology and Proc-
ess (JCS-14-92), August 13, 1992.



84

received) for an additional unit of a good is less than the marginal
resource cost of producing the additional unit of the good.76

The benefit principle, transportation excise taxes, and effi-
ciency

While all taxes finance benefits (i.e., pay for Government serv-
ices), Government provision of transportation services is different
from the provision of many other services. At least conceptually, it
is possible to exclude many citizens from the use of transportation
services. For example, only licensed drivers are permitted to drive
on the public roadways, while the all citizens, without exclusion,
enjoy the benefits of the national defense. This distinction makes
the provision of transportation services somewhat like the provi-
sion of other goods and services by the private market for which
prices are charged.77 Receipts from many of the transportation ex-
cise taxes discussed in this document are dedicated to financing
specific benefits through Federal expenditure programs. Some peo-
ple view transportation excise taxes such as these as payments for
the provision of specific services (highways, air traffic control, locks
and dams, etc.) much as the fees collected at highway toll booths
pay for the construction and maintenance of specific toll roads.
Some argue that it is appropriate to tie certain Government serv-
ices or expenditures to specific tax revenues, under what is some-
times referred to as the “benefit principle,” of taxation.7® Such
taxes are often referred to as “benefit taxes.” The tax is viewed as
the price one must pay for the service. For example, to drive a car
on the public highways one must buy gasoline and that means one
must pay the Federal gasoline excise tax. If one chooses not to
drive, then generally one does not purchase taxed gasoline, at least
directly. When a tax is collected in return for a service provided,
the efficiency standard remains unchanged. The tax generally
would be viewed as promoting the efficient use of society’s re-
sources as long as the tax paid for an additional unit of the trans-
portation service exceeds the incremental, or marginal, resource
cost of producing the additional units of transportation service.

As a practical matter, it would be difficult design and administer
a pure benefit tax. Such a tax theoretically may require a different
tax payment by each individual. Determining the correct payment
and administering such a system would be costly. Moreover, many
would view such taxes as unfair because two seemingly similar tax-
payers may be asked to pay different amounts of tax. On the other
hand, simplification may dilute some of the efficiency advantages
of a theoretical benefit tax.

76For a more detailed discussion of economic efficiency in the provision of transpértation serv-
ives, see, Congressional Budget Office, Paying for Highways, Airways, and Waterways: How Can
Users Be Charged? May 1992.

7 There are reasons that might lead to the conclusion that the private market would not pro-
vide transportation or other services, even if it were possible to exclude certain users and charge
individual prices. See the discussion of economies of scale below.

78'The benefit principle has long been advanced as a standard of equity and is discussed more
in that context below.



Table 7.—Revenue and Outlays for the Inland Waterways Trust Fund, Fiscal Years 1993-2002
[Millions of dollars]

Year 993° 1994" 1995" 1996" 19975 1998 1999 2000 2001» 2002>

Tax Revenue ..
Budget Authority

79 113 129 116 7 119 120 123 125 127

88 6 55 53 55 56 58 59 61 68

Outlays From Prior Years’ Budget Authority u 51 83 28 21 0 0 0 0 0

Total Outlays ..... : i 6 93 87 68 56 87 59 61 63
“The Inland Waterways Trust Fund revenue projections are net of refunds.

Data for 1993-1996 report actual tax revenues transferred to the Trust Fund as tabulated by the CBO using IRS data. The data for 1993-
1996 also report actual New Budget Authority and Outlays.

CBO projections based on CBO March 1996 baseline including projected inflation.
Souree: Congressional Budget Office.

19


85

Marginal cost pricing, transportation excise taxes, and eco-
nomic efficiency

An alternative way to achieve an economically efficient outcome
is to set the price charged to users of a service equal to the mar-
ginal cost of providing that service to the individual user. As ex-

lained above, consumers compare the price of a service with the
Benefit they anticipate from receiving an additional unit of service.
If the price exceeds the benefit, consumers will not use the addi-
tional service, or will decrease their use. On the production side,
if consumers are charged less than the marginal cost of providing
the service, they may be encouraged to overuse the service. To!
welfare declines as costs exceed the benefits provided. If consumers
are charged more than the marginal cost of providing the service,
they may be discouraged from using the service. ‘Potal welfare
could increase by further provision of the service because further
use would produce benefits that exceed costs. When price equals
marginal cost there is neither overuse nor underutilization and so-
- ciety’s resources are used efficiently. ‘

The conclusion that efficiency results when users are asked to
pay the marginal cost of providing the service is not the same as
saying the user should pay the average cost of provision of the serv-
ice. Thus, setting taxes by average cost generally will not lead to
an efficient allocation of resources. The structure of present-law
Highway Trust Fund taxes was chosen, in part, to correspond to a
1982 DOT cost allocation analysis based on average costs.

The conclusion that marginal cost pricing produces an efficient
outcome may appear contradictory with the previous discussion
that benefit taxation could produce an efficient outcome. The pre-
vious discussion suggested that an outcome could be efficient if
each user were charged his or her marginal benefit so long as that
benefit exceeded the incremental, or marginal, cost of providing the
service. The difference between that standard and the standard
currently under discussion involves whether.consumers of the serv-
ice pay the full value of the benefit they receive or whether they
pay the marginal cost of producing that benefit. When consumers
pay only for the marginal cost of producing that benefit, there gen-
erally is value to the consumer beyond the value of the resources
used to produce the benefit. When consumers gy, the full value of
the incremental benefit they receive, the provider receives as incre-
mental profit that value of the benefit that exceeds the marginal
cost of producing the service. Thus, the difference between the two
efficient outcomes involves whether consumers retain the value of
benefit in excess of cost or whether consumers pay that value of
benefit in excess of cost over to the producer of the service.79

If the transportation excise taxes were imposed at levels that
represented the incremental resource cost incurred for providing
transportation services to each taxpayer, then the taxes could be
called “economically efficient.” However, in choosing a tax rate that
equals a user’s marginal cost a question arises as to whether policy

7 Economists call the benefit a consumer receives in’ exces of the price he or she must pay:
the “consumer surplus.” Likewise, economists call the revenue a producer receives in excess of
the marginal cost of producing a good or service the “producer surplus.” Thus, the difference
between the two efficient pricing structures may be described as whether the consumer surplus
is transferred to the producer.



30

Table 2.—Current Federal Water Transportation Fuels

Excise Tax Rates

{Rates shown in cents per gallon]
* Trust Fund General ite
‘Transportation Rate FundRate | “Rag
Inland/Intracoastal Water-
way Fuels 20.0 43 24.3
Recreational Motorboat:
Gasoline 11.5 6.8 18.3
Diesel Motor Fuel No tax No tax 1No tax

1 Beginning after December 31, 1997, tax rate will be 24.3 cents per gallon, all

for the ( General Fund.



6

(3) through September 30, 1999, a 14-cents-per-gallon excise
tax imposed on gasoline used in recreational motorboats, reve-
nues from 11.5 cents per gallon of which are dedicated to the
Aquatic Resources Trust Fund and the Land and Water Con-
servation Fund ($1 million per year);

(4) after December 31, 1997 and through December 31, 1999,
a 24.3-cents-per-gallon General Fund excise tax on diesel fuel
used in recreational motorboats; and

(5) a permanent $3 General Fund excise tax imposed on pas-
sengers traveling on commercial vessel voyages extending one
or more nights, or on voyages on which gambling occurs be-
yond the territorial waters of the United States; and

(6) a permanent 4.3-cents-per-gallon General Fund transpor-
tation fuels excise tax imposed on inland and intracoastal wa-
terway fuels and on motorboat gasoline.

4, Rail transportation excise taxes

There is no Federal rail transportation trust fund. Instead, rail-
roads generally construct and maintain railways using their own
capital. Thus, there are no Federal rail transportation trust fund
excise taxes. Diesel motor fuel used in trains is, however, subject
to a General Fund excise tax of 5.55 cents per gallon. After Sep-
tember 30, 1999, this rate is scheduled to decline to 4.3 cents per
gallon. The 4.3-cents- -per-gallon rate is permanent.

Limited amounts of Federal General Fund expenditures finance
rail programs such as operating assistance for Amtrak and safety-
related expenditures by the Federal Rail Administration.

B. Budgetary Treatment of Transportation Excise Tax
Revenues and Trust Fund Expenditures

Because most transportation excise taxes are dedicated to Trust
Fund programs, extensions and modifications of the taxes fre-
quently have been considered in conjunction with extensions and
revisions of Trust Fund expenditure programs. Viewed in their to-
tality, the excise taxes and programmatic expenditures require ap-
proval of at least three legislative components, by at least three
committees in each House of Congress—the tax-writing committee,
one or more authorizing committees, and the appropriations com-
mittee. The tax-writing committees ensure adequate revenues and
review Trust Fund expenditure purposes; the authorizing commit-
tees consider competing transportation needs on a detailed level;
and, the appropriations committees reconcile transportation spend-
ing needs with all other Federal spending needs. Historically, Trust
Fund tax provisions and expenditure authorizations generally have
been enacted as separate titles of a single Act; appropriations gen-
erally have been enacted separately as part of the annual Congres-
sional appropriations process.

The Budget, Enforcement Act of 1990 and related legislation (col-
lectively the “1990 Budget Act”) include two provisions that are
central to the operation of the Federal transportation Trust Fund
programs: an assumption that dedicated excise taxes are imposed
permanently (even if statutorily they are scheduled to expire) and
classification of Trust Fund spending as discretionary spending



45

Example (1).—In 1995, the Airport Trust Fund excise taxes were
scheduled to expire after December 31, 1995. The taxes had been
imposed since before Janu: 1, 1995. In November 1995, when
Congress passed the Balanced Budget Act of 1995 extending these
excise taxes, no revenue increase was scored from the extension.
This occurred because the February 1995 CBO revenue baseline,
against which legislation was scored, assumed permanent imposi-
tion of these dedicated excise taxes (i.e., the scheduled expiration
date was disregarded in forecasting future Government receipts).

Example (2).—The Airport Trust Fund excise taxes expired after
December 31, 1995. When the CBO issued its 1996 revenue base-
line, projected future receipts from the Airport Trust Fund excise
taxes were deleted, and deficit forecasts were adjusted accordingly.
The excise taxes were reimposed by the Small Business Job Protec-
tion Act of 1996 (the “Small Business Act”) for the period August
27, 1996, through December 31, 1996. Because the Airport Trust
Fund excise taxes had expired when the 1996 CBO revenue base-
line was issued, no revenue from these excise taxes was included
in the baseline, and thus, revenue increases were scored from their
reinstatement in the Small Business Act, for the approximatel
four-month period during which the taxes actually were reim .

Example (3).—Assume the Airport Trust Fund excise taxes ex-
pire as scheduled after December 31, 1996. When the February
1997 CBO revenue baseline is issued, the Airport Trust Fund ex-
cise taxes will have expired and the baseline will not include any
projected receipts from them. If Congress acts to reimpose the
taxes in 1997 after the CBO baseline is issued, revenue increases
will be scored for the period during which the taxes are reimposed.

Example (4).—Assume, on the other hand, that the Small Busi-
ness Act had extended the Airport Trust Fund taxes through April
15, 1997. In that Act, revenue increases would have been scored for
the period during which the taxes were reimposed (i.e., through
April 15, 1997). In the February 1997 CBO revenue baseline, the
taxes would be assumed to be in effect for the entire budget period
because the taxes would have been in effect at the time the CBO
baseline was issued, and as dedicated excise taxes, would be as-
sumed. permanent under the budget scorekeeping rules. If Congress
before April 16, 1997, approved a further extension, or reimposed
the taxes after the assumed April 15 expiration and before a new
revenue baseline was issued in 1998, no revenue increases would
be scored because the February 1997 CBO revenue baseline would
assume permanent imposition of the taxes.

Example (5).—The Highway Trust Fund excise taxes are sched-
uled to expire after September 30, 1999. Assume that as part of
Highway Trust Fund expenditure reauthorization legislation in
1997, Congress extends these taxes for three additional years. No
additional Federal revenues would be scored from this extension
because the 1997 CBO revenue baseline will reflect permanent im-
position of the excise taxes under the Budget Act rule that current
dedicated excise taxes are assumed permanent.

Example (6).—Assume that as part of the highway legislation de-
scribed in Example (5), the Highway Trust Fund special motor
fuels tax on alternative fuels is extended at a lower rate than is
imposed under present law. This provision would be scored as hav-



5

2. Highway transportation excise taxes

Excise taxes are imposed on fuels and heavy vehicles (including
certain parts and accessories therefor) used in highway transpor-
tation. Between 1956 when the Highway Trust d_was estab-
lished and 1991, all revenues from these taxes were dedicated to
funding for the programs financed by that Trust Fund. Beginning
in 1983, the Highway Trust Fund financed certain mass transit
programs as well as traditional highway construction and mainte-
nance programs. Since 1991, a portion of the motor fuels excise tax
revenues also has been dedicated to the General Fund of the Treas-
ury for deficit reduction. The articles subject to tax and the Trust
Fund tax rates generally have been structured to produce financial
contributions from different highway transportation segments, de-
termined in part by reference to past studies of relative Federal
program costs created by those segments. A majority of the reve-
nues produced by highway transportation excise taxes is derived
from the taxes on motor fuels.

The current highway transportation excise taxes consist of:

(1) taxes on gasoline, diesel fuel, and special motor fuels;

(2) a retail sales tax imposed on trucks and trailers having
gross vehicle weights in excess of prescribed thresholds;

(3) a tax on manufacturers of tires designed for use on
heavy highway vehicles; and

(4) an annual use tax imposed on trucks and tractors hav-
ing taxable gross weights in excess of prescribed thresholds.

The Trust Fund components of the highway motor fuels excise
taxes and the non-fuels highway excise taxes are scheduled to ex-

ire after September 30, 1999; the General Fund component of the

ighway motor fuels excise taxes is permanent. Highway Trust
Bund expenditure authority is’ scheduled to expire after September
30, .

3. Water transportation excise taxes

Six excise taxes are imposed on four segments of the water trans-
portation sector: shipping on designa’ inland and intracoastal
waterways, domestic and international shipping through United
States ports, recreational motorboat transportation, and certain
commercial Passenger water transportation. In the case of the first
three segments, at least a portion of the taxes imposed is dedicated
to financing of Federal Trust Fund programs benefiting the trans-
portation segments subject to tax. The tax on commercial pas-
senger water transportation is exclusively a General Fund tax.

e water transportation excise taxes, and the Trust Funds, if
any, to which the revenues are dedicated, consist of:

(1) a permanent 20-cents-per-gallon excise tax on fuels used
on commercial cargo vessels traveling on a designated system
of United States inland and intracoastal waterways, revenues
from which are dedicated to the Inland Waterways Trust Fund;

(2) a permanent harbor maintenance excise tax imposed on
the loading and unloading of commercial cargo and passengers
at all publicly navigable U.S. ports (other than ports that are
part of the inland or intracoastal waterway system, above),
revenues from which are dedicated to the Harbor Maintenance
Trust Fund;



39

fish, and wetlands restoration programs. The Aquatic Trust Fund,
established in 1984 as the successor to two prior special funds with
similar purposes, is divided into two accounts: a Boating Safety Ac-
count and a Sport Fish Account (Code sec. 9504). .

As described in Part II.C., motorboat gasoline taxes fund both
the Boat Safety Account and a portion of the Sport Fish Account.
The Sport Fish Account also receives substantial funding from an
excise tax on sport fishing equipment (including outboard motors
and certain electronic fish finding devices); the wetlands activities
of the Sport Fish Account are funded entirely with revenues from
the tax on gasoline used in off-highway small engines.

Boating Safety Account

The Boating Safety Account is funded exclusively with motorboat
gasoline excise tax revenues. This Account receives up to $70 mil-
lion per fiscal year of these revenues, but no transfers occur if the
transfers would result in the balance in the Account exceeding $70
million. Two-thirds of the monies in the Boating Safety Account in
any fiscal year may be spent for State boating safety programs,
with the remaining one-third being available to offset operating ex-
penses of United States Coast Guard (including the Coast Guard
Auxiliary) recreational boating safety programs.54 The types of
State programs for which funding may be provided include:

(1) Providing facilities, equipment, training, supplies, and
personnel for boat safety education programs and boat safety
law enforcement activities;

(2) Acquiring, constructing, and repairing public access sites
used primarily by recreational boaters; .

(3) Conducting boat safety inspections and accident inves-
tigations;

(4) Establishing and maintaining facilities for emergency or
search-and-rescue assistance; an

(5) Establishing and maintaining navigation aids.

Expenditures may be made from the Boating Safety Account
through March 31, 1998.55 Boating Safety Account appropriations
have historically fallen below the maximum $70 million per year;
as a result, a portion of monies that otherwise would be allocated
for this purpose have been transferred to the Sport Fish Account.

Sport Fish Account

The Sport Fish Account funds Federal-State grants programs ad-
ministered by the Department of the Interior for restoring and
managing all species of fish that have material value in conriection
with sport or recreation in the marine and/or fresh waters of the
United States. A sub-account of the Sport Fish Account (which re-
ceives gasoline excise tax revenues attributable to off-highway
small-engine use) finances wetlands restoration activities.

The Sport Fish Account operates under a permanent appropria-
tion Act, enacted in 1951;5¢ therefore, substantially all of the mon-
ies received by the Account are spent on a current basis.

54 Most of the Coast Guard’s budget is from General Fund revenues.
85 See also section 13106 of Title 46, United States Code.
6 See section 777 et seq., Title 16, United States Code.



18

B. Highway Transportation Excise Taxes
1. In general

Excise taxes are imposed on fuels and heavy vehicles (including
certain parts and accessories therefor) used in highway transpor-
tation. Between 1956 when the Highway Trust Fund was estab- .
lished and 1991, all revenues from these taxes were dedicated to
funding for the programs financed by that Trust Fund. Beginning
in 1983, the Highway Trust Fund financed certain mass transit
programs as well as traditional highway construction and mainte-
nance programs. Since 1991, a portion of the motor fuels excise tax
revenues also has been dedicated to the General Fund of the Treas-
ury for deficit reduction. The articles subject to tax generally, and
the Trust Fund tax rates, historically have been structured to
produce financial contributions from different highway transpor-
tation segments, determined in part by reference to past studies of
relative costs created by those segments. A majority of the reve-
nues produced by highway transportation excise taxes is derived
from the taxes on motor fuels.

The current highway transportation excise taxes consist of:

(1) taxes on gasoline, diesel fuel, and special motor fuels;

(2) a retail sales tax imposed on trucks and trailers having
gross vehicle weights in excess of prescribed thresholds;

(3) a tax on manufacturers of tires designed for use on heavy
highway vehicles; and

(4) an annual use tax imposed on trucks and tractors having
taxable gross weights in excess of prescribed thresholds.??

The Trust Fund components of the highway motor fuels excise
taxes and the non-fuels ighway taxes are scheduled to expire after
September 30, 1999; the eral Fund component of the highway
motor fuels excise taxes is permanent. Highway Trust Fund ex-
penditure authority is scheduled to expire after September 30,
1997. (Each of the highway transportation excise taxes is described
in more detail below.)

2. Highway motor fuels excise taxes
Tax rates

Separate Federal excise taxes are imposed on gasoline, diesel
fuel,23 and special motor fuels used for highway transportation
(secs. 4041 and 4081). With the exception of the special motor fuel
compressed natural gas (“CNG”), the excise taxes on each of these

22 Two additional highway-related excise taxes are imposed under present law: a graduated-
rate excise tax on automobiles that fail to meet specified fuel efficiency standards (the “gas guz~
aler tax”) and a retail excise tax on “luxury” automobiles. The gas guzzler tax applies to auto-
mobiles having a rated fuel efficiency less than 22-5 miles per gallon. The tax ranges from
$1,000 to $7,700 per vehicle depending on fuel efficiency. This tax is permanent. The current
rate of the excise tax on luxury automobiles is 9 percent of the excess of the retail price over
$54,000, This tax is scheduled to expire after December 31, 2002; phased annual rate reductions
and indexing of the price threshold are scheduled to occur between 1997 and 2002. Revenues
from both of these excise taxes are retained in the General Fund. These taxes are not dis
further in this document because they generally are not viewed as imposed on transportation .

23 Kerosene generally is taxed as an aviation fuel if it is suitable for that use. Kerosene also
commonly is blended with diesel fuel to prevent gelling of the diesel fuel in colder temperatures.
hrm Gevouone is blended with taxable diesel fuel, the blender is lable for payment of the appli-
cable diesel motor fuel excise tax rate (24.3 cents per gallon) on the blended kerosene. Kerosene
that is not used as a motor fuel is not subject to the highway transportation excise taxes.



13

The 10-percent air passenger transportation excise tax also does
not apply to domestic United States segments of uninterrupted
international air transportation. Uninterrupted international air
transportation includes only travel (entirely by air) that does not
both Begin and end in the United States (or in the 225-mile zone)
and during which there is no more than a 12-hour scheduled period
between arrival and departure at any point in the United States.1¢
For example, assume that a passenger travels from Tokyo to: New
York, with a four-hour stop in Seattle. The domestic segment of the
flight (ie., Seattle to New York) is not subject to the domestic air
passenger transportation excise tax because that segment is a part
of uninterrupted international air transportation.

Unlike many Federal excise taxes, the Federal Government,
State and focal governments, and private, non-profit organizations
are subject to tax on commercial air transportation purchased by

em.

Exemptions
Exemptions are provided for helicopters engaged in the explo-
ration for, or the development or removal of, minerals, oil, or

gas, and in timber (including logging) operations if the helicopters
neither take off from or land at a facility eligible for Aviation Trust
Fund assistance or otherwise use Federal aviation services during
the flight.5 In addition, emergency medical aircraft (both ‘fixed-
wing and helicopter) are exempt from tax when the aircraft are
equipped for and exclusively dedicated to emergency medical trans-
portation. This latter exemption applies regardless of whether the

‘ederal aviation system is used or the aircraft takes off from or
lands at a Federally assisted airport. A further exemption applies
to transportation on aircraft having a maximum FAA certificated
takeoff weight of 6,000 pounds or less, if the aircraft is not oper-
ated on an established line.

History of tax

The current 10-percent domestic air passenger excise tax rate
dates to 1990 legislation. In 1990, the tax rate was increased from
8 percent to 10 percent for a five-year period (through December
31, 1995) as part of budget reconciliation legislation. That legisla-
tion also provided that revenues from the percentage point in-
crease would be retained in the General Fund as a deficit reduction
measure for two years of the five-year period. The 10-percent tax
lapsed after December 31, 1995. The Small Business Job Protection
Act of 1996 (the “1996 Act”) reinstated the tax for the period Au-
gust 27, 1996 through December 31, 1996.

The 8-percent tax rate was imposed concurrent with establish-
ment of the Airport Trust Fund in 1970. Except for the period from
October 1, 1980 through August 31, 1982, when the rate tempo-
rarily was reduced to 5 percent as a result of a general expiration
of the Airport Trust Fund excise taxes, the rate remained at 8 per-
cent until enactment of the 1990 legislation described above. Before

+4A more liberal rule is provided for military personnel traveling in uniform while on leave
in trans; tion that involves both international and domestic United States segments.

28In the case of flights involving multiple intermediate stops, this determination is made on
a segment-by-segment basis.



2

Congress generally (and of specific Committees) in oversight of
these taxes and programs.

Appendix A presents a table of Federal motor fuels excise tax
rates currently imposed on various transportation sectors. Appen-
dix B presents a table of present-law non-motor fuels Federal
transportation excise tax rates. Appendix C provides information
(prepared by the Congressional Research Service (“CRS”)) on cer-
tain non-tax Federal fees imposed on transportation providers. Ap-
pendix D contains certain correspondence related to preparation of
materials by the staff of the Joint Committee on Taxation.



Figure 4.-- Federal Transportation Trust Fund Outlays, Fiscal 1995
(millions of dollars)

Mass transit
$3,179

Water tansportation

Highway transportation $612

$19,472

Air transportation
$7,384

Source: Sce Tables 4 - 8.


23

is no General Fund component of these taxes. Each of the taxes is
scheduled to expire after September 30, 1999.

Retail excise tax on heavy vehicles
Tax rate and base

A 12-percent excise tax is imposed on the first retail sale of
heavy highway trucks, tractors, and trailers (sec. 4051).34 Trucks
having a gross vehicle weight (“GVW”) of 33,000 pounds or less are
not subjest to the tax; trailers having a GVW of 26,000 pounds or
less are exempt. Gross vehicle weight is defined as the loaded
weight (generally based on axle capacity) at which the vehicle is
designed to operate.

Although the tax is imposed only on the first retail sale, the first
sale of a remanufactured vehicle is taxable as the sale of a new ve-
hicle. The determination of whether modifications to an existing ve-
hicle constitute repair or remanufacture is based on all relevant
facts and circumstances. In general, modifications are treated as
remanufacture if the cost of the modifications exceeds 75 percent
of the cost of a comparable new vehicle. However, lesser modifica-
tions that result in a change in function of a truck are treated as
remanufacture.

In general, the tax base is the full retail sales price of the base
vehicle and all parts and accessories. Pursuant to Treasury Depart-
ment rulings, however, certain equipment that is installed on igh-
way vehicles, but which is unrelated to its highway transportation
function, is excluded from the tax base. Furtl er, the tax includes
provisions designed to prevent the sale of stripped down” vehicles
to which additional parts and accessories will be added shortly
after the taxable event. Under these provisions, all parts and acces-
sories installed on a vehicle within six months of the first retail
sale are subject to tax. Because the tax is determined on an ad va-
lorem basis, the Treasury Department is authorized to prescribe
presumed markup rules to equalize the tax cost of vehicles sold di-
rect], by manufacturers to consumers (typically fleet sales) to that
of vehicles sold through retail dealers.

History of tax

The heavy vehicle excise tax originally was imposed as a manu-
facturers’ excise tax. Before the 1956 establishment of the Highway
Trust Fund, the tax rate was 8 percent; the 1956 legislation in-
creased the rate to 10 percent where it remained until 1982 legisla-
tion that both change the point at which the tax is imposed and
increased the rate. From 1917 until 1971, a manufacturers’ excise
tax also was imposed on automobiles at rates that ranged from 3
Percent to 10 percent over the period. Between 1971, when auto-
mobiles and light trucks first were exempted from the tax, and
1982, the weight threshold for determining whether a vehicle was
taxable was 10,000 pounds GVW. The 1982 rate increase and the
taxable threshold modifications were enacted in response to a DOT
highway cost allocation study. Before 1982, an 8-percent companion
excise tax to the heavy vehicle excise tax was imposed on parts and

34 backup “use” tax is imposed on otherwise taxable vehicles that are placed in service be-
fore a taxable sale occurs.



9

ness it is necessary to look beyond the statutory incidence of a tax
to its economic incidence, or market effect. When analyzing taxes
earmarked for specific Government expenditures, some suggest
that the benefit principle is an equitable basis of taxation and oth-
ers suggest cost recovery or cost allocation is an equitable basis of
taxation. Administrability involves an assessment of the expense to
the Government and the taxpayer of imposing and collecting the
tax imposed. In evaluating a tax, tradeotts must be made among
the three goals. Rarely is a tax that is deemed most equitable the
most efficient or most administrable tax. Likewise, the most admin-
istrable tax may not be the most efficient or most equitable.

Effect of transportation excise taxes on the market for trans-
portation services

The design of a system of transportation excise taxes can be ex-
pected to affect the market for transportation. The present-law
transportation excise taxes generally are imposed on the inputs of
transportation service providers (e.g., taxes on fuels or equipment)
or are imposed on the purchase of the transportation service (e.g.,
the air transportation excise taxes). In either case, it generally is
assumed that market forces will cause the burden of these excise
taxes to flow through to consumers. Thus, the present-law excise
taxes may be expected to alter the prices that individuals pay for
transportation services.

The tax burdens imposed may cause consumers to choose one
mode of transportation over another mode. Thus, if an excise tax
is imposed on one sector of the transportation industry (e.g., high-
way) at a higher rate than on another sector with which that sector
competes (e.g., rail or aviation), consumers may find it more cost
effective to ship by rail than by truck or to travel by airplane rath-
er than by automobile, bus, or rail. The analysis is complicated by
current expenditure policy that ties the Federal Government’s pro-
vision of certain services (e.g., highway construction and mainte-
nance) to specific taxes collected. For example, under present law,
the highway transportation excise taxes generally are dedicated to
road construction and maintenance, services that are used by high-
way users, while rail transportation, which is subject to lower
transportation excise taxes, receives relatively few Government-
provided services.

Similar questions arise within an industry sector. For example,
the current domestic air passenger transportation excise tax is im-
posed on the value of the ticket. The revenues from this excise tax
generally are used to fund FAA operations, airport grants, and air-
way facilities and equipment. The ad valorem character of the tax

ill cause a traveler flying first class to pay more in tax than a
traveler flying coach on the same flight, despite the fact that all
travelers on a plane receive the same services from the FAA. Like-
wise, on a comparable flight, customers of a discount air carrier
will pay less tax than customers of a higher fare air carrier.4

4This does not mean, however, that the discount carrier's flight pays less for air traffic control
services than does the higher fare carrier's flight. A discount carrier with all seats occupied
might generate more tax revenue than a partially occupied higher fare air carrier flight on a
comparable route even though both flights receive the same FAA services.



28

to shipments by the United States Government and to cargo of
nonprofit organizations which are intended for humanitarian or de-
velopment assistance overseas (e.g., shipments of Project Hope).
History of tax

~The harbor maintenance excise tax was imposed in 1986 legisla-
tion, effective on April 1, 1987. The tax rate originally was set at
0.04 percent of the value of the cargo or passenger transportation

charges; the rate subsequently was increased in 1990 to 0.125 per-
cent, effective January 1, 1991.
4, Taxes on fuels used in recreational motorboats
Imposition of taxes °

Three separate excise taxes are imposed on fuels used in rec-
reational motorboats. First, gasoline used in recreational _motor-
boats is subject to an 11.5-cents-per-gallon excise tax rate, revenues
from which are dedicated to the Aquatic Resources Trust Fund and
the Land and Water Conservation Fund ($1 million per year) (sec.
4081). In addition to this dedicated excise tax, motorboat gasoline
is subject to a General Fund excise tax rate of 6.8 cents per gallon
(sec. 4081).87 Of the resulting total 18.3-cents gallon tax im-
posed on motorboat gasoline, 14 cents per gallon is scheduled to ex-
pire after September 31, 1999; the remaining 4.3 cents per gallon
rate is permanent (like the General Fund transportation motor
fuels excise tax imposed on other transportation sectors).3° The tax
on motorboat gasoline is collected in the same manner as the high-
way transportation gasoline excise tax. The provisions dedicatin;
revenues to the Aquatic Resources Trust Fund and the Land an
Water Conservation Fund expire after September 31, 1997.59

Beginning after December 31, 1997, diesel fuel used in rec-
reational motorboats is scheduled to be subject to a combined Gen-
eral Fund excise tax rate of 24.3 cents per gallon (sec. 4081).4°
(This tax rate is inclusive of the 4.3-cents-per-gallon permanent
General Fund transportation motor fuels excise tax, described
below.) The entire 24.3-cents-per-gallon excise tax is retained in the
General Fund. The recreational motorboat diesel fuel excise tax is
imposed under the same administrative rules as the highway
transportation diesel fuel excise tax. This tax is scheduled to expire
after December 31, 1999.41

®7The Aquatic Resources Trust Fund benefits from a permanent appropriation for certain of
its expenditure programs. The budget effect of this permanent appropriation provision led Con-
sin, 1998 ta limit the portion of the aggregate excise tax imposed on motorboat gasoline
hat is dedicated to the Aquatic Resources Fund to 11.5 cents per gallon (in contrast to
fhe 14 cents per gallon of highway gasoline tax revenues that is dedicated to the Highway Trust

28The motorboat gasoline excise tax rate is identical to that imposed on highway gasoline,

3° The actual flow of funds for these taxes is as follows: revenues received in the General Fund
are transferred to the Highway Trust Fund (to the extent of 11.5 cents per gallon) along with
other gasoline excise tax revenues, and thereafter are retransferred to the two other Funds.
After the September 30, 1997 expiration of the retransfers from the Highway Trust Fund, 11.5
cents lion of the motorboat gasoline excise tax revenues will be retained in the Highway
Trust (absent any further legislative extensions).

“ff the LUST excise tax rate were reimposed, this rate would increase automatically to 24.4
cents per gallon, with all revenues still being retained in the General Fund.

41 Statutorily, this tax is imposed by tially overriding an historical exemption from tax pro-
vided for off-highway uses of diesel fuel. Thus, no permanent 4.3-cents-per-gallon tax rate is im-
posed on motorboat diesel fuel.



APPENDIX B. PRESENT-LAW NON-FUEL FEDERAL
TRANSPORTATION EXCISE TAX RATES
(AS OF NOVEMBER 1, 1996)

Tax

Tax Rate

Airport and Airway Trust Fund
Taxes:
Air passenger ticket tax
International departure tax
Domestic air cargo tax .........
Highway Trust Fund Taxes:
Tax on highway vehicles
(trucks over 33,000 Ibs.
and trailers over 26,000

Tax on highway tires

Annual use tax on highway
vehicles.

Waterway Taxes:
Habor Maintenance Trust
Fund tax.

Tax on international ship
passenger departures.

Other Automotive-Related Taxes:
Retail tax on luxury auto-
mobiles.

10 percent of amount paid.
$6 per person.
6.25 percent of amount paid.

12 percent of retail price.

40 lbs. or less—no tax.
4070 Ibs.—15 cents/lb. over 40
Ss.
70-90 Ibs.—$4.50, plus 30 cents/
lb. over 70 lbs.
Over 90 Ibs.—$10.50, plus 50
cents/Ib. over 90 lbs.
Under 55,000 Ibs.—no tax.
55,000-75,000 lbs.—$100, plus
22 per 1,000 lbs. over 55,000

Ibs.
Over 75,000 lbs.—$550.

0.125 percent of value of com-
mercial cargo loaded or un-
loaded at U.S. ports.
$3 per passenger on commercial
vessels over one or more
nights or vessels engaged in
gambling on board outside
U.S. waters.

Tax is imposed on sales price in
excess of indexed threshold
(currently $34,000):

9 percent for August 27,
1996-December 31, 1996; 8
percent for 1997; 7 percent for
1998; 6 percent for 1999; 5
percent for 2000; 4 percent for
2001; 3 percent for 2002; 0
percent (repealed) after 2002.

(98)



90

not by the benefit received, but by allocating to each user a share
of the expenditures related to the average costs that user imposes
on the service. Such an approach attempts to allocate to each user,
or class of users, the expenditures incurred that may be reasonably
attributed to that user.83 Although such a tax system for transpor-
tation may place the burden of financing the system on the users
of the system, as was discussed in the context of the benefit prin-
ciple above, it may not fully meet the equity objective because it
allocates costs to each individual user of the transportation service
in only a rough fashion.

Reliance on broad averages may obscure substantial differences
among different users within a broad user class. The current High-
way Trust Fund motor fuels excise taxes rates were restructured
in 1982, largely based on a cost allocation analysis. Cost allocation
as a basis for taxation generally attempts to be allocate costs on
average. New cars are generally more fuel efficient than old cars,
even for cars of the same weight, yet generally it is the weight of
the vehicle per axle that gives rise to road deterioration. An aver-
age tax on all automobile gasoline purchases more lightly taxes
newer automobiles. Similarly, within a cost allocation framework,
inequities among different users within a broad user class may
arise due to differing use of the Government services provided. The
current gasoline excise tax is imposed at the same uniform rate for
all gasoline purchased regardless of whether the driver primarily
drives on highways financed with Federal expenditures or local
roads maintained by the driver’s State or local government.

As discussed above regarding the benefit principle, such appar-
ent inequities could be addressed within the cost allocation framé-
work. For example, user groups could be defined more narrowly. As
noted above, weight per axle is a significant determinant of the
damage to a road surface imposed by a given vehicle. One could
conceive of fuels tax rates that vary by the number of axles on a
given vehicle with the tax rate being lower for vehicles with more
axles.84 Such a fuels tax would require collection at the retail pump
in order to distinguish vehicles. The points of collection and admin-
istrative costs associated with the gasoline excise tax would in-
crease dramatically were such a change adopted, while compliance
likely would decline compared to the current fuels excise tax sys-
tem.

®3As examples, see, Department of Transportation, Federal Highway Administration, Final
Report on the Federal Highway Cost Allocation Study, Report of the Secretary of Transportation
to the United States Congress Pursuant to Public Law 95-599, Surface Transportation Assist-
ance Act of 1978 (May 1982) and Department of Transportation, Heavy Vehicle Cost Responsibil-
ity Study, Report of the Secretary of Transportation to the United States Congress Pursuant
to Section 931 of the Deficit Reduction Act of 1984 (November 1988). See also the brief descrip-
tions in Part VI of current Department of Transportation cost allocation studies relating to the
costs of highway services and the cost of air traffic services.

® Alternatively, the annual vehicle use tax might be imposed as a tax that declines as the
number of axles increases within a vehicle weight class, rather than a tax per vehicle. Some
analysts observe that the toll (fee) structure of most toll roads is exactly backwards from the
point of view of either marginal cost pricing or cost recovery as higher tolls generally are im-
posed on additional axles.



10

Assessing changes in the present transportation excise tax struc-
ture requires an analysis of the questions of efficiency, equity, and
administrability. For example, a recent proposal by a group of
seven major commercial air carriers would convert the present-law
ad valorem air passenger transportation excise tax into three
“taxes” or “fees” with rates set at flat amounts based on three fac-
tors: revenue passengers, seats filled, and mileage. Such a change
would involve substantially greater administrative cost for the air-
lines and the IRS than the current excise tax does. However, de-
pending on how the tax factors (e.g., mileage) were measured, the
system might more appropriately assign costs of FAA services to
air travelers if it more closely approximated the marginal costs of
services provided by the FAA for each flight.

The burden across different sectors of the flying public would
change, however, if the excise tax system were changed. The FAA
has estimated that, if flying patterns did not change, one air car-
rier, and ultimately its passengers, would experience approximately
a 60-percent increase in tax burden if the seven airlines’ proposal
were adopted while the tax burdens of the seven proponents, and
ultimately their passengers, all would decline.5 Adoption of such a
proposal, through the resulting changes in fares charged for air
transportation by the proponents and the air carriers whose tax
burden increased, could alter the share of the air transportation
market held by each.

5See, letter and accompanying materials to the staff of the Aviation Subcommittee of the
House Committee on Transportation and Infrastructure from Charles A. Hunnicutt, Assistant
Secretary of Transportation for Aviation and International Affairs, June 7, 1996,



v

APPENDICES

APPENDIX A. PRESENT-LAW FEDERAL TRUST FUND AND
GENERAL FUND MOTOR FUELS EXCISE TAX RATES ON
VARIOUS TRANSPORTATION SECTORS
(AS OF NOVEMBER 1, 1996)

[Rates shown in cents per gallon]

Transportation Sector Trust General Total tax

Fund Fund
Highway Transportation:
In general (trucks, automobiles):?
Gasoline 14.0 43 18.3
Diesel fuel . 200° 4.3 24.3
Special motor fuels? 14.0 4.3 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 Transportatio
Inland waterway 20.0 43 24.3
Recreational boats:
Gasoline 14.0 43 18.3
Diesel fuel .. no tax no tax 4no tax
Air Transportation:
Commercial aviation ... 5no fuels 43 43
tax
Noncommercial aviation:
Gasoline 15.0 4.3 19.3
Jet fuel 1715 43 ” 218

+ Reduced highway motor fuels excise tax rates apply to mixtures of taxable fucls
with ethanol and methanol produced from renewable sources (i.e., “gasohol”) and to
certain “neat” (at least 85 percent pure) methanol fuels produced from natural gas,
2 Heavy highway vehicles also are subject to Trust Fund excise taxes on retail ve-"
hicle price (12 percent) and tires, as well as to an annual use tax. _
2Examples of special motor fuels are propane, liquefied natural gas (“LNG”),
other liquids used as a fuel in highway transportation, and compressed natural ged
(“CNG”). CNG, a gaseous fuel rat an a liquid fuel, is subject only to a General
Fund tax of 48.54 cents per thousand cubic feet (equivalent on a Btu basis to the
4.3-cents-per-gallon General Fund tax rate imposed on propane).
4 After December 31, 1997, and before January 1, 2000, the tax rate will be 24.3
cents per gallon for the General Funi
5 Airport Trust Fund excise taxes imposed on commercial aviation consist of a 10-
percent domestic passenger tax, a $6 per person international departure tax, and a
.25-percent domestic air freight tax, all imposed on passengers and shippers of
freight rather than on the transportation provider.

(ci)



102

Surface Transportation Board? —

The Surface Transportation Board (STB), established in 1996, is
the successor agency to the Interstate Commerce Commission
(ICC). A major issue in the creation of the STB was the reliance
on user fees to fund a significant portion of the Board’s activities.
After considerable controversy, the Board adopted a new user fee
structure, effective September 16, 1996. The user fee structure was
printed in the Federal Register on August 14, 1996.

The STB retains some of the regulatory power once vested in the
ICC, particularly as regards railroad activities. Some interstate
trucking, bus, and inland waterway activity also remains subject to
STB review. The fee structure adopted by the Board is designed to
charge the firms doing business with the agency some portion of
the cost to the STB for the processing of t! is business. The fee
structure does not provide for full cost recovery, however; the ma-

jority of the STB’s funding is provided through the annual appro-

priations process.
Highways and Transit+

All federal taxes and fees collected in this sector appear to be as-
sociated with the federal highway trust fund. We have contacted
knowledgeable professionals at the American Road and Transpor-
tation Builders Association (ARTBA), the American Association of
State Highway and Transportation Officials (AASHTO), the Amer-
ican Public Transportation Association (APTA), and the Federal
Highway Administration (FHWA) without uncovering any taxes or
fees that meet the criteria of this memorandum. In addition, we
have contacted environmental professionals to see if highway or
transit construction is subject to special fees by the Environmental
Protection Agency (EPA). In this instance, transportation related
construction is treated the same as all other types of construction.
Maritime®

A very extensive 1993 study by the U.S. General Accounting Of-
fice (GAO) found that 12 federal agencies imposed $1.9 billion in
taxes and fees on waterborne commerce. Several of the fees men-
tioned in the study are similar to those imposed on other transpor-
tation modes described in this memorandum, e.g. customs and im-
migration. The study also lists as fees a number of items that
would not meet your definitions. Fees levied by the Panama Canal
Commission, for example, can be viewed as voluntary tolls on facil-
ity users. In 1995, these tolls produced $460.0 million in revenues,
a portion of which went to Panama. In 1999, all revenues from the
Canal will go to Panama. It should also be pointed out that the
United States no longer charges tolls for the use of its portion of
the St. Lawrence Seaway. The portion of the maritime industry
subject to tolls is relatively small.

As a result of conversations with professional staff at the Mari-
time Administration (MARAD), we have reason to believe that the
structure studied in 1993 is essentially unchanged. There may

3For additional information on this subject contact Stephen J. Thompson at 77771.
4For additional information on this subject contact William A. Lipford at 77764.
5 For additional information on this subject contact Kenneth R. DeJarnette at 77769.

6



64

E. National Railroad Passenger Corporation (AMTRAK)

Table 10 presents data on budget authority and outlays related
to the National Railroad Passenger Corporation (“AMTRAK”),
which is financed with General Fund appropriations.



VI. STATUS OF CURRENT DEPARTMENT OF TRANSPOR-
TATION AVIATION AND, HIGHWAY COST ALLOCATION

The goods and services subject to transportation excise taxes and
tax rates of certain of these taxes have been influenced by cost allo-
cation studies by the Department of Transportation. Past cost allo-
cation studies by the DOT have reviewed the costs expected to be
associated with expenditure programs of a transportation Trust
Fund administered by that Department and have assigned those
costs (pursuant to a methodology developed by DOT) to the dif-
ferent segments (e.g., automobile v. truck drivers) of the transpor-
tation sector that is expected to benefit from the Trust Fund pro-

grams.

The DOT last issued cost allocation studies in 1992 (aviation)
and 1982 (highway). During the past year, the DOT through the
FAA and the Federal Highway Administration (“FHwA”) has been
engaged in comprehensive updates of the 1992 and 1982 studies.
To date, neither of the updated studies has been issued. The sub-
missions from the FAA and FHwA, reproduced below, provide a
status report on these cost study update efforts.

In addition to these studies by the DOT, the Federal Aviation Re-
authorization Act of 1996 provided for the establishment of an
independent Commission (comprised of appointees of the President
and the leadership of both the House and Senate) to review the
programmatic needs of the FAA and possible funding options to
meet those needs. The Commission’s report may include rec-
ommendations on modifications to the Airport Trust Fund excise
tax structure or a recommendation that a user fee system be estab-
lished. The Commission’s work on FAA funding is to include review
of an independent cost assessment of FAA activities which is to be
completed within 90 days after a contract being awarded for the as-
sessment. (The FAA was directed to award a contract for this as-
sessment within 30 days of enactment of the 1996 reauthorization
Act.) The Secretary of Transportation must report to the Congress
on the Commission’s findings no later than one year after enact-
ment of the reauthorization Act (ie., no later than October 9,
1997).

A. Airport and Airway Trust Fund

The following progress report on its cost allocation work was re-
ceived from the FAA on October 31, 1996.

FAA COST ALLOCATION WHITE PAPER
In 1995, the Federal Aviation Administration (FAA) contracted
with GRA Associates to conduct a study of FY 1995 FAA program
costs and user cost responsibility (FY95CAS). Information was to
be developed for the cost of services provided by FAA to aviation
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15

The domestic air freight excise tax base does not apply to charges
for certain accessorial ground services, such as costs of ground
transportation from a downtown freight carrier drop station to the
airport. Accessorial service charges are not subject to tax only if the
service could be performed by a party other than the transportation
provider and if the provider maintains in its records a separate ac-
counting for the charge.

Unlike the domestic air passenger excise tax, air freight trans-
portation providers are not required to state the amount of this tax
separately on customer bills.

Exemptions

The air freight excise tax does not apply to Property transported
by emergency medical aircraft performing qualify ing medical serv-
ices. The Treasury Department further has ruled that the tax does
not apply to amounts paid for transportation of proj rty in
cropdusting, and aerial firefighting service, or the use of helicopters
in construction such as setting equipment on the roofs of buil lings
or installing power lines.
History of tax

The domestic air freight excise tax was first imposed by the 1970
legislation that established the Airport Trust Fund. Except for the

riod when the Airport Trust Fund excise taxes generally expired
from October 1, 1980 through August 31, 1982, the tax rate was
5 percent of the transportation charge until 1990, when the current
6.25-percent rate was enacted. Revenues attributable to the 1.25-
percentage point rate increase were retained in the General Fund
as a deficit reduction measure for the first two years of the original
five-year period during which the 6.25-percent rate applied. The
tax expired after December 31, 1995, and was reinstated by the
1998 Act for the period August 27, 1996 through December 31,

3. Airport Trust Fund excise taxes imposed on fuels used in
general aviation

Imposition of tax and tax base

In lieu of the passenger and freight excise taxes imposed on com-
mercial air transportation, general aviation is subject to Airport
Trust Fund excise taxes on the fuels it consumes (secs. 4081 and
4091). These taxes are imposed at rates of 17.5 cents per gallon on
jet fuel and 15 cents per gallon on aviation gasoline. The jet fuel
tax is imposed on the sale of the fuel by producers, defined to in-
clude registered wholesale distributors.!6 The aviation gasoline tax
is imposed on the removal of the gasoline from registered terminal
facilities under the same administrative rules as apply to the high-
way motor fuels excise taxes.17 7

Like the Airport Trust Fund excise taxes on commercial air
transportation, the fuels taxes imposed on general aviation cur-

‘6The majority of this tax is imposed on wholesale distributors of jet fuel. Because most major
airports have wholesale distributors on site that deliver fuel directly into aircraft, the absence
of a retail intermediary effectively renders much of the tax a retail tax.

174 more complete discussion of the administration of the gasoline tax is included in Part

ILB., regarding the highway transportation motor fuels excise taxes.



99
APPENDIX B.—Continued.

Tax Tax rate

Tax on gas guzzler automobiles:

Fuel economy rating (miles per gallon. Tax per vehicle:
At least 22.5 0
21.5-22.5 $1,000
20.5-21.5 1,300
19.5-20.5 1,700
18.5-19.5 2,100
17.5-18.5 2,600
16.5-17.5 3,000
15.5-16.5 3,700
14.5-15.5 4,500
13.5-14.5 5,400
12.5-13.5 6,400
Less than 12.5 7,700

1Includes tractors of the kind chiefly used for highway transportation with a
trailer or semitrailer.



20

Exempt off-highway uses.—In addition to exemptions for these
highway uses of otherwise taxable motor fuels, fuels used in off-
highway uses (limited to off-highway business uses in the case of
gasoline) and on farms for farming purposes generally are exempt
from these motor fuel taxes.25 In no case is tax imposed on fuel
used in an off-highway use to fund the Highway Trust Fund. Rath-
er, where tax is imposed, it is either for the General Fund (i.e., die-
sel fuel used after December 31, 1997, in motorboats, and diesel
fuel used in trains) or to finance other Trust Funds (e.g., motorboat
psoline taxes that are dedicated to the Aquatic Resources Trust

‘und).

Alcohol fuels.—Partial exemptions from the highway excise taxes
are provided for alcohol fuels that are used as special motor fuels
or are blended with gasoline for use as a highway motor fuel. In
the case of ethanol and renewable source methanol (derived from
sources other than petroleum, natural gas, or coal), the excise tax
exemption is equal to 5.4 cents per gallon of ethanol (6.0 cents per
gallon for methanol) used as an alcohol special motor fuel, and the
same amount per gallon of blended fuels consisting of gasoline or
diesel fuel blended with these alcohols in prescribed proportions.
This exemption is coordinated with an income tax credit equal to
54 cents per gallon for ethanol and 60 cents per gallon of renewable
source methanol, producing a net tax subsidy for these fuels.?6

Present law allows alcohol blenders (persons that blend ethanol
or renewable source methanol and gasoline for use as a highway
fuel) a choice of three methods of realizing this subsidy. First, the
subsidy may be realized in whole or in part by an income tax cred-
it. Second, blenders that register with the Internal Revenue Service
may purchase gasoline to be blended with alcohol in certain gaso-
line/alcohol ratios at a special reduced tax rate (and alcohol tax-
free) so that the tax-paid on the gasoline is reduced by the portion
of the alcohol subsidy in excess of full tax-exemption for the alco-
hol. Third, blenders purchasing gasoline bearing the full 18.3-cents-
per-gallon tax rate and blending the gasoline with alcohol may
apply for a refund (on weekly basis) which bears interest unless
paid by the Internal Revenue Service (the “IRS”) within 20 days.27

Additionally, the Highway Trust Fund tax rate on methanol pro-
duced from natural gas and used as a highway special motor fuel
is reduced to 7 cents per gallon (instead of 14 cents per gallon).
Methanol produced from natural gas is not eligible for the income

25 Diesel fuel is the same fuel (#2 fuel oil) as is commonly used as home heating oil. Fuel oil
used as heating oil is not subject to the Federal excise tax.

26'The 0.6- and 6-cents-per-gallon differences between the subsidies for ethanol and renewable
source methanol were e to offset the revenue loss from a 10-cents-per-gallon small pro-
ducer income tax credit available to ethanol, but not to methanol.

27'The choice of how the alcohol subsidy is realized generally will depend on the arrangements
under which the blender purchases gasoline, the blender’s tax circumstances, or proportions of
gasoline and alcohol in the blended fue. For example, reduced tax rate gasoline purchases may

‘used to realize the full renewable source alcohol fuels tax subsidy only on gasoline/alcohol
mixtures that meet either of three rtions: 90, 92.3, or 94.5 percent gasoline and 10, 7.7,
or 6.5 percent aleohol respectively. The balance of the alcchol tax subsidy on nonconforming mix:
tures must be claimed through the income tax credit,

Blenders that receive their gasoline pursuant to inventory exchange agreements among su}
pliers (where one taxpayer-supplier delivers fuel from its terminal to a customer of another suc!
Eupplier and bills the other supplier rather than the blender) might not purchase gasoline at
reduced tax rates. These blenders are eligible for the ited excise tax refunds.

‘All taxpayers are eligible for the income tax credit; however, that credit may not be used to
offset alternative minimum tax liability and is not refundable. Thus, a blender that has limited
regular income tax liability would prefer the excise tax methods of receiving the alcohol subsidy.



49

Table 3 presents data on actual and projected revenues for Fiscal
Years 1993-2002, for each of the Federal transportation excise
taxes described in Part II. The revenues reported in this, and sub-

sequent tables, in a budgetary sense reflect, gross receipts rather
than net revenues. (See discussion in Part IV.)



94

y approximated the marginal costs of services provided by the FAA
for each flight, they might improve the efficiency of resources de-
voted to domestic air passenger transportation. There is no data,
at present, to suggest that the marginal, or incremental, costs of
the provision of FAA services increases with the number of revenue
passengers or seats on a given flight. While marginal costs may be
related to miles flown, as discussed in Part VILE., to be fully effi-
cient one may want to vary such charges depending on where the
miles are flown, as the incremental costs of FAA services are likely
to be greater on the approximately 250-mile flight from Washing-
ton to New York than on the approximately 250-mile flight from
St. Louis to Kansas City.85

Finally, the burden across different sectors of the flying public
would change. The FAA has estimated that if flying patterns did
not change one discount air carrier, and ultimately its passengers,
would experience approximately a 60 percent increase in tax bur-
den, while the tax burdens of the seven major air carriers, and ulti-
mately their passengers, who proposed the change all would de-
cline.®6 By increasing the costs to discount carriers while reducing
costs to other carriers, the structure of the domestic air passenger
industry, and the income characteristics of people traveling by air,
likely would change.

Highway transportation services

The current structure of highway transportation excise taxes re-
lies heavily on the 1982 DOT cost allocation study.87 As discussed
in Part VILB., average cost allocation is offered as an equitable
way to recover the costs incurred in provision of highway services.
One result of 1982 excise tax changes is that users of the freight
shipping services of heavy trucks bear a heavier tax than do users
of passenger automobiles. The diesel fuel excise tax rate is 6 cents
per gallon ater than the gasoline excise tax rate because most
trucks use diesel fuel and most automobiles use gasoline as a fuel.
In addition, there are separate non-fuel excise taxes that generally
are imposed only on heavy trucks: the tax on certain tires; the
heavy vehicle retail excise tax; and the annual use tax. The higher
tax rates for trucks (fuel and non-fuel taxes) were imposed in an
attempt to reflect the greater road damages from trucks and heavy
trucks in particular. The structure of these taxes demonstrates
compromises reached to accommodate administrability of the tax
system to the desire to equitably recover costs. Administrative costs
could have been minimized by relying solely on the fuels excise

Ss Another approach, suggested by some would expand the current 4.8-conts-per-gallon fuels
excise tax on commercial aviation fuels to include a Fund component rate (as is imposed
under present law on highway transportation). Such a fuels tax rate would reflect miles traveled
and ffs and landings, and thereby important components of FAA costs, as well as being
administratively easier to collect than the proposal by the seven major airlines (because fuels
taxes already are imposed), Data would need to be developed and analyzed in order to evaluate
fully whether such a proposal would accurately assign FAA costs (either the marginal costs or
the average costs) to those creating the costs as well as to determine the effect of such a pro-
posal on the air transportation market.

®6See, letter and accompanying materials to the staff of the Aviation Subcommittee of the
House Committee on Transportation and Infrastructure from Charles A. Hunnicutt, Assistant
Secretary of Tran: tion for Aviation and International Affairs, June 7, 1996.

87 Department of Transportation, Federal Highway, Administration, Final Report on the Fed-
gral Highway Cost Allocation Study, Report of the Secretary of Transportation to the United
States Congress Pursuant to Public Law 95-599, Surface Transportation Assistance Act of 1978
(May 1982).



IIL. FEDERAL TRANSPORTATION TRUST FUND AND
GENERAL FUND TRANSPORTATION EXPENDITURE
PROGRAMS

Five Federal transportation-related Trust Funds currently re-
ceive dedicated funding from excise taxes, imposed generally on the
beneficiaries of the Trust Fund programs. These are the Airport
Trust Fund, the Highway Trust Fund (Highway and Mass Transit
Accounts), the Inland Waterways Trust Fund, the Harbor Mainte-
nance Trust Fund, and the Aquatic Resources Trust Fund (Sport
Fish and Boating Safety Accounts).44 Expenditures from these
Trust Funds and certain General Fund monies finance the Federal
Government’s role in transportation activities. In addition to the
specified, dedicated excise tax revenues transferred to these Trust
Funds, the Trust Funds earn interest on any unused balances,
which ore invested in Federal Government securities (Code sec.
960: .

A. Airport and Airway Trust Fund

1. Trust Fund expenditure purposes

The Airport Trust Fund was created in 1970 to finance a major
portion of the Federal expenditures on national aviation programs.
Prior to that time, these expenditures had been financed with Gen-
eral Fund monies. The 1996 expenditure authorization legislation,
enacted on October 9, 1996, generally extended expenditure author-
ity for these programs through September 30, 1998; conforming
amendments to the Code Airport Trust Fund expenditure provi-
sions were included in that legislation.45 The statutory provisions
relating to the Airport Trust Fund were placed in the Code in 1982
(Code sec. 9502).

General Trust Fund expenditure purposes

The current general expenditure purposes for the Airport Trust
Fund are:

44$1 million per year of motorboat gasoline excise tax revenues is dedicated to the Land and
Water Conservation Fund, which provides grants for certain Federal-State conservation projects.
Unlike the Trust Funds cited above, the Land and Water Conservation Fund is not a formal
Trust Fund. Additionally, gasoline excise tax revenues from fuel used in off-highway rec-
reational trails vehicles is dedicated to the National Recreational Trails Trust Fund, subject to
funds for the programs of that Trust Fund being appropriated and obligated. No transfers have
‘occurred since enactment of that Trust Fund in 1991, as no appropriations have been made.
Both of these funds are beyond the scope of this document.

45Federal Aviation Reauthorization Act of 1996 (the “FAA Act of 1996”), enacted on October
9, 1996 (P.L. 104-264). See also conference report on H.R. 3539 (H. Rept. 104-848). Title X of
HLR. 3539 extended the authority to spend from the Airport Trust Fund through September 30,
1998,

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16

rently are scheduled to expire after December 31, 1996. The tax on
jet fuel and 1 cent per gallon of the tax on aviation gasoline expired
during the period January 1, 1996 through August 26, 1996; the re-
maining 14 cents per gallon of the aviation gasoline excise tax con-
tinued to be imposed, with revenues being deposited in the High-
way Trust Fund. When the Airport Trust Fund excise taxes were
reinstated in the 1996 Act, revenues from this 14-cents-per-gallon
tax collected during the tax-expiration period were transferred to
the Airport Trust Fund. .
Exemptions

Exemptions are provided for helicopters engaged in the explo-
ration for, or the development or removal of, hard minerals, oil, or
gas, and in timber (including logging) operations if the helicopters
neither take off from or land at a facility eligible for Airport Trust
Fund assistance or otherwise use Federal aviation services during
the flight.1® In addition, emergency medical aircraft (both fixed-
wing and helicopter) are exempt from fuels taxes when the aircraft
are equipped for and exclusively dedicated to emergency medical
transportation.19 This latter exemption applies regardless of wheth-
er the Federal aviation system is used or the aircraft takes off from
or lands at a Federally assisted airport. A further exemption ap-
plies to fuels used by tax-exempt aircraft museums operated for the
care and exhibition of World War II combat aircraft.

Fuels sold for export or for use as supplies for vessels or aircraft ©
(generally use by the United States military), use by State and
local governments and nonprofit educational organizations, or use
on a farm for farming purposes are exempt from the aviation fuels
excise taxes.

History of tax .

The general aviation gasoline tax was imposed at a 2-cents-per-
gallon rate before the Airport Trust Fund was established in 1970
(revenues from this tax were dedicated to the Highway Trust Fund
from 1956 through 1970). The general aviation gasoline tax rate
was increased to 7 cents per gallon beginning in 1970, and the tax
on jet fuel was imposed at the same rate. During the period when
the Airport Trust Fund taxes generally were expired previously
(October 1, 1980—-August 31, 1982), the tax on jet fuel was zero and
the tax on aviation gasoline reverted to the pre-Trust Fund rate of
2 cents per gallon. In 1982, when the Airport Trust Fund taxes
were reinstated, the aviation gasoline tax rate was increased to 12
cents per gallon, and the jet fuel tax rate was increased to 14 cents
per gallon. In 1990, the Airport Trust Fund general aviation fuels
taxes were increased further: the aviation gasoline tax rate was in-
creased further to 15 cents per gallon and the jet fuel tax rate was
increased to 17.5 cents per gallon.

38 Jn the case of flights involving multiple intermediate steps, this determination is made on
a segment-by-segment basis.

1°The Airport Trust Fund exemptions for fixed-wing emergency medical aircraft were enacted
in the Sthall Business Job Protection Act of 1996. A technical correction is needed to clarify ap-
plication of the fuels tax exemptions to these aircraft.



D. Inland Waterways Trust Fund, Harbor Maintenance
Trust Fund, and Aquatic Resources Trust Fund

The Inland Waterways Trust Fund, the Harbor Maintenance
Trust Fund, and the Aquatic Resources Trust Fund are substan-
tially smaller in scale than either the Highway Trust Fund or the
Airport Trust Fund. Tables 7 and 8 present data on revenues and
expenditures for the Inland Waterways and Harbor Maintenance
Trust Funds, respectively. Table 7 (Inland Waterways Trust Fund)
reports actual revenues and expenditures for Fiscal Years 1993—
1996 and projected revenues and expenditures for Fiscal Years
1997-2002. Table 8 (Harbor Maintenance Trust Fund) reports ac-
tual revenues and expenditures for Fiscal Years 1993-1995 and
projected revenues and expenditures for Fiscal Years 1996-2002.
Table 9 reports comparable data for the Aquatic Resources Trust
Fund. Historic data were unavailable and only projected revenues
and expenditures for Fiscal Years 1996-2002 are reported in Table
9.

Tables 7, 8, and 9 report “budget authority.” Budget authority is
authority provided by Federal law to incur financial obligations
that will result in outlays. Specific forms of budget authority in-
clude appropriations, borrowing authority, contract authority, and
spending authority from offsetting collections. Contract authority is
important in transportation spending as contract authority permits
obligations to be incurred in advance of appropriations or receipts.
Contract authority, therefore, may be unfunded. In recent years,
the appropriations committees have imposed obligation limitations
that limit the amount of contract authority that agencies would
otherwise be able to initiate.



L OVERVIEW OF FEDERAL TRANSPORTATION EXCISE
TAXES AND TRUST FUNDS

Unlike most tax issues, Federal transportation excise taxes re-
uire the House Committee on Ways and Means and the Senate
mmittee on Finance to coordinate tax structure and rate deci-
sions with actions of other Congressional committees that set spe-
cific rules governing the level and types of expenditures for which
the tax revenues are dedicated. Because the management of, and
authority to spend monies deposited in, the transportation Trust
Funds is contained in provisions of the Internal Revenue Code (the
“Code”), the tax-writing committees also exercise more direct over-
sight of these programs than is true of many other Federal expend-
iture programs with respect to which primary jurisdiction lies in
other Congressional committees (and which programs typically are
financed with general revenues).

Historically, the portions of the transportation excise taxes that
are dedicated to Trust Funds have been imposed on the industi
sectors judged to create at least some of the costs associated witl
the programs financed with the tax revenues. Because excise taxes
generally are assumed to flow through to consumers in prices for
goods and services, the structure of these sector-specific taxes has
a unique effect on structure of the transportation industry—both
among the different sectors (i.e., aviation, Lighway, water, and rail)
of the industry and among segments of each sector (e.g., hub-and-
spoke and point-to-point commercial airlines).

A. Excise Taxes Imposed on and Trust Funds Benefiting the
portation Industry, by Sector

Excise taxes are imposed on each major sector of the transpor-
tation industry. A majority of these excise taxes is dedicat
Trust Funds established to finance Federal expenditure programs
benefiting the transportation sector subject to tax. The tax rates
and mix of taxes imposed on each transportation sector are influ-
enced by analyses of the costs expected to be incurred by the Fed-
eral Government in providing services to different segments of the
sector. In addition to excise taxes dedicated to Trust Funds, each
transportation sector currently is subject to an excise tax on the
motor fuels it uses, with revenues from this tax being retained in
the General Fund of the Treasury. Certain water transportation
also is subject to a $3 per passenger General Fund excise tax.

In addition to excise taxes imposed to finance Federal transpor-
tation Trust Fund programs, administrative agencies may impose
non-tax fees on certain segments of the transportation industry to
offset the costs of specific services provided by the agencies. These
fees are limited to recovery of the cost of providing the service to
which the charge relates. The fees, and the services with respect
to which they are assessed, are distinct from the dedicated excise

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92

highway maintenance) to specific taxes collected. The provision of
Government services can both increase the private benefit to users
of the service (e.g., fewer potholes in highways will imply that more
eggs arrive at supermarkets undamaged) and reduce the costs of
providing transportation services (e.g., reduced highway congestion
permits eggs to be delivered with lower consumption of costly fuel).
To return to the example of competition between rail and highway
shipping, under present law, certain transportation excise taxes
generally are dedicated to road construction and maintenance,
services that are used by highway users, while the rail transpor-
tation sector receives relatively few Government-provided services.
Thus, the mere fact that the consumers of the services of one sector
of the transportation industry bear a higher tax burden does not
imply that the Federal tax and expenditure system leaves that sec-
tor at a competitive disadvantage. Nevertheless, for a given level
of benefits provided to two transportation sectors, an increased ex-
cise tax rate on one sector relative to the excise tax rate on the
other sector may alter the terms of competition between them.
Similarly, if the level of taxes were held constant and additional
benefits were provided to one sector but not to other sectors, the
terms of competition between the transportation sectors could
change.

Some have advocated retention of the current transportation ex-
cise taxes, but repeal of the Trust Funds, with funding of Federal
transportation programs being carried out solely through appro-
priations from the General Fund. If Congress determined that
spending on transportation services should be increased, while
transportation taxes remained the same, the net cost of providing
transportation services should decline and the demand for such
services might increase. If the additional spending were to occur all
in one sector, on inland waterways for example, the net cost of pro-
viding river barge shipping could be expected to decline relative to
the cost of rail and highway shipping. The river barge sector might
expand relative to the rail and highway sectors. Oppositely, if Con-
gress determined that spending on transportation services should
be decreased, while transportation taxes remained the same, the
net cost of providing transportation services should increase and
the demand for such service might decrease.

A similar situation arises with a proposal that would, with no
change in tax rates, divert monies from the General Fund to a
newly created Passenger Rail Account. Under such a proposal, pre-
sumably the amount of benefits provided to passenger rail users
would rise. This could be expected to decrease the net costs of trav-
eling by rail. One would expect passenger rail services to expand.
Such a proposal also could reduce automobile use as rail travel be-
came more attractive.

More generally, the effect of the excise tax structure on transpor-
tation industry structure involves questions of efficiency, equity,
and administrability. Just as is true with the current excise tax
structure, any change in that is proposed to increase efficiency, to
increase equity, or to improve administrability, can be expected to
change the resources devoted to each sector and the use of each
sector’s services.



37

taxes. Programs financed from this accotint include expenditures
for the following:

(1) Federal-aid highways, including the interstate system, pri-
m and secondary systems, urban systems, forest and public
lands highways, scenic highways, and certain overseas highways;

(2) Interstate highway resurfacing and repair;

(3) Bridge replacement;

(4) Highway safety research and development, including a share
of the cost of National Highway Traffic Safety Administration
(“NHTSA”) programs and university research centers;

(5) Traffic control demonstration grants and traffic control signal
demonstration projects;

(6) Intermodal urban demonstration projects and mass transit
(including carpool and vanpool) grants;

(7) Certain administrative costs of the Federal Highway Adminis-
tration and NHTSA; and

(8) Grants to the IRS for fuels and highway use tax enforcement
activities.

3. Mass Transit Account

The Highway Trust Fund Mass Transit Account receives reve-
nues equivalent to 2 cents per gallon of the highway motor fuels
excise taxes. Mass Transit Account monies are available through
September 30, 1997, for capital and capital related expenditures
under sections 5338(a)(1) and (b)(1) of Title 49, United States Code,
or the Intermodal Surface Transportation Efficiency Act of 1991.

The capital and capital-related mass transit programs include
new rail or busway facilities, rail rolling stock, buses, improvement
and maintenance of existing rail and other fixed guideway systems,
and upgrading of bus systems.



APPENDIX C. CERTAIN NON-TAX FEES IMPOSED ON
TRANSPORTATION PROVIDERS

As discussed in Part IV.B., Congressional authorizing committees
may impose, or authorize executive agencies to impose, true user
fees. The following is an overview, prepared by the Congressional
Research Service (CRS), of Federal user fees currently imposed on
various sectors of the transportation industry.

CONGRESSIONAL RESEARCH SERVICE,
Economics DIVISION,
THE Lisrary OF CONGRESS,
Washington, DC, November 1, 1996.

Memorandum

To: Joint Committee on Taxation (Attention: Ben Hartley).

From: John W. Fischer, Specialist in Transportation; Stephen J.
Thompson; Specialist in Transportation; Kenneth R.
DeJarnette, Specialist in Transportation; William A. Lipford,
Analyst in Transportation.

Subject: Federal taxes and fees on transportation not related to the
transportation trust funds.

This memorandum responds to your request that we identify fed-
eral taxes and fees imposed on the transportation sector, that are
not associated with the several transportation trust funds. As we
discussed, we have tried to identify significant taxes and fees that
can be correlated with the provision of some sort of service by the
federal government. As you might expect, however, this is often not
a clean distinction. As a result, this memorandum includes several
charges that may exceed your working definition of a federal tax
or fee: Information on these charges is provided in sufficient detail
to allow you to make an informed judgment as to whether to in-
clude these charges in your final listing of all federal transpor-
tation taxes and fees.

The remainder of this memorandum will discuss the taxes and
fees levied on each major portion of the transportation sector. As
you will see, there is a wide disparity amongst the transportation
modes as to the degree to which each group is subject to non-trust-
fund taxation. The common theme that can be extracted from this
information is that domestic freight transportation of all kinds and
all international transportation are subject to more additional (non-
trust-fund) taxes and fees than domestic passenger transportation.

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40

D. Rail Transportation Expenditures

There is no Federal rail transportation trust fund. The Federal
Government does provide funding, from the General Fund, for cer-
tain rail transportation activities. This includes operating assist-
ance for the Government National Railroad Passenger Corporation
(CAMTRAK”), funding for the Northeast Corridor Improvement Pro-
gram_and certain high-speed rail projects, and certain safety-relat-
ed rail expenditures of the Federal Rail Administration.