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

(rates shown in cents per gallon)

Transportation Sector Trust Fund General Fund Total Tax

Highway Transportation’

In general (trucks, automobiles)

Gasoline 14.0 43 18.3
Diesel fuel 20.0 43 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 3
Rail Transportation no tax 5.55 5.55
Water Transportation
Inland waterway 20.0 43 24.3
Recreational boats
Gasoline 14.0 43 18.3
Diesel fuel no tax 24.4 24.4
Air Transportation
Commercial aviation no tax? 43 43
Noncommercial aviation
Gasoline 14.04 43 18.3

Jet fuel no tax? 43 43

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

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

> Before January 1, 1996, commercial aviation trust fund taxes consisted of a 10-percent
domestic passenger tax, a $6 dollar international passenger departure tax, and a 6.25-percent domestic air
cargo tax.

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

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

3-



Specifi i issu:

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actually paying the tax are made aware that the tax has been repealed (i.e., a law has been signed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

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

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

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

-8-



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

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

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

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

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

In 1982, the Highway Trust Fund was divided into two accounts, the Highway Account
and the Mass Transit Account. Highway programs continue to be financed from the Highway
Account. The Mass Transit Account, which currently is funded by 2 cents per gallon of the
Highway motor fuels excise tax revenues, finances Federal mass transit assistance programs.

Ini. aterways Trust Fund
Federal excise taxes have been imposed on motor fuels used in vessels operating on a

designated inland waterway system since 1980. The initial tax rate was 4 cents per gallon.
Following a series of scheduled, phased increases, the tax currently is imposed at a rate of

-5-



I. LEGISLATIVE BACKGROUND OF TRANSPORTATION
MOTOR FUELS EXCISE TAXES

Use of motor fuels excise taxes for deficit reduction

Beginning with the establishment of the Federal Highway Trust Fund in 1956 and
extending through 1990, excise taxes on transportation motor fuels generally were imposed
exclusively to finance Federal trust fund programs, and imposition of the taxes was limited to
beneficiaries of the trust funds. In 1990, and again in 1993, transportation motor fuels tax rates
were increased as a deficit reduction measure, with revenues from all or part of the increases
being retained in the General Fund of the Treasury. Unlike the 1990 General Fund tax rate and
the various trust fund rates, the 1993 4.3-cents-per-gallon rate is permanent and all of the
revenues are retained in the General Fund.

1993 ortation motor fuels excise tax S ion of 1990 ta:

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

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

1990 transportation motor fuels excise tax

The Omnibus Budget Reconciliation Act of 1990 (the "1990 Act") increased the existing
highway motor fuels taxes by 5 cents per gallon. This tax also was imposed on diesel motor fuel
used in trains at a reduced rate of 2.5 cents per gallon to reflect the General Fund portion of the

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

-4-


I. EFFECTIVE DATE ISSUES ASSOCIATED WITH REPEAL
OF THE 4.3-CENTS-PER-GALLON TRANSPORTATION
MOTOR FUELS EXCISE TAX

In general

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

Points of imposition of the tax

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

Taxable Fuel Point of Imposition
Gasoline and diesel fuel Generally, removal from pipeline
(all taxable uses except trains or barge terminal
and intercity buses using dyed
diesel fuel)
Train and intercity bus Retail use (if dyed); otherwise,
diesel fuel removal from terminal facility
Inland waterway Retail use
Aviation jet fuel Wholesale sale*

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

-7-



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

Scheduled for a Hearing
Before the
COMMITTEE ON WAYS AND MEANS

on May 8, 1996

Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
May 7, 1996

JCX-18-96



#D-96-13

77-May-96
V. DISTRIBUTIONAL EFFECTS OF A TEMPORARY
REPEAL OF THE 1993 TRANSPORTATION MOTOR
FUELS EXCISE TAX (4.3 CENTS PER GALLON) (1)
Calendar Year 1996
CHANGE IN FEDERAL TAXES (3) FEDERAL TAXES (3) Effective Tax Rate (4)
INCOME FEDERAL UNDER UNDER Present
CATEGORY (2) TAXES (3) PRESENT LAW PROPOSAL Law Proposal
Millions Percent Billions Percent Billions Percent Percent Percent
Less than $10,000. -$287 4.3% $7 0.6% $6 0.6% 6.9% 6.6%
10,000 to 20,000. -§24 1.5% 34 3.0% 34 3.0% 9.2% 9.1%
20,000 to 523 -0.8% 69 6.0% 68 6.0% 14.3% 14.2%
30,000 to -563 -0.6% 96 8.5% 96 8.4% 17.0% 16.9%
40,000 to -481 -0.5% 99 8.7% 99 8.7% 18.3% 18.3%
50,000 to -737 0.3% 234 20.6% 233 20.6% 20.7% 20.6%
-388 0.2% 173 15.2% 172 15.2% 23.3% 23.3%
-333 0.2% 215 18.9% 215 18.9% 24.7% 24.7%
eseenene -99 (5) 212 18.6% 212 18.7% 29.5% 29.5%
Total, All Taxpayers...] -$3,935 0.3% $1,139 100.0% $1,135 100.0% 20.7% 20.6%
Source: Joint Committee on Taxation

Detail may not add to total due to rounding.

(1) The repeal would be effective June 1 through December 31,1996.
(2) The income concept used to place tax returns into income categories is adjusted gross income (AGI) plus: [1] tax-exempt
interest, [2] employer contributions for health plans and life insurance, [3] employer share of FICA tax, [4] worker's compensation,
{5} nontaxable social security benefits, {6] insurance value of Medicare benefits, [7] alternative minimum tax preference items, and
{8] excluded income of U.S. citizens living abroad. Categories are measured at 1996 levels.
(3) Federal taxes are equal to individual income tax (including the outlay portion of the EIC), employment tax (attributed to employees),
and excise taxes (attributed to consumers). Corporate income tax is not included due to uncertainty concerning the incidence of the tax.
Individuals who are dependents of other taxpayers and taxpayers with negative income are excluded from the analysis.
The indirect effects of excise tax changes are not included.

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

(5) Less than .05%.

Page 1 of 1



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

Fiscal Years 1996 - 2005

[Millions of Dollars]
Provision Effective 1996 1997 1998 1999 2000 2001 2002 «= 2003. 2004 «= 2005) 1996-00 1996-02 1996-05
1. Repeal 1993 tax increase of 4.3 cents per
gallon on transportation motor fuels (sunset
after 12/31/96).........0.. 6/1/96 1,655 -1,285 26 9 3 1 — oo _ - -2,903 -2,902 +2,902
2. Repeal 1993 tax increase of 4.3 cents per gallon
‘on transportation motor fuels:
a. Highway gasoline... 6/1/96 1,221 -3,848 -3,853 -3,876 -3,940 -4,035 -4,136 -4,239 -4,345 -4,454 -16,738 24,909
1 b. Highway diesel fuel. 6/1/96 -247 -772 -761 -756 -764 -781 -799 818 -837 -856 -3,300 -4,880
o cc. Railroad diesdl fuel. essa 6/96 “39 124 123 123 124 124 1240 124 124 “124 -533 -781
' d. Inland waterway diesel fuel... 6/1/96 2 -18 18 18 -18 18 -19 19 19 -20 74 “WH
@. Aviation gasoline... 6/1/96 3 8 8 8 8 8 8 8 8 8 “35 “51
f. Noncommercial jet fuel. 6/1/96 8 -25 -25 -26 27 27 -28 -29 -29 -30 “111 “166,
g. Commercial jet fuel...........

6/1/96 135 -439 ~458 A474 -489 ~504 -520 -536 553 571 -1,995 -3,019

Subtotal.. “1,655 5.234 5,246 -5,281 -5,369 -5,498 -5,634 -5,773 -5,916 -6063 -22,785 -33,917

3. Suspend or repeal the remaining 1.25 cents
per gallon tax on railroad diesel fuel:
a. Suspend tax through 12/31/96.
b. Permanent repeal [1].

6/96 “12 9 = _ — _
6/1/96 12 -36 -36 36 — —

oo ond 121 “121 121

Joint Committee on Taxation

NOTE: Details may not add to fotals due to rounding,

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


20 cents per gallon. Revenues from this excise tax are dedicated to the Inland Waterways Trust
Fund to finance construction and rehabilitation expenditures for navigation of 26 specified inland
and intracoastal waterways.

Aquatic Resources Trust Fund and Land and Water Conservation Fund

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

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

Airport and Airway Trust Fund

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

Leaking Undergroun rage Tank Trust Fund

A 0.1-cent-per-gallon excise tax was imposed on all otherwise taxable transportation
motor fuels (other than propane) from 1987 through December 31, 1995. Statutorily, this tax
was structured as an add-on rate to the existing taxes. Revenues from the tax were dedicated to
remediation of ground pollution from underground oil storage tanks.

National Recreational Trails Trust Fund

Highway motor fuels excise tax revenues attributable to fuel consumed in recreational
trail vehicles are dedicated, subject to appropriations, to the National Recreational Trails Trust
Fund to finance Federal programs promoting recreational trail construction and maintenance. To
date, no appropriations to this Trust Fund have been enacted.

-6-



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

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

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

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

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

-2-


INTRODUCTION

The House Committee on Ways and Means has scheduled a hearing on May 8, 1996, to
examine the impact of the 4.3-cents-per-gallon General Fund transportation motor fuels excise
tax enacted by the Omnibus Budget Reconciliation Act of 1993. The transportation motor fuels
excise tax applies to motor fuels used in all transportation sectors: highway, aviation, rail, inland
waterway shipping, and recreational boating.

This document,’ prepared by the staff of the Joint Committee on Taxation, provides a
description of the present-law taxes imposed on transportation motor fuels (Part I), background
information on historical use of revenues from these taxes to finance General Fund and Federal
trust fund activities (Part II), a discussion of effective date issues associated with repeal of the
4.3-cents-per-gallon excise tax (Part III), estimated revenue effects (Part IV), and distributional
effects of a temporary repeal of the 4.3-cents-per-gallon excise tax (Part V). The Appendix
presents a history of the Federal excise tax rates on highway motor fuels, 1955-1996.

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

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

Fuels (JCX-18-96), May 7, 1996.

-l-



ONTENTS

INTRODUCTION .......0 00... 2 6c eee

I PRESENT-LAW FEDERAL EXCISE TAXES IMPOSED ON
TRANSPORTATION MOTOR FUELS ... 2.20.0... eee

Il, LEGISLATIVE BACKGROUND OF TRANSPORTATION MOTOR
FUELS EXCISE TAXES ...... 00.

Wl. EFFECTIVE DATE ISSUES ASSOCIATED WITH REPEAL OF
THE 4.3-CENTS-PER-GALLON TRANSPORTATION MOTOR
FUELS EXCISE TAX 20. etn ee

IV. ESTIMATED REVENUE EFFECTS OF TRANSPORTATION MOTOR
FUELS TAX REPEAL OPTIONS ..........0 0.0.0.0. ccc e eve e eee

V. DISTRIBUTIONAL EFFECTS OF A TEMPORARY REPEAL OF THE
1993 TRANSPORTATION MOTOR FUELS EXCISE TAX ............

APPENDIX: HISTORY OF FEDERAL EXCISE TAX RATES ON
HIGHWAY MOTOR FUELS, 1955-1996 16.0.0

@

10


-TI-

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

(rates shown in cents per gallon)

Highway Trust Fund Rate
General Gasoline and special Diesel “LUST" Total Fuels
Year Fund Rate motor fuels fuel Tax Rate’ Tax Rate
1955 2 no tax no tax nore 2
1956? wees 3 Bn 3
1960 eee 4 4 ances 4
1983 wets 9 Dann 9
1985 ene 9 | 9 (gasoline)
15 (diesel)
1987 anne 9 15 0.1 9.1 (gasoline)
15.1 (diesel)
1990 2.5 11.5 17.5 0.1 14.1 (gasoline)
20.1 (diesel)
1993 6.8 1S 17.5 0.1 18.4 (gasoline)
24.4 (diesel)
1995 43 14.0 20.0 0.1 18.4 (gasoline)
24.4 (diesel)
1996 43 14.0 20.0 no tax 18.3 (gasoline)
24.3 (diesel)

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

? Highway Revenue Act of 1956 established the Highway Trust Fund.