Concepts of "gross receipts" and_"'net revenues"

Under present law, the Code transfers amounts equivalent to "gross receipts” raised by
the air transportation excise taxes, rather than the "net revenues" produced by those taxes, to the
airport Trust Fund. Net revenues equal approximately 75 percent of gross receipts. The concept
of net revenues reflects budget scorekeeping conventions that discount excise tax revenues by
the amount that income tax receipts are expected to decrease as a result of monies being removed
from the private economy for payment of excise taxes.

Amounts in excess of net revenues produced by the excise taxes may be dedicated to the
Airport Trust Fund without a budgetary effect because, as described above, there is no budget
scorekeeping link between the amount of revenues dedicated to the Trust Fund and the level of
Trust Fund expenditures: the Trust Fund is included within the unified Federal budget, and
expenditures from the Trust Fund 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 such direct spending was based on the gross
receipts from the taxes rather than the net revenues estimated to be raised by the taxes.
Similarly, if the Airport Trust Fund were removed from the unified budget, an increase in stated
deficits could occur because actual outlay patterns from the Trust Fund typically lag behind
excise tax collections. Under present law, receipts in excess of the amount to be spent during the
current budget period (even though such funds may be obligated for future transportation
expenditures) act to reduce current budget deficits.

-18-



-SE-

Net Income

Source:

Figure 2.--Net Income of Northwest, TWA, United, and USAir, 1990-1995

600.00

400.00

200.00

0.00

200.00

-400.00

~600.00

-800.00 |

1,000.00

-1,200.00 4

1,400.00
Northwest TWA United USAir

Airlines

CompuStat


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. The
1993 tax is permanent.

E. Repealed Air Transportation Excise Taxes
Two additional excise taxes previously were imposed on air transportation. First, an
annual civil aircraft use tax was imposed from 1970 to 1980. The tax rate was $25 plus 3.5 cents
per pound of the maximum certificated takeoff weight (turbine aircraft) or 2 cents per pound of
maximum certificated takeoff weight in excess of 2,500 pounds (other 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 aircraft tires and tubes (after
1970) were dedicated to the Airport Trust Fund.

-12-



-@Z-

Table 1.--Congressional Budget Office Projection of Airport and Airway Trust Fund Revenues, Outlays, and Cash Balances,
Fiscal Years 1997-2007 (in millions of dollars)
[December 1996 Baseline, Prior to Information Relating to Semi-Monthly Deposits” |

Trust Fund Balances 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Beginning of Year Cash Balance 7,875 4,208 -1,329-7,254 = --13,660 = -21,585  -28,048  -36,160 -44,950 -54,431 -64,695
Tax Revenue 1,527 0 0 0 0 0 0 0 0 0 0
Interest Revenue 399 94 -275 -659 -1,062 -1,483 -1,926 — -2,433 +2,932 -3,514 — -4,147
Total Revenue 1,926 94 -275 -659 = --1,062,— -1,483) 1,926) --2,433,— -2,932, -3,514_— 4,147
Outlays 5,593 5,630 5,650 5,748 5,864 5,980 6,185 6,357 6,549 6,750 7,029
End of Year Cash Balance 4,208 -1,329—--7,254 -13,660 = -20,585 —-28,048 += -36,160 -44,950 -54,431  _-64,695  -75,871
a- Estimate of tax revenue assumes the Airport Trust Fund is credited with semi-monthly deposits during the period October | - December 31, 1996. The staff of

the Joint Committee on Taxation recently learned that most such deposits were not made, suggesting that these December 1996 baseline cstimates overstate
current cash balances. The staff of the Joint Committee on Taxation understands that as much as $1.2 billion in excise taxes were not deposited during the
period of October 1 - December 31, 1996, See text for detailed explanation.

Source: Congressional Budget Office.


Prior to 1997, the Airport Trust Fund excise taxes included three taxes on commercial air
transportation:

(1) a 10-percent excise tax on domestic air passenger transportation;
(2) a $6 per person international air passenger departure tax; and
(3) a 6.25-percent domestic air freight excise tax.

During the same period, general aviation (e.g., corporate aircraft) was subject to Airport
Trust Fund excise taxes on the fuels it used rather than the commercial aviation passenger ticket
and freight excise taxes. The Airport Trust Fund rates for these excise taxes were 17.5 cents per
gallon for jet fuel and 15 cents per gallon for aviation gasoline.

Airport Trust Fund expenditure programs

Current Airport Trust Fund program expenditure authorizations are scheduled to expire
after September 30, 1998. The Airport Trust Fund expenditure purposes are included in the
Code (sec. 9502) by reference to general purposes and to programs as authorized under specific
aviation legislation (as periodically updated).

Budgetary treatment of air transportation excise taxes and Trust Fund expenditures

The Budget Enforcement Act of 1990 and related legislation (collectively, the "1990
Budget Act") include two provisions that are central to the operation of the Airport Trust Fund
programs and Trust Fund excise taxes: a budget scorekeeping assumption that current dedicated
excise taxes are imposed on a permanent basis (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 air transportation excise taxes (and
transferred to the Airport Trust Fund) and the spending from the Airport Trust Fund. The Trust
Fund balances similarly have no effect in a broader budgetary sense on the amount that can be
obligated for transportation program expenditures. If Trust Fund excise taxes and programs are
extended and reauthorized before expiration of the taxes, there is neither a revenue nor a
spending budget score from the legislation. However, if the taxes expire (as is currently true
with the Airport Trust Fund excise taxes), Congressional Budget Office ("CBO") revenue
baselines issued after the expiration do not include any revenue with respect to the expired taxes.
Thus, if the taxes are reimposed following issuance of a new CBO revenue baseline, a revenue
increase will be scored based upon the period of time for which the taxes are being reimposed.
Because there is no link between Airport Trust Fund spending and dedicated revenues, the
resulting revenue increases may be used under the Budget Act to offset revenue loss from
enactment of other tax provisions without affecting the Trust Fund programs.

-3-



-EE-

Table A-3.--Sales Revenues of Five Selected Domestic Passenger

Airlines with Annual Revenues Less Than $3 Billion,

1990-1995 ($ millions)

Alaska America Atlantic Comair
Airgroup West Southwest Southeast Holdings
Year Inc. Airlines Airlines Airlines Inc.

1990 1,047.0 1,315.8 1,186.8 187.2 201.7
1991 1,104.0 1,413.9 1,313.6 221.9 217.4
1992 1115.4 1,294.1 1,685.2 235.6 248.3
1993 1,128.3 1,325.4 2,296.7 288.5 296.6
1994 1,315.6 1,408.8 2,591.9 312.1 360.7
1995 1,417.5 1,550.6 2,872.8 328.7 463.3

Source: CompuStat

Table A-4,--Net Income of Five Selected Domestic Passenger

Airlines with Annual Revenues Less Than $3 Billion,

1990-1995 ($ millions)

Alaska America Atlantic Comair
Airgroup West Southwest Southeast Holdings
Year Inc. Airlines Airlines Airlines Inc.

1990 17.2 -TA.7 47.1 25.4 13.1
1991 10.3 -222.0 26.9 32.5 12.4
1992 84.8 -131.8 103.6 37.1 19.3
1993 30.9 37.2 169.5 50.5 28.5
1994 22.5 62.2 179.3 52.7 29.3
1995 17.3 53.8 182.6 SLI 60.0

Source: CompuStat


V. CURRENT AND PROJECTED FINANCIAL STATUS OF THE AIRPORT
TRUST FUND

In general

Expenditures from the Airport Trust Fund are governed by three sets of statutory
provisions: authorizing Acts, annual appropriations Acts, and the Code's Trust Fund provisions.
The current authorizing Act provides for expenditures through September 30, 1998 (generally by
authority granted to the FAA to enter into contracts). Public Law 104-205, providing
transportation appropriations for the 1997 fiscal year, limits authorized contract authority to
specified dollar amounts for the various FAA programs. This appropriations Act further
provides that at least a portion of the funding for each of the FAA programs is "to be derived
from the Airport and Airway Trust Fund," with the balance being derived from general revenues.
In general, all of the appropriations for FAA programs, except for a portion of the FAA's
operating expenses, which is derived from the General Fund, are derived from the Airport Trust
Fund. These programs include the FAA's operating expenses, expenditures for facilities and
equipment programs; research, engineering and development program expenditures; and, the
airport improvement grant program for State and local government airports. In addition to
setting dollar limits on future commitments for the capital programs, the current appropriations
Act generally provides that the amounts appropriated for capital expenditures may be utilized at
any time through September 30, 1999.

The Code's Trust Fund provisions adopt, by cross-reference, the expenditure provisions
of these authorization and appropriation Acts. In addition, the Code's Trust Fund provisions
determine which revenues will be deposited into the Airport Trust Fund, and thus will be
available to finance expenditures which are authorized and appropriated from that Fund. The
current Code provisions transfer to the Airport Trust Fund only those receipts from the air
transportation excise taxes that are received by the Tr: D ment before January 1, 1997.
Amounts received after December 31, 1996, are retained in the General Fund (and thus are not
available for financing authorized and appropriated Airport Trust Fund expenditures) under
present law. As described more fully below, the commercial air transportation excise taxes are
not deposited in the Treasury immediately following their collection from consumers by
commercial passenger and freight air carriers (the “air carriers"). Until recently, it was
anticipated that these Code provisions would allow transfer to the Trust Fund of all receipts
attributable to taxes paid by consumers when the taxes were imposed in 1996 except those paid
by consumers during the month of December 1996.”

The financial condition of the Airport Trust Fund generally is evaluated by reference to
two balances: a cash balance and an uncommitted balance. The cash balance reflects all cash on

” A similar situation arose with respect to amounts attributable to air transportation taxes
paid by consumers during the month of December 1995. Those amounts were transferred to the
Airport Trust Fund when the Trust Fund taxes were reimposed in the 1996 Act.

-19-



"look back" rules). For example, air carriers generally would not be subject to underpayment
penalties if their semi-monthly deposits for the fourth quarter (October 1 through December 31)
equaled at least the amount they were required to remit during the second quarter (April 1
through June 30) of the same year.

During calendar year 1996, no commercial air transportation excise taxes were imposed
before August 27. In a general information letter to the Air Transport Association of America,
dated August 30, 1996, the Internal Revenue Service advised the air carriers that,
notwithstanding that no excise taxes were required to be remitted during the second quarter of
1996, applicable Treasury Department regulations permitted the air carriers to continue to avail
themselves of the look back rules in determining tax deposits for the fourth quarter. Because the
Airport Trust Fund taxes had expired and therefore nothing was required to be remitted during
the second quarter, the Internal Revenue Service stated that air carriers were not required to
make semi-monthly deposits with respect to the fourth quarter. The staff of the Joint Committee
on Taxation recently learned that, in general, the air carriers therefore chose not to make semi-
monthly deposits of these taxes during the fourth quarter of 1996. Instead, the air carriers
generally retained the taxes collected from their passengers on tickets sold and freight shipped
during the period September 1-November 30, 1996, and intend to remit the entire amount they
collected with their excise tax returns for the fourth quarter, due on February 28, 1997.
(Similarly, the air carriers are expected to retain most taxes attributable to December 1996 sales
until their excise returns for the first quarter of 1997 are due on May 31, 1997.)

Therefore, with the exception of receipts attributable to the period August 27, 1996

through August 31, 1996, it is understood that only relatively small amounts were received by
the Treasury before January 1, 1997. It of the 1996 reimposition of the i
transportation excise taxes. Tax receipts that were receiv if mber 31, 1996,
credited to the Airport Trust Fund, absent further legislative change.

Effect on Airport Trust Fund balance and the Federal Aviation Administration budget
for the 1997 fiscal year

When the Treasury Department and the FAA learned that most air carriers had not
deposited passenger and freight excise taxes during the fourth quarter of 1996, the two agencies
re-evaluated their projections of the Airport Trust Fund's uncommitted balance and the ability of
the FAA to fund its operations and enter into new capital commitments during the 1997 fiscal
year. The current FAA funding constraints do not affect the ability of the FAA to continue to
make payments on commitments that have been entered previously (except for certain
“incrementally accrued" contracts, described below). The cash balance of the Airport Trust Fund
includes committed funds that are sufficient to finance completion of those prior commitments.
Table 3, below, was submitted by the FAA on January 31, 1997, and summarizes the FAA's
analysis of its financial condition as of that date. The information contained in Table 3 is very
preliminary and may change before the Finance Committee's hearing on February 4, 1997.

-25-



balance is projected to be depleted before the end of the 1997 fiscal year. Thus, absent
reinstatement of the air transportation excise taxes, or dedication of either other revenue sources
to the Airport Trust Fund or appropriation of additional amounts from the General Fund, the
FAA would not be able to enter into new capital contracts at some point during the current fiscal
year.** It should be understood, however, that because the current appropriations Act provides
that appropriated amounts will remain available for spending through September 31, 1999, the
constraints on current fiscal year spending resulting from the lower uncommitted Airport Trust
Fund balance will not prevent the FAA from ultimately spending these appropriated amounts.
Instead, those commitments could be made without further Congressional appropriations action
once additional receipts are deposited in the Airport Trust Fund.

*4 The General Accounting Office recently has reported that, absent additional funds, the
uncommitted balance of the Trust Fund would reach zero by July 1997. See, United States

General Accounting Office, Airport and Airway Trust Fund: Issues Raised by Proposal to
Replace the Airline Ticket Tax (GAO/RCED-97-23) December 1996, pp.12-13.

-21-



-E-

Figure 1.-- Sales Revenues of Seven Major Airlines, 1990-1995

18,000.000 ;
_. American
16,000.000
United
14,000.000
12,000.00 Delta
?
& 7
= 10,000.000 cee
BS eee ee mm mes Northwest
co aid “Te
3 weer
§ 8000000, eee USAir
g =
6,000.000 {~-"*—-- ee ee em eee Continental
4,000.000 +
_ TWA
2,000,000 +
0.000 T T T To 1
1990 1991 1992 1993 199. 1995

Source: CompuStat

Year


IV. BUDGET ACT SCOREKEEPING RULES FOR TRANSPORTATION
EXCISE TAXES AND TRUST FUND EXPENDITURES

The 1990 Budget Act includes two provisions that are central to the financing and
operation of the Federal transportation Trust Fund programs: a budget scorekeeping 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 transportation Trust Funds. The Trust Fund balances similarly have no effect
in a broader budgetary sense on the amount that can be obligated for transportation program
expenditures.” If Trust Fund excise taxes and programs are extended and reauthorized before
expiration of the taxes, there is neither a revenue nor a spending budget score from the
legislation. However, if as is currently true with the Airport Trust Fund excise taxes, the taxes
have expired and a new CBO revenue baseline has been issued, the new CBO baseline includes
no revenue with respect to the expired taxes. Thus, the reimposition of the taxes would be
scored as a revenue increase. Further, because Airport Trust Fund spending is not linked to
dedicated revenues, the resulting revenue increases may be used under the Budget Act to offset
the revenue loss from enactment of other tax or direct spending provisions without affecting
Trust Fund programs.

Treatment of dedicated excise taxes under CBO revenue baseline

The 1990 Budget Act provides that excise taxes that are dedicated 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 CBO and Office of Management and Budget
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 in
approximately January or February of each year; 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.”! As a result of their inclusion in
the revenue baseline, extensions of Trust Fund excise taxes generally are not scored as raising

2° Unrelated to this general budgetary result, the Highway Trust Fund, but not the
Airport Trust Fund, has internal anti-deficit provisions that limit amounts that can be authorized
and appropriated from specific Trust Fund Accounts (Highway and Mass Transit Accounts).

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

-16-



History of tax.--The 10-percent domestic air passenger transportation 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, which
also provided that revenues from the 2-percentage point increase 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 August 27, 1996 through December 31, 1996.

The 8-percent tax rate was imposed concurrent with establishment of the Airport Trust
Fund in 1970. Except for a period between 1980 and 1982 when the rate temporarily was
reduced to 5 percent as a result of a general expiration of the Airport Trust Fund excise taxes, the
rate remained at 8 percent until enactment of the 1990 legislation described above. Before
establishment of the Airport Trust Fund in 1970, the tax was imposed at rates varying between 5
and 15 percent, with revenues going to the General Fund. (Federal aviation expenditures were
financed entirely from the General Fund before 1970.)

International air passenger departure tax

Imposition and tax base.--Prior to 1997, a $6 per passenger excise tax was imposed on
international air transportation which began in the United States (sec. 4261{c)). The $6 tax
applied to all commercial air passenger transportation from the United States which was 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
was subject to this tax (because the international portion of the flight was exempt from the 10-
percent tax) as was transportation from the United States to a foreign country. This tax applied
regardless of whether the transportation was purchased within the United States (i.e., the tax
applied to a return segment from the United States of "round trip" travel originating and ending
in a foreign country even if payment occurred within the foreign country).

History of tax.--The international air passenger transportation tax was first imposed, at a
$3 per passenger rate, by the 1970 legislation that established the Airport Trust Fund. Except for
a period between 1980 and 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
December 31, 1995, and was reinstated by the 1996 Act for the period August 27, 1996, through
December 31, 1996

Domestic air freight excise tax

Imposition and tax base.--Before January 1, 1997, a 6.25-percent excise tax was imposed
on air transportation of freight within the United States (sec. 4271). Like the domestic air
passenger excise tax, this tax applied regardless of whether payment for the transportation was
made within the United States; however, the tax did not apply unless the transportation both
began and ended within the United States. Transportation was treated as beginning and ending
within the United States if both the point of origination and the final destination point were

-8-



APPENDIX: DATA ON FINANCIAL CONDITION OF COMMERCIAL
AIR CARRIERS

The following figures and tables report revenues and net income for twelve selected air
passenger airlines for the period 1990 through 1995. The data are revenues and net income as
reported for financial accounting purposes and were derived from the CompuStat data base.

The revenue and income data for the selected airlines are reported by two groups. The
first group is comprised of American Airlines, Continental Airlines, Delta Airlines, Northwest
Airlines, Trans World Airlines, United Airlines, and USAir. These seven airlines are the seven
largest air passenger carriers serving the domestic market. Each of the seven airlines have had
annual revenues in excess of $3 billion throughout the period 1900 through 1995. Figure 1 and
Table A.1 report annual revenues, which largely are comprised of passenger ticket sales, for each
of these seven large airlines. The data show that throughout the period American, United, and
Delta experienced revenue growth. Revenues for Northwest and USAir were flat, while
Continental and TWA experienced revenue declines. Figures 2 and 3 and Table A.2 report net
income for these airlines. Generally each airline reported losses between 1990 and 1994, while
1995 was a year of positive net income for all except TWA.

The second group of airlines is five smaller airlines: Alaska Airlines, America West
Airlines; Atlantic Southeast Airlines; Comair; and Southwest Airlines. Each of these airlines
had annual revenues of less than $3 billion throughout the period 1990 through 1995. While
there are other "small" airlines, these five airlines were selected because of the availability of
data on revenue and net income for each year of the period 1990 through 1995. Figure 4 and
Table A.3 report revenues for these airlines. Alaska Airlines, America West, Atlantic Southeast,
and Comair each reported modest revenue growth for 1995 compared to 1990. Southwest
Airlines reported more substantial revenue growth throughout the period. Figure 4 and Table
A.S document that these five smaller airlines generally were profitable throughout the period
1990-1995. :

Reported 1996 operating results for these twelve air carriers are not yet generally
available. However, financial news accounts generally characterize 1996 as a year of revenue
and profit growth.”

® For example, The Value Line Investment Survey recently wrote that "[t]he Air
Transport Industry will report its highest profits ever for 1996, and next year should be good,
also. Traffic has been rising and ticket prices are higher than they were a year ago." The Value
Line analyst projects that total industry revenues (including freight operations) will be more than
ten percent higher for 1996 than 1995 and that total industry profits will be 35 percent higher in
1996 than in 1995. The Value Line Investment Survey, December 20, 1996, p. 251.

31-



Table 3.--Estimated Effects of New Information on the Uncommitted Balance of the
Airport Trust Fund and the FAA Budget, continued
DRAFT ANALYSIS OF FY 1997 SPENDING OPTIONS
{All Sums in $Billions)
TRUST FUND (TF) BALANCE INFORMATION FY1997
TF cash balance, beginning of year (not additive to table) {$7.9}
TF uncommitted balance, beginning of year $2.4
Adjustment for recapture of December 1995 taxes $0.2
Oct. to Dec. 1996 transfers by Treasury $1.2
Funds to be withdrawn by Treasury (subject to upward revision) ($1.2)
Available TF balance before interest on cash balance $26
Interest for FY 1997 (based on adjusted cash balance) $0.4
Avaitable TF balance before obtigations $3.0
Obligations for F&E programs through 1/31 $0.9
‘Obligations for F&E from FY 1996 appropriations ($0.6)
Obligations for RE&D through 1/31 $0.1
Obligations for AIP through 1/31 $0.1
Obligations for Operations through 1/31 $0.5
Obtigations for OST programs (completed 1/97) $0.1
15 Net obligations of FY 1997 appropriations through January 31 $14
©
' Remaining TF batance (including interest) $1.9
GENERAL FUND BALANCE INFORMATION
GF appropriation, beginning of year $3.3
GF obligations through 1/31 $1.2
Remaining GF balance $2.1
RATES OF OBLIGATION
Oct. Nov. Dec. Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Total
‘Obligation rate per month for Operations $0.39 $0.37 $0.55 $0.40 $0.40 $0.41 $0.41 $0.41 $0.41 $0.41 $041 $0.41 $4.95
Capital Programs 1/

] Obligations per month for F&E $0.05 $0.35 $0.19 $0.31 $0.18 $0.20 $0.11 $0.13 $0.13 $0.10 $0.13 $0.12 $1.98
Obligations per month for RE&D $0.00 $0.03 $0.02 $0.02 $0.02 $0.02 $0.02 $0.02 $0.02 $0.02 $0.02 $0.02 $0.21
Obligations per month for AIP $0.00 $0.01 $0.06 $0.06 $0.07 $0.08 $0.08 $0.09 $0.16 $0.27 $0.28 $0.31 $1.46
Total capital obligations per month $0.05 $0.39 $0.26 $0.39 $0.26 $0.30 $0.21 $0.24 $0.30 $0.39 $0.42 $0.45 $3.65

Total Operations and capital obligations per month $0.45 $0.75 $0.81 $0.78 $0.66 $0.71 $0.61 $0.65 $0.71 $0.80 $0.83 $0.85 $8.61
44 Monthly totals do not include costs associated with potential interruptions in contracts.



Il. PRESENT AND PRIOR FEDERAL AIR TRANSPORTATION EXCISE TAXES -
A. In General

Before January 1, 1997, excise taxes were imposed on commercial air passenger and
freight transportation and on fuels used in general aviation (i.e., transportation on non-common
carrier aircraft that is not for hire) to fund the Airport Trust Fund.* In addition, like other
transportation sectors, the air transportation sector generally is subject to a permanent 4.3-cents-
per-gallon excise tax on fuel used in aviation. Revenues from this 4.3-cents-per-gallon
transportation motor fuels tax are retained in the General Fund for deficit reduction. The Airport
Trust Fund was established in 1970 to finance a major portion of the costs of FAA services and
grant programs for airports. Before establishment of the Airport Trust Fund, 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 prior-law Airport Trust Fund excise taxes included three taxes on commercial air
transportation:

(1) a 10-percent excise tax on domestic air passenger transportation;
(2) a $6 per person international air passenger departure tax; and
(3) a 6.25-percent domestic freight excise tax.

During the same period, general aviation (e.g., corporate aircraft) was subject to Airport
Trust Fund excise taxes on the fuels it used rather than to the commercial aviation passenger
ticket and freight excise taxes. The Airport Trust Fund rates for these excise taxes were 17.5
cents per gallon for jet fuel and 15 cents per gallon for aviation gasoline.

Each of these taxes is described in more detail below.

Current Airport Trust Fund program expenditure authorizations are scheduled to expire
after September 30, 1998.

> Previously, the taxes expired during the period January 1, 1996, through August 26,
1996.

* Air transportation is taxable regardless of whether public or commercial airports are
used in taking off or landing aircraft.

-5-



Financial status of the Airport Trust Fund

Late in 1996, the FAA and the Genera! Accounting Office reported that the uncommitted
balance of the Airport Trust Fund would be sufficient to fund all of the fiscal 1997 operational
expenses of the FAA that were expected to be funded from the Trust Fund, and would allow the
FAA to enter into new capital program commitments through July 1997. However, the staff of
the Joint Committee on Taxation recently received new information which indicates that
pursuant to certain Internal Revenue Service tax deposit rules, commercial passenger and freight
air carriers have delayed significantly the time when the pre-1997 excise taxes collected by them
from air passengers and freight shippers will be received by the Treasury Department. Asa
result of this delay, an overwhelming majority of the revenues resulting from reimposition of the
Airport Trust Fund air passenger and freight excise taxes from August 27, 1996 through
December 31, 1996, were not received by the Treasury Department before January 1, 1997, and
therefore such revenues cannot be transferred to the Airport Trust Fund.

The Treasury Department has been crediting revenues to the Airport Trust Fund since the
beginning of the 1997 fiscal year, based on estimates of receipts that were made before this
information was known. As a result of the new information, the Treasury Department will be
required to adjust the Airport Trust Fund balance downward. As of January 31, 1997, the
amount of the anticipated adjustment is understood to be approximately $1.2 billion. The FAA
estimates that, after this adjustment is made, the uncommitted balance of the Airport Trust Fund,
plus the uncommitted portion of the FAA's 1997 fiscal year appropriation from the General
Fund, will be sufficient to fund all of the FAA's operations for the 1997 fiscal year, but will only
permit the FAA to enter into new capital program commitments through March 1997 at the
latest. However, because these numbers are only estimates and because they do not include any
estimates of the costs of terminating certain multiple phase contracts, the FAA may have to stop
making new commitments and begin notifying contractors of its intent to terminate multiple
phase contracts on March 1, 1997, or earlier, absent legislative action.

-4-



revenues when the extensions are enacted. On the other hand, reductions in excise taxes (even as
part of an extension of those taxes), are scored as losing revenue.

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

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 January 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 1995 CBO revenue
baseline, against which legislation was scored, assumed permanent continuation 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 baseline, 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 Protection 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 baseline was issued, no revenue
from these excise taxes was included in the baseline, and thus, revenue increases were scored
from their reinstatement in the 1996 Act, for the approximately four-month period during which
the taxes actually were reimposed.

Example (3).--The Airport Trust Fund excise taxes expired again after December 31,
1996. Because the Airport Trust Fund excise taxes expired before the January 1997 CBO
revenue baseline was issued, the baseline does not include any projected receipts from them. If
Congress acts to reimpose the taxes in 1997, revenue increases will be scored for the period
during which the taxes are reimposed.

Trust Fund expenditures as discretionary spending

The 1990 Budget Act divides Federal Government spending into two major categories:
direct spending and discretionary spending. Direct spending is spending for which no
appropriation is required (e.g., entitlements such as social security old age benefits).
Discretionary spending may occur only when funds are appropriated. All discretionary spending
programs must compete for a fixed pool of dollars under aggregate annual caps imposed on
Federal discretionary spending. As described above, spending for the Federal transportation
Trust Fund programs is classified as discretionary spending. When authorizing legislation is
enacted, generally, it is not considered to be an increase in Federal spending. Rather, that
spending is scored when the funds are appropriated, which occurs after the 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.

-17-



Special rules applied to air transportation between the continental United States and
Alaska or Hawaii and between Alaska and Hawaii. The portion of such transportation which
was not within the United States (e.g., the portion over the Pacific Ocean between the continental
West Coast or Alaska and Hawaii) was not subject to the 10-percent air passenger excise tax.’
The 10-percent excise tax applied in full, however, to air transportation within the States of
Alaska and Hawaii.

The 10-percent air passenger transportation excise tax also did not apply to domestic
United States segments of uninterrupted international air transportation. Uninterrupted
international air transportation was defined to include only travel (entirely by air) that did not
both begin and end in the United States (or in the 225 mile zone) and during which there was not
more than a 12-hour scheduled period between arrival and departure at any point in the United
States.'' For example, assume that a passenger traveled from Tokyo to New York, with a four-
hour stop in Seattle. The domestic segment of the flight (i.e., Seattle to New York) was not
subject to the domestic air passenger transportation excise tax because that segment was a part of
uninterrupted international air transportation.

The Federal Government, State and local governments, and private, non-profit
organizations were subject to tax on commercial air transportation purchased by them.

Exemptions.--Exemptions were provided for helicopters engaged in the exploration for,

-or the development or removal of, hard minerals, oil, or gas, and in timber (including logging)

operations if the helicopters neither took off from nor landed at a facility eligible for Airport
Trust Fund assistance or otherwise used Federal aviation services during the flight.” In addition,
emergency medical aircraft (both fixed-wing and helicopter) were exempt from tax when the
aircraft were equipped for and exclusively dedicated to emergency medical transportation. This
latter exemption applied regardless of whether the Federal aviation system was used or the
aircraft took off from or landed at a Federally assisted airport. A further exemption applied to
transportation on aircraft having a maximum FAA certificated takeoff weight of 6,000 pounds or
less, except when the aircraft was operated on an established line.

from the taxable zone if the Treasury determined that Canada or Mexico, respectively, imposed
an appropriate air transportation tax on flights from such locations.

'° The $6 per passenger international air passenger departure excise tax, described
below, did apply to this transportation.

‘| A more liberal rule was provided for military personnel traveling in uniform while on
leave in transportation that involves both international and domestic United States segments.

” Jn the case of flights involving multiple intermediate stops, this determination was
made on a segment-by-segment basis.

-7-



-€Z-

Table 2.--Congressional Budget Office Projection of Airport and Airways Trust Fund Uncommitted Balances,
Fiscal Years 1997-2007 (in millions of dollars)
[December 1996 Baseline, Prior to Information Relating to Semi-Monthly Deposits ”]

Trust Fund Balances 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Beginning of Year Unpaid

Commitments ” 5,498 6,072 6,856 7,807 8,856 9,989 11,214 12,446 13,724 15,035 16,378
New Budget Authority ” 6,167 6,414 6,601 6,797 6,997 7,205 TAIT 7,634 7,860 8,094 8,333
Outlays 5,593 5,630 5,650 5,748 5,864 5,980 6,185 6,357 6,549 6,750 7,029
End of Year Unpaid Commitments 6,072 6,856 7,807 8,856 9,989 1,214 12,446 = 13,724 15,035 16,378 17,862 *
End of Year Cash Balance ” 4,208 -1,329 -7,254 -13,660 -20,585 —--28,048 = -36,160 -44,950  -54,431  -64-695  -75,871 *
End of Year Uncommitted Balances 0 0 0 0 0 0 0 0 0 0 0

a- This estimate of uncommitted balances assumes the Airport Trust Fund is credited with semi-monthly deposits of air transportation excise taxes during the
period October 1 through December 31, 1996. The staff of the Joint Committee on Taxation recently learned that most such deposits were not made,
suggesting that these December 1996 baseline estimates overstate current uncommitted balances. The staff of the Joint Committee on Taxation understands
that as much as $1.2 billion in excise taxes were not deposited during the period of October | through December 31, 1996. See text for detailed explanation.

b- Unpaid Commitments: all budget authority which has been provided but not yet expended, a combination of unobligated and obligated balances.

c- Budget Authority: authority provided by Congress to enter into contracts committing funds.

d- "Cash" available in Airport Trust Fund at the end of the fiscal year, see Table 1.

Source: Congressional Budget Office.



BACKGROUND INFORMATION ON FEDERAL AIR TRANSPORTATION
EXCISE TAXES AND THE AIRPORT AND AIRWAY TRUST FUND

Scheduled for a Public Hearing
Before the
SENATE COMMITTEE ON FINANCE

on February 4, 1997

Prepared by the Staff
of the

JOINT COMMITTEE ON TAXATION

February 3, 1997

JCX-3-97



producers, defined to include registered wholesale distributors.’ The aviation gasoline tax was -
imposed on the removal of the gasoline from registered terminal facilities under the same
administrative rules as apply to the highway motor fuels excise taxes.

Like the Airport Trust Fund excise taxes on commercial air transportation, the fuels taxes
imposed on general aviation expired 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 remaining 14 cents per gallon of the aviation gasoline excise tax continued to be
collected, with revenues being deposited in the Highway Trust Fund. When the Airport Trust
Fund excise taxes were reinstated in 1996, revenues from this 14-cents-per-gallon tax collected
during the tax-expiration period were transferred to the Airport Trust Fund. All of the aviation
fuels taxes (including the 14-cents-per-gallon tax) expired after December 31, 1996.

Exemptions

Exemptions were provided for helicopters engaged in the exploration for, or the
development or removal of, hard minerals, oil, or gas, and in timber (including logging)
operations if the helicopters neither took off from nor landed at a facility eligible for Airport
Trust Fund assistance or otherwise used Federal aviation services during the flight."* In addition,
emergency medical aircraft (both fixed-wing and helicopter) were exempt from fuels taxes when
the aircraft were equipped for and exclusively dedicated to emergency medical transportation.’
This latter exemption applied regardless of whether the Federal aviation system was used or the
aircraft took off from or landed at a Federally assisted airport. A further exemption applied 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 and in foreign trade), by State and local governments and nonprofit
educational organizations, or on a farm for farming purposes were exempt from the aviation
fuels excise taxes.

3 The majority of this tax was 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 rendered much of the tax a retail tax.

'* In the case of flights involving multiple intermediate steps, this determination was
made on a segment-by-segment basis.

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

-10-



within the United States (i.e., layover time outside the United States and movement of aircraft in -
deadhead service were treated as part of taxable transportation).

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

The domestic air freight excise tax base did not include charges for accessorial ground
services. These services included costs of ground transportation such as movement from a
downtown freight carrier drop station to the airport. Accessorial service charges were excluded
only if the service could be performed by a party other than the transportation provider and if the
provider maintained in its records a separate accounting for the charge.

Unlike the air passenger excise taxes, air freight transportation providers were not
required to state the amount of this tax separately on customer bills.

Exemptions.--The air freight excise tax did not apply to property transported by
emergency medical aircraft performing qualifying medical services. The Treasury Department
further ruled that the tax did not apply to amounts paid for transportation of property in
cropdusting, and aerial firefighting service, or the use of helicopters in construction such as
setting equipment on the roofs of buildings 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 a period when the Airport Trust
Fund excise taxes generally expired between 1980 and 1982, the tax rate was 5 percent of the
transportation charge until 1990, when the 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 1996
Act for the period August 27, 1996, through December 31, 1996.

C. 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 commercial air
transportation, general aviation was subject to Airport Trust Fund excise taxes on the fuels
consumed (secs. 4081 and 4091) during the period when the Airport Trust Fund excise taxes
were imposed. These taxes were imposed at rates of 17.5 cents per gallon on jet fuel and 15
cents per gallon on aviation gasoline. The jet fuel tax was imposed on the sale of the fuel by

-9-



'

w

oO
t

TABLE 4.--ESTIMATED REVENUE EFFECTS OF OPTIONS TO EXTEND AIRPORT AND AIRWAY TRUST FUND EXCISE TAXES *

Fiscal Years 1997 - 2007

{Billions of Dollars}
Provision Effective 1997 1998 1999 2000 2001 2002 «©2003 «= 2004 «2005 2006 «= 2007'S 1997-02 1997-07
1, Extension of alrport and airway trust fund excise
taxes through 9/30/97... 3/1/97 2.7 02 od _ _ cm _ _ _ ” - 29 29
2. Extension of airport and airway trust fund excise
taxes through 9/30/07... ‘3/1/97 27 5.2 5.5 5.9 62 66 7.0 74 79 8.4 8.9 32.1 71.8
c
Joint Committee on Taxation

NOTE: Details may not add to totals due to rounding.

a- This table shows the net revenue effect of reimposition of the excise taxes (gross receipts less income tax revenue offset).



VI. ESTIMATED BUDGET EFFECTS OF REIMPOSING AIRPORT AND AIRWAY
TRUST FUND EXCISE TAXES

Table 4, below, shows the estimated budget effects of reimposing the Airport Trust Fund
excise taxes (both commercial and general aviation taxes) that expired after December 31, 1996.
The first line of the table shows the estimated budget effects of reimposing the excise taxes for
the period March 1, 1997, through September 30, 1997. The second line shows the estimated
budget effects of reimposing the excise taxes for the period March 1, 1997, through September
30, 2007.

The revenue estimates in Table 4 assume that the provisions of the Treasury
Department's regulations relating to deposits of excise taxes are overridden to prevent recurrence
of a delay in receipt of tax deposits such as that which has been discovered with respect to the
fourth quarter of 1996. The estimates also assume that the reinstated air passenger ticket tax,
international departure tax, and domestic air freight excise tax would be effective for air
transportation beginning after February 28, 1997 (with respect to amounts paid after that date),”*
and that these three excise taxes would terminate with respect to transportation purchased after
the termination date. Transportation would be considered to be purchased no later than the date
on which a ticket was issued. (Earlier tender of payment by the consumer, whether or not
processed by the air carrier in the case of checks or credit card payments, would be treated as
payment.)

?8 Payments between related parties before March 1, 1997, for transportation occurring
after February 28, 1997, would not receive the benefit of this delayed effective date.

-29-



B. Airport Trust Fund Excise Taxes Imposed on Commercial Air Transportation

The three Airport Trust Fund excise taxes imposed on commercial air transportation were
retail excise taxes.’ The structure of these excise taxes has remained unchanged since the period
when airline fares were regulated by the Federal Government. That is, ultimate liability for
payment of tax was imposed on the person purchasing the transportation, not on the
transportation provider.* Transportation providers were subject to penalties, however, if they
failed to make reasonable efforts to collect the tax. Air transportation providers were required to
state separately the domestic air transportation excise tax on passenger tickets.

Domestic air passenger excise tax

Imposition and tax base.--The 10-percent air transportation passenger tax generally
applied only to amounts paid for domestic air transportation (Code sec. 4261). In the case of
domestic air transportation for which payment was made outside the United States, the tax
applied only if the transportation both began and ended within the United States. Domestic
transportation 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* 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.”

5 It 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 air transportation
(and subject to the commercial passenger tax) when it transports persons for compensation, but
when the same aircraft transports only employees of the owner corporation, it is treated as
engaged in general aviation (and subject to the Airport Trust Fund fuels taxes, described below).
A similar flight-by-flight determination regarding taxation is made with respect to aircraft owned
by affiliated groups of corporations.

© Structured in this manner, the excise taxes were not a factor-in rates set by regulatory
bodies. The only other example of a "collected" Federal excise tax is the telephone tax, which
also originally was imposed only on activities subject to governmental rate regulation.

7 Because the tax applied to "amounts paid" for air transportation, no tax was imposed on
transportation under airline frequent flyer programs for which no charge was made. Similarly,
no-charge transportation provided to airline employees as a fringe benefit was not subject to tax;
tax was imposed (determined by reference to actual amounts paid) for reduced-rate travel
available under both frequent flyer programs and airline employee and family fringe benefit
programs.

® The term "continental United States" excludes Alaska and Hawaii.

° The Treasury Department was authorized to enter into agreements with Canada and
Mexico excluding specified areas that geographically fall within 225 miles of the United States

-6-



hand in the Trust Fund--both that which is required to satisfy outstanding obligations (or
commitments) and funds with respect to which no commitments have been made. This balance
is used to evaluate the Trust Fund's ability to pay outstanding bills as they become due. The
uncommitted balance includes only funds with respect to which binding commitments have not
as yet been made. This balance is used to evaluate the ability of the FAA to enter into new
commitments as provided in authorization and appropriation Acts. As is true with most other
transportation Trust Funds, actual disbursements from the Airport Trust Fund for capital
expenditures lag significantly behind the time when commitments are made because many of the
commitments are for capital projects, with respect to which payment is made only as work is
completed. Thus, the cash balance typically is significantly larger than the uncommitted
balance. (For example, at the beginning of the 1997 fiscal year, the cash balance of the Trust
Fund was estimated by the CBO to be approximately $7.9 billion, whereas the uncommitted
balance was estimated to be only $2.4 billion.) The delay in actual disbursements produces
Trust Fund cash balances that frequently are referred to as "surpluses" by persons who propose
increased transportation spending. Because expenditures continued to be made from the Airport
Trust Fund during the part of calendar year 1996 when no excise taxes were imposed, both the
cash balance and the uncommitted balance of the Trust Fund are lower than has been true in the
past.

Cash and uncommi balances of the Airport Trust Fund (as reported in the Decemb:

1996 CBO baseline)

Tables 1 and 2, below, provide the CBO's current baseline estimate of the financial
condition of the Airport Trust Fund.” Both of these tables were produced before receipt of new
information, also described below, regarding when air passenger and freight taxes imposed on
consumers during the period September 1 through November 30, 1996, were deposited by the air
carriers with the Treasury Department. Therefore, the balances reflected in these tables are
understood to be overstated, but the exact amount of this overstatement is unknown at the
present time. The tables should be viewed only as providing an upper limit on funds available
from the Trust Fund.

Table 1 shows that, looking at the cash balance, the Airport Trust Fund is projected to
continue to be able to pay bills coming due with respect to previous commitments through the
end of the 1997 fiscal year. The CBO projects that the Airport Trust Fund will end the 1997
fiscal year with a cash balance of $4.2 billion.

Table 2 provides the CBO's current estimates of the fiscal condition of the Airport Trust
Fund with respect to uncommitted funds. This table shows that the Trust Fund's uncommitted

2 Table | is an updated version of Table 4 in Joint Committee on Taxation, Present Law

and Background Information on Federal Transportation Excise Taxes and Trust Fund
Expenditure Programs, JCS-10-96, November 14, 1996, p. 55. The current table reflects the

CBO's December 1996 baseline. The prior table was based on the CBO's March 1996 baseline.
-20-



-LE-

3,000 5

2,500 4

2,000

1,500

Revenue ($ million)

1,000

500 +

Figure 4.--Sales Revenues of Alaska Air, America West, Southwest, Atlantic
Southeast, and Comair, 1990-1995

_-- Southwest

America West

Alaska Air

Comair Holdings

Atlantic Southeast

1990

Source: CompuStat

1991 1992 1993 1994 1995

Year


-8E-

Figure 5.--Net Income of Alaska Air, America West, Southwest, Atlantic
Southeast, and Comair, 1990-1995

200

Net Income

-250 /
Alaska Air America West Southwest Atlantic Comair

Airlines

Source: CompuStat



The Treasury Department estimates that it incorrectly credited the Airport Trust Fund
with approximately $1.2 billion of receipts that were assumed to have been received before
January 1, 1997, but in fact will not be received from the airlines until February 28, 1997. These
receipts are attributable to excise taxes collected from consumers during the months of
September, October, and November 1996, as explained above. Table 3 shows that, after this
adjustment, the FAA currently estimates the Trust Fund's uncommitted balance to be $1.9
billion. The 1997 fiscal year appropriations Act also provides $3.3 billion in General Fund
appropriations for the FAA's operations. As of January 31, 1997, the FAA estimates that it has
obligated $1.2 billion of the General Fund appropriation, thus leaving $2.1 billion available for
additional commitments in the 1997 fiscal year. When the Trust Fund's uncommitted balance
and the remaining General Fund appropriation are combined, the FAA is provided with a total of
approximately $4.0 billion to finance its operations for the remaining months of the 1997 fiscal
year.

As Table 3 shows, the amount needed to fund FAA operations (e.g., air traffic controller
salaries) through the end of the current fiscal year is estimated to be approximately $3.5 billion.”
The remaining $0.5 billion in available funds could then be used to enter into new capital
commitments. Under normal circumstances, this $0.5 billion would permit the FAA to continue
entering into new capital program commitments at planned levels through March 1997. Because
these numbers are only estimates and because of provisions of certain outstanding contracts,
described below, the FAA may need to reduce capital commitments before the end of March to
protect against inadvertently overcommitting available Trust Fund monies.

The FAA's contract accounting does not treat the full cost of certain contracts that are
"incrementally accrued" as committed when contracts are entered. An example of such an
arrangement would be a contract for a project to be completed in multiple phases, where the
FAA would treat as committed only the amounts required for the current phase of the project, but
the contract might provide that if the contract is terminated before all phases are completed, the
contractor could receive liquidated damage payments. In some cases, these liquidated damage
payments may be increased if the FAA fails to provide 30 to 60 days notice of its intent not to
continue the contract. The FAA is continuing to review its outstanding contracts to determine
the extent of such liquidated damage provisions. Table 3 does not include any estimates of such
damages. Any liquidated damages under these contracts would reduce the $0.5 billion otherwise
available for new capital commitments during February and March 1997. Thus, absent earlier
legislative action, i that the may have to stop entering new commitments and
begin notifying contractors that they will not extend contracts such a ribed beginni:

on March 1, 1997, or earlier.

27 This $3.5 billion includes monies required to fund the salaries of approximately 2,800
FAA employees that are paid through capital accounts (primarily the facilities and equipment
("F&E") and research and experimental development ("RED") accounts).

-26-



I. OVERVIEW

Since 1970, a majority of the revenues derived from air transportation excise taxes has
been dedicated to the Airport and Airway Trust Fund (the "Airport Trust Fund"). Unlike many
other tax issues, Federal excise taxes on aviation and other transportation sectors require the
Committee on Finance to coordinate tax structure and rate decisions with actions of other
Congressional committees that set specific 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 generally are contained in provisions of the
Internal Revenue Code (the "Code"), the Finance Committee also exercises more direct oversight
of these programs than is true of many other Federal expenditure programs with respect to which
primary jurisdiction lies in other committees (and which typically are financed with general
revenues).

Historically, the portions of the transportation excise taxes that are dedicated to Trust
Funds such as the Airport Trust Fund have been imposed on the persons judged to create at least
some of the costs associated with the programs financed with the tax revenues. The tax rates and
mix of taxes dedicated to Trust Fund program financing are influenced by analyses of the costs
expected to be incurred by the Federal Government in providing services to different segments
of the sector. The most recently released study of Federal Aviation Administration ("FAA")
costs was published in 1991. The FAA completed an updated study in 1996; however, that study
has not been released because of establishment of a Congressionally mandated independent
commission to review FAA costs and financing in the Federal Aviation Reauthorization Act of
1996.

Air transportation excise taxes

Before January 1, 1997, excise taxes were imposed on commercial air passenger and
freight transportation and on fuels used in general aviation (i.e., transportation on non-common
carrier aircraft which is not for hire) to fund the Airport Trust Fund. In addition, like other
transportation sectors, the air transportation sector was and is subject to a permanent 4.3-cents-
per-gallon excise tax on aviation fuel, revenues from which are retained in the General Fund for
deficit reduction.? The Airport Trust Fund was established in 1970 to finance a major 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 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 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 exempt for a period of approximately two years (through September 30, 1995)
when the tax initially was imposed.

-2-



Il. AIRPORT AND AIRWAY 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 General Fund monies. The 1996 expenditure authorization legislation, enacted on
October 9, 1996, generally extended expenditure authority for these programs through
September 30, 1998; conforming amendments to the Code Airport Trust Fund expenditure
provisions were included in that legislation.” The statutory provisions relating to the Airport
Trust Fund were placed in the Code in 1982 (sec. 9502).

General Trust Fund expenditure purposes

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

(1) obligations incurred under provisions of previous aviation authorizing legislation
enacted since 1970, as those provisions were in effect on the date of enactment of the FAA Act
of 1996;!8

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

(a) air traffic control,

(b) air navigation,

({c) communications, or

(d) supporting services for the airway system; and

” Federal 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 H.R. 3539 extended the authority to spend from the Airport Trust Fund through
September 30, 1998.

‘* The Acts (or provisions of Acts) pursuant to which Airport Trust Fund expenditures
are allowed are Title I of the Airport and Airway Development Act of 1970; the Airport and
Airway Development Act Amendments of 1976; the Aviation Safety and Noise Abatement Act
of 1979; the Fiscal Year 1981 Airport Development Authorization Act; the Airport and Airway
Improvement Act of 1982; the Airport and Airway Safety and Capacity Expansion Act of 1987;
the Federal Aviation Administration Research, Engineering, and Development Authorization Act
of 1990; the Aviation Safety and Capacity Expansion Act of 1990; the Airport and Airway
Safety, Capacity, Noise Improvement, and Intermodal Transportation Act of 1992; the Airport
Improvement Program Temporary Extension Act of 1994; the Federal Aviation Administration
Authorization Act of 1994; and, the Federal Aviation Reauthorization Act of 1996.

-13-



(2) Facilities and Equipment Program (F&E).--Costs of acquiring, 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).--Expenses of flight checks and
operations and maintenance of air navigation facilities, including air traffic control; services
provided under international agreements relating to the U.S. share of joint provision of air
navigation services; weather reporting services provided to the FAA by the National Oceanic
and Atmospheric Administration.

(5) Small Community Air Service Program.--Contract authority for fiscal years 1992-
1998 for payments to ensure that eligible localities receiving airline service at the time of
deregulation continue to have airline 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.

(7) 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.

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)."° The balance of those expenses, principally a
portion of FAA operations and maintenance (e.g., air traffic control expenses), is financed from
general revenues.

© See section 48104, 49 U.S.C.

-15-



INTRODUCTION

This document, prepared by the staff of the Joint Committee on Taxation, provides a
description of present and prior air transportation excise taxes and information on the financial
status of the Airport and Airway Trust Fund. The Senate Committee on Finance has scheduled a
public hearing on this subject for February 4, 1997.

Part I of this document is an overview. Part II is a description of present and prior law
with respect to Federal air transportation excise taxes. Part III is a summary description of
present-law Airport and Airway Trust Fund expenditure program purposes. Part IV is a
discussion of the budgetary treatment of air transportation excise taxes and the Airport and
Airway Trust Fund. Part V presents information on the current and projected status of the
Airport and Airway Trust Fund. Part VI presents the estimated budget effects of reimposing the
Airport and Airway Trust Fund excise taxes. The Appendix presents data on the financial
condition of certain U.S. commercial air carriers.

' This document may be cited as follows: Background Information on Federal Air

Transportation Excise Taxes and the Airport and Airway Trust Fund (JCX-3-97), February 3,
1997.

-1-



-9¢-

3,000 4

2,500 +

2,000

1,500

1,000

500

Figure 3.--Net Income of American, Continental, and Delta, 1990-1995

Net Income

-500

-1,000 +

-1,500

-2,000

2,500 ¢

Source: CompuStat

American

Continental

Airlines

Delta

1990
1991
11992
E1993
1994
1995



New information relating to cash and uncommitted balances of the Airport Trust Fund

Before new information was discovered during the week of January 27, 1997, the FAA
and the General Accounting Office had reported that the uncommitted balance of the Airport
Trust Fund would be sufficient to fund all 1997 fiscal year operational expenses of the FAA that
were expected to be funded from the Trust Fund and to allow the FAA to enter into new capital
program commitments (as anticipated by current authorization and appropriation Acts) until July
1997. However, the staff of the Joint Committee on Taxation recently received new information
which indicates that, pursuant to certain Internal Revenue Service tax deposit rules, many
commercial air transportation providers (“air carriers") have delayed significantly the time when
taxes will be received in the Treasury Department. As a result of this delay, it is understood that
overwhelming majority of the revenues resulting from reimposition of the Airport Trust Fund
ir passenger and freight excise taxes from August 27, 1996, through December 31, 1996, were
not received by the Treasury Department before January 1, 1997, and therefore cannot be
transferred to the Trust Fund. Thus, the cash and uncommitted balances reported in the
December 1996 CBO baseline estimates (Tables 1 and 2) are likely to be substantially
overstated.

As described in Part Il, the air passenger ticket and air freight excise taxes are collected
from passengers and freight shippers by the commercial air carriers. The air carriers then remit
the funds to the Treasury Department; however, the air carriers are not required to remit monies
immediately. Excise tax returns are filed quarterly (similar to annual income tax returns) with
taxes being deposited on a semi-monthly basis (similar to estimated income taxes). For air
transportation sold during a semi-monthly period, air carriers may elect to treat the taxes as
collected on the last day of the first week of the second following semi-monthly period.”* Under
these "deemed collected” rules, for example, the taxes on air transportation sold between October
1 and October 15, are treated as collected by the air carriers on or before November 7. These
amounts generally must be deposited with the Treasury by November 10. Thus, on average,
revenues from commercial air passenger and freight transportation generally are not received by
the Federal Government until approximately one month after the air carrier actually sells the
transportation.

Like income tax withholding and estimated tax payments, the excise taxes contain
payment safe harbors for avoiding underpayment penalties. In general, Treasury regulations
provide that commercial air carriers are not subject to underpayment penalties if their semi-
monthly deposits of passenger ticket and freight waybill taxes for a quarter equal at least the
amount of taxes they were required to remit during the second preceding calendar quarter (the

25 Air carriers generally make this election because it allows them to delay remitting tax
beyond the date when remittance otherwise would be required.

6 See, Treas. reg. secs. 40.6302(c)-1 and (c)-3.

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INTRODUCTION .........0. 2.00 c ccc ee ee eeee
1 OVERVIEW ... 2.66.
IL. PRESENT AND PRIOR FEDERAL AIR TRANSPORTATION

Til.

Iv.

VI.

EXCISE TAXES .. 0.00... ccc cee n eet eee
A. InGeneral 60...

B. Airport Trust Fund Excise Taxes Imposed on Commercial Air
Transportation 2... 66.66 eee eee

C. Airport Trust Fund Excise Taxes Imposed on Fuels Used in General
Aviation 6 eee eens

D. Genera! Fund Transportation Fuels Excise Tax ............-..0-55
E. Repealed Air Transportation Excise Taxes ...............-200055

AIRPORT AND AIRWAY TRUST FUND EXPENDITURE
PURPOSES «0000010

BUDGET ACT SCOREKEEPING RULES FOR TRANSPORTATION
EXCISE TAXES AND TRUST FUND EXPENDITURES ............

CURRENT AND PROJECTED FINANCIAL STATUS OF THE
AIRPORT TRUST FUND ..... 1.60.

ESTIMATED BUDGET EFFECTS OF REIMPOSING AIRPORT AND
AIRWAY TRUST FUND EXCISE TAXES ................-00005-

APPENDIX: DATA ON FINANCIAL CONDITION OF COMMERCIAL AIR

CARRIERS «22.02 ete ee

@

W

12

13

16

19

29

31



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Table A-1,--Sales Revenues of the Seven Domestic Passenger Airlines with Annual
Revenues of $3 Billion or Greater, 1990-1995 ($ millions)

Northwest Trans United American Continental Delta
Airlines World (UAL USAir (AMR Air Lines Air Lines
Year Corp. Airlines Corp) Group Corp) Inc. Inc.
1990 7,426.4 4,601.3 11,037.4 6,558.6 11,719.6 6,230.5 8,582.2
1991 7,682.9 3,651.4 11,662.5 6,514.1 12,887.0 5,551.0 9,170.6
1992 8,127.6 3,618.7 12,889.7 6,686.4 14,396.0 5,575.2 10,836.7
1993 8,648.9 3,154.4 14,511.0 7,083.2 15,701.0 5,775.3 11,996.6
1994 9,142.9 3,407.7 13,950.0 6,997.2 16,137.0 5,669.9 12,359.0
1995 9,084.9 3,316.8 14,943.0 7,474.3 16,910.0 5,825.0 12,194.0

Source: CompuStat

Table A-2.--Net Income of the Seven Domestic Passenger Airlines with Annual
Revenues of $3 Billion or Greater, 1990-1995 ($ millions)

Northwest Trans United American Continental Delta
Airlines World (UAL USAir (AMR Air Lines Air Lines
Year Corp. Airlines Corp) Group Corp) Inc. Inc.
1990 302.5 -237.6 94.5 454.4 -39.6 -2,343.8 302.8
1991 320.2 34.6 331.9 -305.3 -240.0 -305.7 324.4
1992 1,079.5 B77 956.8 1,228.9 -935.0 -125.3 -506.3
1993 115.3 623.8 -50.0 393.1 110.0 2,601.6 1,001.9
1994 295.5 435.8 * SLO 684.9 228.0 613.3 -409.0
1995 450.9 227.5 349.0 119.3 167.0 224.0 408.0

Source: CompuStat


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Table 3.--Estimated Effects of New Information on the Uncommitted Balance of the
Airport Trust Fund and the FAA Budget
(Submitted by the FAA on January 31, 1997)

DRAFT ANALYSIS OF FAA's FY 1997 SPENDING OPTIONS
(All Sums in $Billions)

TRUST FUND (TF) BALANCE INFORMATION FY1997
TF uncommitted balance, beginning of year $2.4
Total FY 1997 Adjustments (interest, recoveries, etc.) $0.6
Available FY 1997 TF balance after adjustments, before obligations $3.0
Net obligations of FY 1997 appropriations through January 31 $14
Remaining TF balance for rest of FY 1997 $1.9 $1.2 available to fund Operations for 3 months

GENERAL FUND BALANCE INFORMATION

$0.2 available to fund F&E/R,E&D workforce for 8 months
$0.5 remaining to fund capital programs

GF balance, beginning of year $3.3
GF obligations through January 31 $1.2
Remaining GF balance $2.1 Funds Operations for 5 months

SCENARIO: PROTECT AGENCY WORKFORCE THROUGH FISCAL YEAR
Shaded Area Indicates Months That Can Be Fully Obligated

Feb. Apr. May
Obfigation rate per month for Operations (post 1/31) “80.40 $0.44 $0.41 $0. 4
Cumulative Remaining Operations Obligations $0.40 $0.81 $1.21 $1.62 $2.03

Capital Programs 1/

Obligation rate per month for F&E (post 1/31) $0.11 $0.13 $0.13 $0.10 $0.13 $0.12
Obligation rate per month for RE&D (post 1/31) $0.02 $0.02 $0.02 $0.02 $0.02 $0.02
Obfigation rate per month for AIP (post 1/31) $0.08 $0.09 $0.16 $0.27 $0.28 $0.31
Total capital obligations per month (post 1/31) $0.21 $0.24 $0.30 $0.39 $0.42 $0.45
Cumulative remaining capital obligations 70.26 $0. $0.77 $1.01 $1.31 $1.70 $2.12 $2.57

1/ Monthly totals do not include costs associated with potential interruptions in contracts.


History of

The 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 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. In 1982, the aviation
gasoline tax rate was increased to 12 cents per gallon, and the aviation jet fuel tax rate was
increased to 14 cents per gallon. In 1990, the aviation gasoline tax rate was increased further to
15 cents per gallon and the jet fuel tax rate was increased to 17.5 cents per gallon.

D. General Fund Transportation 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 generally 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 (typically, a wholesale
distributor); aviation gasoline is taxed upon removal 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.!*

History of tax

The Omnibus Budget Reconciliation Act of 1990 (the "1990 Act") 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 programs (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 1993 Act
expanded upon the 1990 Act, adding an additional 4.3-cents-per gallon to the existing General

‘© The tax base established in 1993 for this tax generally paralleled that of the Leaking
Underground Storage Tank ("LUST") Trust 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
intracoastal 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.

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

No expenditures are permitted to be made from the Airport Trust Fund after September
30, 1998. 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 accomplish expenditure of Trust Fund monies for any new purposes without an
amendment (approved by the tax-writing committees) to the Code.

Specific Airport Trust Fund expenditure programs

Authorized expenditures for the following airport and airway programs are included
under the general purposes, described above.

(1) Airport Improvement Program (AIP).--

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

(b) Airport construction--Construction, improvement or repair of a public
airport (includes removal of airport hazards 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 passengers and baggage at certified air
carrier airports having 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 needed
development with respect to safety, security, or capacity).

(d) Land acquisition--Includes land or property interests for airport noise
control purposes; also includes acquisition of land for, or work necessary to
construct, pads suitable for aircraft deicing (subject to certain limitations).

(e) Airport-related equipment--Airport security equipment required by
Department of Transportation regulations, snow removal equipment, noise
suppressing equipment, navigation aids, and safety equipment required for airport
certification; also includes construction or purchase of capital equipment
necessary for compliance by an airport 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 nonaeronautical business.

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

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