Airport and Airway Trust Fund: Financial Outlook Is Positive, but the Trust Fund's Balance Would Be Affected If Taxes Were Suspended
Published: 2003-09-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The multibillion dollar Airport and Airway Trust Fund (Trust Fund) provides most of the funding for the Federal Aviation Administration (FAA). The Trust Fund relies on revenue from 10 taxes, including passenger ticket, fuel, and cargo taxes. Concerns about the financial outlook of the Trust Fund have emerged recently given the downturn in passenger air travel, requests from the airlines to suspend some of the Trust Fund taxes, and the need to reauthorize FAA's major programs in 2003. GAO was asked to determine (1) the projected financial outlook of the Trust Fund and (2) how a 1- year suspension of various taxes accruing to the Trust Fund (i.e., a tax holiday), would affect its financial status. We were asked to assess five potential tax holidays that would have begun on April 1, 2003, and ended on April 1, 2004. GAO used a model developed by FAA that made financial projections for the Trust Fund using expenditure assumptions that were based on (1) the Senate Committee on Commerce, Science, and Transportation's May 2, 2003, and the House Subcommittee on Aviation's May 15, 2003, reauthorization proposals authorizing over $34 billion and (2) the President's proposal authorizing almost $38 billion from the Trust Fund. For each of these proposals, GAO asked FAA to model the effects of five different tax holidays.
section_title: What GAO Found
paragraphs: Over the next 3 years, with no change in tax rates and assuming that FAA's passenger traffic and airfare projections are valid, the Trust Fund is expected to continue to have sufficient revenue to cover authorized spending and end each year with a surplus, or an "uncommitted balance" as it is usually called, under each of the three expenditure scenarios we analyzed. For fiscal years 2004 through 2006, the potential uncommitted balances would range from over $4.4 billion (if Congress adopted either the House or the Senate proposal) to $1 billion, if the President's proposal were adopted. Suspending some or all of the taxes that accrue to the Trust Fund for 1 year would reduce or eliminate the Trust Fund's uncommitted balance. As depicted below, if all taxes accruing to the Trust Fund were suspended, effective April 1, 2003, almost $10 billion in tax revenue would be forgone and the uncommitted balance would be eliminated by October 2003. The status of the Trust Fund would also differ according to the reauthorization proposal adopted and the taxes suspended. For example, suspending the passenger ticket tax and adopting either the House or Senate proposal would reduce the uncommitted balance to $1.8 billion and $2 billion, respectively, in 2006. However, suspending the same tax and adopting the President's proposal would eliminate the uncommitted balance by October 2003. The budgetary consequences of the remaining potential tax holidays would vary substantially. FAA officials stated that under the President's proposal, a passenger ticket tax holiday might require spending cuts to its capital programs, while a cargo tax holiday would require few if any spending cuts to its programs. In its comments on a draft of this report, FAA agreed with the report's findings and provided some clarifying comments that we incorporated where appropriate.

section_title: Letter
paragraphs: The multibillion dollar Airport and Airway Trust Fund (hereafter called the  Trust Fund) provides all of the funding for three out of four of the Federal  Aviation Administration’s (FAA) major accounts—Airport Improvement  Program; Facilities and Equipment; and Research, Engineering, and  Development—and a majority of support for the fourth account,  Operations. The Trust Fund relies on a number of taxes for its revenue,  including passenger ticket, fuel, and cargo taxes that are paid by  passengers and airlines.
In fiscal year 2002, the Trust Fund received about $10 billion in revenue and  had expenditures of about $12 billion. Although expenditures exceeded  revenues in fiscal year 2002, since its creation in 1970, Trust Fund revenues  have generally exceeded expenditures—resulting in a surplus (or an  “uncommitted balance” as it is usually called). For example, at the end of  fiscal year 2002, the Trust Fund’s uncommitted balance was nearly $5  billion. The Trust Fund’s uncommitted balance represents money against  which there is no outstanding budget commitment or authority to spend  and, subject to congressional approval, is the amount available to finance  FAA accounts in the future. It was also used to offset forgone revenue  when Trust Fund taxes lapsed in 1996 and to fund new airport security  requirements resulting from the September 11, 2001, terrorist attacks.
Although the Trust Fund’s uncommitted balance totaled almost $5 billion at  the end of fiscal year 2002, a number of recent developments have raised  congressional concerns about its financial outlook. First, domestic  passenger traffic has declined over 12 percent over the last 3 years, in part  because of a sluggish economy and the public’s reluctance to travel.  Second, the airline industry is experiencing significant financial problems,  and the airlines have asked Congress for tax relief, such as suspending the  taxes that support the Trust Fund, which is known as a “tax holiday.”  According to Air Transport Association officials, such relief could lower  airline operational costs, generate additional passenger traffic through  lower fares, or improve yields realized on existing traffic. Third, given that  the current authority—the Wendell H. Ford Aviation Investment and  Reform Act for the 21st Century—for funding FAA’s major programs and  activities expires at the end of fiscal year 2003, Congress will have to  decide what level of expenditures from the Trust Fund is appropriate to  authorize for fiscal year 2004 and beyond. Recently, the Senate Committee  on Commerce, Science, and Transportation; the House Committee on  Transportation and Infrastructure’s Subcommittee on Aviation; and the  President presented reauthorization proposals for FAA. The three  proposals differ regarding the amounts authorized from the Trust Fund, the  number of years authorized, and how much would be used to support FAA  programs. In light of these developments, we were asked to address the  following questions: 1. What is the projected financial outlook of the Trust Fund? 2. How would the suspension (i.e., a tax holiday) of various taxes  accruing to the Trust Fund affect its financial status?
To answer these questions, we requested Trust Fund financial projections  from FAA using the expenditure scenarios included in the following three  proposals: (1) the Senate Commerce, Science, and Transportation  Committee’s reauthorization proposal, known as the Aviation Investment  and Revitalization Vision Act (S. 824, May 2, 2003, version, hereafter called  the Senate); (2) the House Transportation and Infrastructure Committee,  the Aviation Subcommittee’s reauthorization proposal, known as Flight  100—Century of Aviation Reauthorization Act (H.R. 2115, May 15, 2003,  version, hereafter called the House); and (3) the President’s reauthorization  proposal, known as the Aviation Authorization Act of 2003. Because there  is a difference in the number of years that the three expenditure scenarios  would authorize funding for FAA’s accounts, our analysis compares  proposed authorizations for fiscal years 2004 through 2006, which were  included in each scenario. For each of these three proposals, we asked FAA  to model the effects of the following five different tax holidays: a cargo tax  holiday, a fuel tax holiday, a flight segment tax holiday, a passenger ticket  tax holiday, and an “all” tax holiday that would include the four taxes  previously mentioned and the international departure/arrival taxes. We  selected these five holidays because they represent a range of different tax  holiday scenarios. At your request, our analysis was based on a tax holiday  hypothetically beginning on April 1, 2003, and lasting 1 year until April 1,  2004. Although our analysis is based on hypothetical tax holidays during  this period, the results of our analysis would remain valid if Congress were  to decide to implement the tax holidays retroactive to April 1, 2003, or  would be similar if Congress were to grant a tax holiday at a later time. The  information and analysis presented in this report are based on FAA’s most  recently published aviation forecasts, which were made in November 2002.  Appendix I provides additional details on our scope and methodology.
We performed our work from February through August 2003 in accordance  with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: The Trust Fund was established by the Airport and Airway Revenue Act of  1970 (P.L. 91-258) to help fund the development of a nationwide airport and  airway system and to fund FAA investments in air traffic control facilities.  It provides all of the funding for the Airport Improvement Program (AIP),  which provides grants for construction and safety projects at airports; the  Facilities and Equipment (F&E) account that funds technological  improvements to the air traffic control system; and a Research,  Engineering, and Development (RED) account. In fiscal year 2002, the  Trust Fund provided 79 percent of the funding for FAA Operations, which  represented almost 50 percent of Trust Fund expenditures.
The Trust Fund is supported by 10 dedicated excise taxes. One of the major  taxes is referred to as the passenger ticket tax, which include the following  3 taxes:  7.5 percent tax on the price of domestic airline tickets,  7.5 percent tax on the value of awards of free or reduced-rate air fares  (frequent flyer awards tax), and   7.5 percent tax on the price of domestic airline tickets to “qualified rural  airports” (flight segment fees do not apply if this tax is levied).
The remaining 7 excise taxes that finance the Trust Fund include the  following:  $3 on each flight segment, indexed to inflation starting in 2002;  6.25 percent tax on the price charged for transporting cargo by air;  $0.043 per gallon tax on commercial aviation jet fuel;  $0.193 per gallon tax on general aviation gasoline;  $0.218 per gallon tax on general aviation jet fuel;  $13.40 tax on international arrivals, indexed to inflation; and  $13.40 tax on international departures, indexed to inflation.
In fiscal year 2002, the Trust Fund received about $10 billion in revenue  from these taxes and interest. As shown in figure 1, the passenger ticket  tax was the largest single source of Trust Fund revenue, totaling about 47  percent of all receipts, followed by the flight segment tax at 15 percent of  total receipts, and the international departure/arrival tax at about 13  percent of total receipts.
Trust Fund expenditures totaled almost $12 billion in fiscal year 2002. As  shown in figure 2, FAA Operations accounted for nearly half of Trust Fund  expenditures, followed by AIP grant funding at 24 percent, F&E at 23  percent, and RED at almost 2 percent.
FAA’s current authorization expires on September 30, 2003, and Congress is  considering three proposals that would reauthorize funding for FAA. In the  May 2, 2003, version of S. 824, the Senate proposes to authorize $43.4  billion from 2004 through 2006 for FAA programs, of which $34.4 billion  would be funded from the Trust Fund, with the balance of $9.1 billion  covered by the General Fund. In the May 15, 2003, version of H.R. 2115, the  House Subcommittee on Aviation proposes to authorize $60 billion from  2004 through 2007 for FAA programs, of which $47.2 billion would be  funded from the Trust Fund, with the balance of $12.8 billion covered by  the General Fund. The President’s proposal authorizes $57.3 billion from  2004 through 2007 for FAA programs, of which $50.8 billion would be  funded from the Trust Fund and the remaining $6.6 billion would be funded  from the General Fund.
Table 2 breaks down the distribution of the funding among FAA programs  for each of the three expenditure scenarios through 2006. Under each  proposal, the Trust Fund provides all of the funding for the AIP, F&E, and  RED programs and funds between 58 and 79 percent of FAA Operations.  The balance of FAA Operations is funded through the General Fund and not  reflected in table 2.
section_title: Projected Financial Outlook for the Trust Fund Is Positive but Depends on Realization of Forecasted Passenger Traffic Levels and Airfares
paragraphs: Over the next 3 years, the Trust Fund is projected to have sufficient  revenue to fund authorized spending and end each year with an  uncommitted balance under each of the three expenditure proposals. This  positive financial outlook depends on the realization of FAA’s forecasted  passenger traffic levels and airfares. As shown in figure 3, under the  Senate’s and House’s proposals, the Trust Fund’s year-end uncommitted  balance is projected to be over $4.4 billion over the next 3 years. Under the  President’s proposal, the Trust Fund’s year-end uncommitted balance is  projected to range between $2.9 billion in 2004 and $1 billion in 2006.
The primary reason that the Trust Fund’s uncommitted balance would be  higher under the Senate’s and House’s proposals is that they use the  formula created in the Wendell H. Ford Aviation Investment and Reform  Act for the 21st Century (AIR-21) to determine how much funding for FAA  Operations should come from the Trust Fund, and the President’s proposal  does not. Under AIR-21, the formula sets the amount of Trust Fund revenue  that will be authorized for FAA Operations and RED in a given year equal to  projected Trust Fund revenues (as specified in the President’s budget)  minus the authorizations for the capital accounts (AIP and F&E) in that  year. Thus, under the Senate’s proposal, the Trust Fund is projected to  support $14.1 billion, or 61 percent of FAA Operations from 2004 through  2006. Under the House’s proposal, the Trust Fund is projected to support  $13.3 billion, or 58 percent of FAA Operations from 2004 through 2006. In  contrast, the President’s proposal specifies a set amount of Trust Fund  revenue to be used for FAA Operations. Therefore, if Congress enacts the  President’s proposal, the Trust Fund would provide $18.3 billion for FAA  Operations from 2004 through 2006, or about 79 percent of its total  estimated costs for Operations.
Although the Trust Fund is projected to have a surplus over the next  several years under each of the expenditure proposals, this projection  depends to a significant extent on the realization of forecasted commercial  passenger traffic levels and airfares. If passenger traffic or yields fall below  the levels that FAA projected in November 2002, the Trust Fund may not  have sufficient revenues to fund projected expenditures. For example,  table 3 presents the projected Trust Fund balances under each expenditure  proposal and shows the impact if revenues were 5 percent or 10 percent  less than currently projected. The Trust Fund could absorb these revenue  shortfalls while retaining a positive balance under the Senate’s and House’s  proposals because the AIR-21 formula would limit appropriations from the  Trust Fund for FAA Operations. In contrast, if revenues were 5 percent  lower than projected, the uncommitted balance of the Trust Fund would  reach zero during 2006 under the President’s proposal; if the revenues were  10 percent lower than projected the uncommitted balance would reach  zero in 2005.
section_title: Suspending Some or All Taxes Accruing to the Trust Fund Would Reduce or Eliminate the Trust Fund’s Uncommitted Balance
paragraphs: Billions of Trust Fund revenue would be forgone if all taxes accruing to the  Trust Fund were suspended for 1 year. As shown in figure 4, suspending all  taxes would result in almost $10 billion in forgone Trust Fund revenues.  The amount of Trust Fund revenues forgone under the other tax holiday  scenarios would range from approximately $447 million if the cargo tax  were suspended to nearly $5.2 billion if the passenger ticket taxes were  suspended.
Under an all tax holiday, the Trust Fund’s uncommitted balance would  reach zero by October 2003, no matter which expenditure proposal were  adopted, as shown in figures 5 through 7. However, the other four tax  holiday scenarios would affect the Trust Fund’s uncommitted balance in  different ways under each of the three expenditure proposals. Figure 5  shows the effects of several tax holidays under the Senate’s proposal.  Although the Trust Fund’s uncommitted balance would decrease under the  other four tax holiday scenarios, it would not reach zero. For example, a  passenger ticket tax holiday would decrease the Trust Fund’s uncommitted  balance from $4.8 billion in 2002 to $2 billion in 2003 and to $2.1 billion in  2004, while a fuel tax holiday would reduce it to $4.1 billion in 2003 and to  $4.2 billion in 2004.
Similarly, as shown in figure 6, under the House’s proposal, the Trust Fund’s  uncommitted balance would also decrease under the other four tax holiday  scenarios, but it would not reach zero. For example, a flight segment fee  tax holiday would decrease the Trust Fund’s uncommitted balance from  $4.8 billion in 2002 to $3.5 billion in 2003 and to $3.6 billion in 2004, while a  cargo tax holiday would reduce it to $4.3 billion in 2003 and to $4.3 billion  in 2004.
In contrast, as shown in figure 7, under the President’s proposal, the Trust  Fund’s uncommitted balance would reach zero under three of the five tax  holiday scenarios by the end of 2006. For example, a passenger ticket tax  holiday would cause the uncommitted balance to reach zero by October  2003. A fuel tax holiday and cargo tax holiday would be the only tax holiday  scenarios in which the Trust Fund’s uncommitted balance would not reach  zero by 2006 under the President’s proposal. Under a fuel tax holiday, the  Trust Fund’s uncommitted balance would decrease from $4.8 billion in 2002  to $135 million in 2006, a decrease of about $4.7 billion. Similarly, a cargo  tax holiday would decrease to $495 million in 2006, a decrease of about $4.3  billion.
A tax holiday under the President’s proposal would have a greater effect  because that proposal would require the Trust Fund to support a larger  percentage of FAA Operations compared with the Senate’s and House’s  proposals. For example, if there were an all tax holiday and the President’s  proposal was adopted, the Trust Fund would support 79 percent of FAA  Operations. Under the Senate’s and House’s proposals, the amount of  funding spent on FAA Operations would be reduced in response to the  amount of revenues lost from a tax holiday due to the adoption of the AIR- 21 funding formula for Operations.
In addition to forgone revenue and the elimination or reduction of the Trust  Fund’s uncommitted balance, granting any kind of tax holiday could pose  budgetary challenges for FAA. For example, as previously noted, a 1-year  all tax holiday starting in April 2003 would cause the uncommitted balance  of the Trust Fund to reach zero by October 2003 and might require FAA to  make significant spending cuts to the aviation programs supported by the  Trust Fund unless additional funding were authorized from the General  Fund. If there were a 1-year all tax holiday, FAA officials said they would  continue to maintain some FAA Operations, particularly air traffic control  services because it is considered an emergency function that involves the  safety of human life. However, according to FAA officials, the agency  would have to suspend activities for the AIP, F&E, and RED programs until  April 2004 and use the funds appropriated for these suspended capital  programs to continue to first fund FAA Operations. According to FAA  officials, additional support from the General Fund would also be needed  to continue funding Operations during the first 6 months of fiscal year 2004.
FAA officials also stated that if a 1-year all tax holiday under all three  expenditure scenarios were granted, FAA might have to delay or terminate  some multimillion dollar F&E contracts, unless Congress authorized  funding from the General Fund. FAA officials stated that while their  contracts have clauses that limit liability, it is their experience that any  remaining obligated funds for contracts in a given fiscal year that have not  actually been expended would be used to offset contract termination costs.  If there were a 1-year all tax holiday, FAA estimates it could incur in excess  of $1 billion in contract termination costs. For example, according to FAA  officials, terminating the National Aerospace System Implementation  Services contract, which provides engineering support for the  implementation of programs such as the Standard Terminal Automation  Replacement System, would result in termination costs of $20 million. We  reviewed FAA’s data on the unobligated balances of outstanding F&E  contracts and verified that the amount totaled $1.5 billion. However, we did  not review individual FAA outstanding F&E contracts to confirm FAA’s  statement that on the basis of its experience, any remaining obligated funds  for contracts in a given fiscal year that have not actually been expended  would be used to offset contract termination costs.
Although FAA would not have to terminate contracts under the House’s and  Senate’s proposals if there were a passenger ticket tax, flight segment tax,  or fuel tax holiday, FAA’ s ability to continue to fund its programs with  Trust Fund revenue would be affected under the President’s proposal if one  of these holidays were granted. For example, if passenger ticket taxes were  suspended for 1 year, beginning in April 2003, the uncommitted balance  would reach zero by October 2003. Consequently, FAA officials stated that  its AIP and F&E programs would have to be suspended from October 2003  through May 2004, if additional funds were not provided from the General  Fund. However, to fully fund FAA Operations, particularly air traffic  control services, Congress would have to authorize additional funding from  the General Fund to offset revenue shortfalls created by these tax holidays.
section_title: Agency Comments
paragraphs: We provided the Department of Transportation with a draft of this report  for its review and comment. FAA officials agreed with information  contained in this report and provided some clarifying and technical  comments that we incorporated where appropriate.
We are sending copies of this report to the appropriate congressional  committees; the Secretary of Transportation; and the Administrator, FAA.  We will also make copies available to others upon request. In addition, this  report is also available at no charge on GAO’s Web site at  http://www.gao.gov.
Please contact me or Tammy Conquest at (202) 512-2834 if you have any  questions. In addition, Jay Cherlow, Colin Fallon, Dave Hooper, and  Richard Swayze made key contributions to this report.
section_title: Scope and Methodology
paragraphs: To determine the projected financial status of the multibillion dollar  Airport and Airway Trust Fund (hereafter called the Trust Fund), we  obtained from the Federal Aviation Administration (FAA) the financial  projections for the Trust Fund that it had developed under the expenditure  proposals included in the President’s reauthorization proposal.  We  subsequently asked FAA to develop similar projections using the  expenditure scenarios in the proposals from the Senate Committee on  Commerce, Science, and Transportation and the House Committee on  Transportation and Infrastructure, Subcommittee on Aviation. In addition,  since the realization of FAA’s projections depends on passenger traffic  levels and airfares, we asked FAA to develop two additional projections  under each of the three expenditure proposals. Specifically, we asked FAA  to project what would happen if tax revenues accruing to the Trust Fund  from fiscal years 2003 through 2007 were 5 percent and 10 percent below  the levels projected in FAA’s November 2002 forecasts. Accordingly, our  findings on the financial outlook of the Trust Fund are based on FAA’s  projections, rather than on any projections of our own. We reviewed the  process, methodology, and sources of information used by FAA to make  these projections and found them reasonable.  We discussed the approach  and results of our analysis with FAA officials who are responsible for  making the projections, representatives from the Airports Council  International and the Air Transport Association, and two academic experts.
To assess the effect of various tax holidays on the financial status of the  Trust Fund, we asked FAA to develop additional financial projections  under various tax holiday scenarios. FAA developed these additional  projections under each of the three expenditure proposals that we used in  determining the financial condition of the Trust Fund. We then assessed the  effect of each tax holiday scenario under each expenditure proposal by  comparing the financial projection for the Trust Fund under that tax  holiday scenario and expenditure proposal with FAA’s baseline projection.
We used the following five tax holiday scenarios:  An all taxes holiday, in which all taxes that accrue to the Trust Fund are  suspended.
A passenger ticket tax holiday, in which the passenger ticket tax, the  rural airport tax, and the frequent flyer tax are suspended.
A flight segment tax holiday, in which the passenger segment tax holiday  is suspended.
A fuel tax holiday in which the commercial aviation, general aviation  gasoline, and general aviation jet fuel taxes are suspended.
A cargo tax holiday in which the cargo waybill taxes are suspended.
The following assumptions were also included in the analyses:  As requested in March 2003, we based our analysis on hypothetical tax  holidays that would have begun on April 1, 2003, and ended on April 1,  2004.
The FAA projections presented do not account for budgetary responses  by FAA to the drop in revenues resulting from a tax holiday. Unless each  dollar of lost revenue resulting from a tax holiday was replaced by  General Fund revenues, FAA would adjust its spending plans, which in  turn would have a direct effect on FAA’s projections.
In addition, in projecting the effect of any particular tax holiday on the  Trust Fund’s revenues, FAA set the tax rate to zero for the tax or taxes that  were being suspended while keeping all other factors in its forecast model  unchanged. That is, FAA’s projections do not take into account changes that  might cause the Trust Fund’s revenues from one tax to increase when  another tax was suspended (i.e., feedback effects). For example, a  suspension of the passenger ticket taxes might lead to lower fares for air  travelers, which in turn might cause more trips to be made, thereby  increasing the Trust Fund’s revenues from the flight segment tax. We  discussed with FAA officials the possibility of preparing additional  projections that incorporated feedback effects to more thoroughly analyze  the impact of tax holidays. However, we chose not to make such a request  because preliminary analysis that we and FAA officials conducted  indicated that these feedback effects would likely not be large enough to  change our findings. Finally, to assess the effect that tax holidays would  have on FAA’s ability to continue to use Trust Fund revenue to support its  programs, we interviewed FAA officials. We reviewed FAA data on the  outstanding Facilities and Equipment (F&E) contracts that had unobligated  balances and verified that they totaled $1.5 billion. However, we did not  review individual FAA outstanding F&E contracts to confirm FAA’s  statement that on the basis of its experience, any remaining obligated funds  for contracts in a given fiscal year that have not actually been expended  would be used to offset contract termination costs.
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