Airport and Airway Trust Fund: Issues Raised by Proposal to Replace the Airline Ticket Tax
Released: 1996-12-09T00:00:00

Letter

Background

The Airport and Airway Trust Fund was established by the Airport and Airway Revenue Act of 1970 (P.L. 91-258) to finance FAA’s investments in the airport and airway system, such as construction and safety improvements at airports and technological upgrades to the air traffic control system. Historically, about 87 percent of the tax revenues for the Trust Fund have come from a tax on domestic airline tickets. The remainder of the Trust Fund is financed by a $6 per passenger charge on flights departing the United States for international destinations, a 6.25-percent charge on the amount paid to transport domestic cargo by air, a 15-cents-per-gallon charge on purchases of noncommercial aviation gasoline, and a 17.5-cents-per-gallon charge on purchases of noncommercial jet fuel.

Ticket Tax May Not Fairly Allocate the System’s Costs Among Its Users

FAA is responsible for a wide range of functions, which range from certifying new aircraft; to inspecting the existing fleet; to providing air traffic services, such as controlling takeoffs and landings and managing the flow of aircraft between airports. Over the past decade, the growth of domestic and international air travel has greatly increased the demand for FAA’s services. At the same time, FAA must operate in an environment of increasingly tight federal resources.

In this context, we have generally supported FAA’s consideration of charging commercial users for the agency’s services. In particular, we have previously suggested that FAA examine the feasibility of charging fees to new airlines for the agency’s certification activities and to foreign airlines for flights that pass through our nation’s airspace. Similarly, we have reported our view that the various commercial users of the nation’s airspace and airports should pay their fair share of the costs that they impose on the system. In addition, to ensure full cost recovery, we have suggested that FAA consider raising the fees that it charges for the certification and surveillance of foreign repair stations.

Because the various taxes that make up the Trust Fund are not based on factors that directly relate to the system’s costs, the extent to which the current financing system charges users according to their demand on the system is open to question. For example, two airlines flying the same number of passengers on the same type of aircraft from Minneapolis, Minnesota, to Des Moines, Iowa, at the same time of day will impose the same costs on the airport and air traffic control system. However, because the ticket tax is based on the fares paid, the airline that charges the lower fares in this example will pay less for the system’s use, even though both airlines had the same number of takeoffs and landings and flew the same number of passengers, the same type of aircraft, and the same distance.

Proposal by Larger Airlines Would Increase the Share Paid by Other Airlines and Have Substantial Competitive Impacts

Motivated by their belief that the current system unfairly subsidizes their low-fare competitors, the nation’s seven largest airlines have proposed that the ticket tax be replaced by user fees on domestic operations. Under the proposal, airlines would pay fees for domestic operations according to the following three-part formula: (1) $4.50 per originating passenger, (2) $2 per seat on jet aircraft with 71 or more seats and $1 per seat on jets and turboprop aircraft with 70 or fewer seats, and (3) $0.005 per nonstop passenger mile.

By using two factors in particular—originating passengers and nonstop passenger miles—the formula tends to favor the larger airlines, which operate hub-and-spoke systems, at the expense of the low-fare and small airlines, which tend to operate point-to-point systems. This relationship can best be shown by example. Consider the two possible routings between St. Louis, Missouri, and Orlando, Florida, shown in figure 1. The “hubbing” airline first takes the passenger to a hub, such as Chicago’s O’Hare Airport, to connect to another flight to Orlando. The point-to-point carrier takes the St. Louis passenger nonstop to Orlando.

The airline that lands at O’Hare to transfer the passenger to another flight to Orlando has twice as many takeoffs and landings as the airline that flies nonstop between St. Louis and Orlando. As a result, the costs imposed by the hubbing airline on the air traffic control system are greater. However, by charging $4.50 per “originating” passenger, the airline that flies the passenger from St. Louis to Orlando via O’Hare would pay the same amount as the airline that flies the passenger nonstop between St. Louis and Orlando, even though the hubbing carrier puts a greater burden on the system.

In addition, by charging $0.005 per “nonstop passenger mile”—or the straight-line distance between the points of origin and destination—the formula does not charge the hubbing airlines for the circuitous routings that are common to their hub-and-spoke operations. As a result, the airline transporting a passenger 297 miles from St. Louis to O’Hare and then flying that passenger 1,157 miles to Orlando would be charged the same as an airline flying a passenger nonstop from St. Louis to Orlando, even though the hubbing carrier placed a greater burden on the air traffic control system.

Because the seven largest airlines operate hub-and-spoke systems and most low-fare and small airlines operate point-to-point systems, the proposed fee system would shift the financial burden away from the larger airlines and onto their competitors. For example, as figure 2 shows, on the basis of FAA’s traffic forecasts for fiscal year 1997, if the ticket tax were replaced by this proposal, the cost to the nation’s seven largest airlines would decrease by nearly $600 million, while the cost to Southwest Airlines, America West, and other low-fare and small airlines would increase by nearly $550 million.

In addition, the coalition’s proposal would charge commuter carriers $1 per seat while charging airlines $2 per seat. Most major commuter carriers are owned by or affiliated with one of the coalition airlines; Continental Express, for example, is a wholly-owned subsidiary of Continental Airlines. As a result, by charging commuter carriers less per seat, the proposal would provide the coalition airlines with an additional benefit.

Implementing a proposal that would shift nearly $600 million in costs from one segment of the industry to another could have substantial competitive impacts and needs to be studied first. While the ticket tax might provide low-fare airlines with a competitive advantage, other public policies favor some large carriers. For example, a few large airlines control nearly all the takeoff and landing slots at the four “slot-controlled” airports, which give them an advantage over their competitors. Simply eliminating the potential “subsidy” to low-fare airlines created by the ticket tax, while leaving the other policies in place that provide some large airlines with a competitive advantage, might result in higher fares and a reduction in service options for consumers.

In addition, the proposal as written could have a dramatic shift in costs that could affect regions differently. On the one hand, consumers in regions such as the West and Southwest that have benefitted from the entry of low-fare airlines could pay more than they do under the ticket tax. On the other hand, consumers in the East and Upper Midwest, who have not experienced the entry of low-fare airlines to the same extent, could pay relatively less.

Nevertheless, under any fee system that incorporated common measures of the system’s usage, such as departures and aircraft miles flown, it is likely that the relative share paid by low-fare airlines would increase compared with what they pay now under the ticket tax. In 1995, for example, Southwest accounted for 6.3 percent of the airlines’ payments under the ticket tax. In that year, Southwest accounted for 10 percent of the industry’s departures and 7 percent of the aircraft miles flown. However, if only these two measures were considered, Southwest’s share would not increase to the same extent as under the large airlines’ proposal. Under the coalition’s proposal, Southwest’s share of the industry’s contribution to the Trust Fund would increase to 10.3 percent.

A more precise fee system, however, would account for those costs incurred by FAA in managing the airport and airway system, which vary greatly by the amount, type, and timing of various airline operations. For example, the air traffic control costs imposed by a flight arriving at 5 p.m. at New York’s congested LaGuardia Airport—regardless if that flight involves a large jet or commuter aircraft—are much greater than those imposed by a flight arriving at noon at the noncongested airport in Des Moines. Likewise, hubbing operations at the nation’s largest airports increase the peak service demands on the airway system and increase FAA’s operating and staffing costs. Neither the 10-percent ticket tax nor the largest airlines’ proposal accounts for these factors.

Further Study With Broader Input Needed to Determine How Best to Finance FAA

Determining how best to finance FAA involves complex issues, requiring careful examination. In addition, an evaluation of alternative financing for FAA would need to involve the Department of Transportation’s (DOT) Office of Aviation and International Affairs. This office is responsible for evaluating the potential competitive implications of any changes to our aviation system. By changing what each airline pays, any new funding mechanism will have ramifications for airline competition that DOT would be better positioned to examine for the Congress than FAA. Likewise, DOT may also be better positioned than FAA to determine the extent to which a new financing mechanism might otherwise affect the aviation system.

Recognizing the complexities associated with determining how best to finance FAA, the Congress recently directed that the issues involved be studied further. Specifically, the Federal Aviation Reauthorization Act (P.L. 104-264), enacted in October 1996, requires FAA to contract with an independent firm to assess the agency’s funding needs and the costs occasioned by each segment of the aviation industry on the airport and airway system. This assessment, which the contractor is required to complete by February 1997, will be a critical piece in designing a new fee system if the Congress ultimately decides to replace the ticket tax.

The 1996 act also created the National Civil Aviation Review Commission, which is charged with studying how best to finance FAA in light of the contractor’s independent assessment of funding needs and system costs. The commission is to have 21 members—13 appointed by the Secretary of Transportation and 8 appointed by the Congress—and represent “a balanced view of the issues important to general aviation, major air carriers, air cargo carriers, regional air carriers, business aviation, airports, aircraft manufacturers, the financial community, aviation industry workers, and airline passengers.” The commission must report its findings and recommendations to the Secretary of Transportation within 6 months of receiving the contractor’s independent assessment—in other words, by August 1997. After receiving the commission’s report, the Secretary of Transportation is required to consult with the Secretary of the Treasury and report to the Congress by October 1997 on the Administration’s recommendations for funding the needs of the aviation system through 2002.

Agency Comments

We provided DOT with a draft copy of this report for review and comment. We discussed the draft with DOT officials, including the Deputy Assistant Secretary for Aviation and International Affairs, who stated that the agency was in complete agreement with the report. DOT also provided us with two comments, which we incorporated where appropriate. First, the agency noted that the coalition’s proposal also benefits the largest airlines by charging commuter carriers $1 per seat while charging airlines $2 per seat. DOT pointed out that because most of the commuter carriers are owned by or affiliated with one of the coalition airlines, this differential would provide the coalition airlines with an additional benefit. Second, in our draft report, we stated that FAA was completing work on its own cost allocation study, which the agency expected to release by the end of the year. DOT commented, however, that because of the recent congressional mandate that FAA contract with an independent firm to undertake such an assessment, FAA would likely not release its study.

Scope and Methodology

We obtained information for this report from (1) documents and data provided by DOT, FAA, and the coalition airlines and (2) our discussions with representatives of the coalition as well as the executives of several large carriers, including the CEO of American Airlines, and representatives of low-fare and other smaller airlines, including the CEO of Southwest Airlines. For our analysis of the implications of reinstating the taxes, we used the rates in effect as of November 1996. For FAA’s funding levels, we used the agency’s enacted fiscal year 1997 budget. We performed our review from June through November 1996 in accordance with generally accepted government auditing standards.

We are sending copies of this report to the Secretary of Transportation; the Acting Administrator, FAA; the Director, Office of Management and Budget; and other interested parties. We will send copies to others upon request.

If you or your staff have any questions, please call me at (202) 512-2834. Major contributors to this report are listed in appendix II.

Status of the Airport and Airway Trust Fund and the Potential Effect on FAA’s Budget of the Trust Fund’s Taxes Lapsing

During fiscal years 1990 through 1996, the Airport and Airway Trust Fund financed 100 percent of three FAA accounts—Grants-in-Aid for Airports (the Airport Improvement Program); Facilities and Equipment; and Research, Engineering, and Development. Also, during this period, the Trust Fund has, with the exception of fiscal year 1990, financed about half of FAA’s fourth account—Operations—and the remainder of this account was financed by the General Fund. Under FAA’s fiscal year 1997 budget, as enacted, the Trust Fund would continue to finance 100 percent of three accounts and would finance one-third of the Operations account if the taxes that finance the Trust Fund are extended beyond December 31, 1996. Table I.1 shows FAA’s funding sources for fiscal years 1990 through 1996 and FAA’s fiscal year 1997 budget as enacted.

Table I.1: FAA Funding, Fiscal Years 1990-97 (3,017) (2,033) (2,250) (2,251) (2,285) (2,122) (2,420) (3,255) (807) (2,003) (2,110) (2,279) (2,295) (2,450) (2,223) (1,700) (3,017) (2,033) (2,250) (2,251) (2,285) (2,122) (2,420) (3,255) (4,123) (6,103) (6,637) (6,611) (6,294) (6,112) (5,725) (5,306)

Under Public Law 104-205, FAA must use up to $75 million in user fees charged for air traffic control and related services to nongovernmental aircraft that fly over but do not takeoff or land in the United States in lieu of General Fund financing.

If the taxes that finance the Trust Fund are not extended beyond December 31, 1996, the Trust Fund’s balance available (referred to as the uncommitted balance) will be below the level needed to finance FAA’s fiscal year 1997 budget as enacted. Specifically, the Trust Fund will be about $1 billion short of the funding needed to finance its portion of FAA’s fiscal year 1997 budget. Therefore, the total funding commitments that FAA can make are reduced by this amount.

According to FAA’s estimates, the Trust Fund could provide about $4.28 billion for FAA’s budget and $65 million for non-FAA expenditures, thereby bringing the Trust Fund’s total contribution to about $4.35 billion. However, FAA’s budget as enacted calls for $5.31 billion from the Trust Fund and $3.26 billion from the General Fund. FAA also estimates that, under current law, the Trust Fund balance available will be $0 by early July 1997 if the taxes are not reinstated (or the tax on airline tickets is not replaced by user fees). Table I.2 shows the Trust Fund’s enacted share of FAA and non-FAA budgets and the potential funding shortfall for fiscal year 1997.

Also, the authority to transfer the tax receipts from the Treasury to the Trust Fund will expire on December 31, 1996. As a result, some taxes imposed late in 1996 will not be deposited in the Treasury until 1997 and, therefore, cannot be transferred to the Trust Fund. FAA estimates that this amount will total about $300 million. If the Congress provides transfer authority for moving this $300 million to the Trust Fund, then FAA estimates that the Trust Fund balance available to finance FAA would not reach $0 until late July 1997 and the potential shortfall would be reduced to $724 million.

FAA officials estimate that in order for the Trust Fund to finance $5.31 billion of FAA’s fiscal year 1997 budget, the taxes would need to be reinstated by July 1997. However, according to FAA officials, reinstatement by this date allows for almost no margin of error in the agency’s estimates of tax revenue. Consequently, if revenue is less than estimated, congressional action would be required to obtain additional financing from the General Fund. Also, the Trust Fund balance available to finance FAA’s fiscal year 1998 budget would depend on when the taxes and transfer authority are reinstated, as shown in figure I.1.

Major Contributors to This Report

Resources, Community, and Economic Development Division, Washington, D.C.

Charles R. Chambers Gerald L. Dillingham Timothy F. Hannegan Julian L. King Robert E. Levin Francis P. Mulvey John T. Noto The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.

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