Federal User Fees: Key Aspects of International Air Passenger Inspection Fees Should Be Addressed Regardless of Whether Fees Are Consolidated
Released: 2007-09-24T00:00:00

Letter

Background

Millions of individuals arrive in the United States every year and undergo an inspection to ensure they are entering the country lawfully and not transporting any illegal goods or harmful pests and prohibited agricultural products.

Prior to the creation of DHS in 2003, passengers were required to undergo separate customs, immigration, and agriculture quarantine inspections (AQI), which were performed by the United States Customs Service, the United States Immigration and Naturalization Service (INS), and APHIS. Under the Homeland Security Act of 2002, however, these passenger inspection functions were transferred to DHS. As part of this realignment, CBP was charged with leading the customs, immigration, and agriculture quarantine inspection functions, and all immigration and agriculture quarantine inspectors were transferred to CBP. The newly created CBP officers were cross-trained on customs, immigration, and agricultural quarantine inspections in what is now referred to as “SABPOE.” As a result, all international passengers are now subject to a single primary inspection—looking for customs, immigration, and agriculture quarantine violations—conducted by a CBP officer. If, as a result of the primary inspection, a passenger requires further scrutiny, that passenger is referred to another CBP officer who conducts a more in-depth secondary inspection. Secondary inspection can involve additional interviews, document reviews, database queries, communication with other law enforcement agencies, observational techniques, and heightened physical inspections. Although CBP absorbed and leads the inspection program for customs, immigration, and agriculture quarantine, other immigration and agriculture responsibilities were not merged into CBP. (See text box for more information on CBP, ICE, and APHIS and their missions.)

CBP, ICE, and APHIS The Homeland Security Act established DHS by merging 22 disparate agencies and organizations with multiple missions, values, and cultures. As part of this transition, both CBP and ICE were newly created from parts of legacy agencies.

CBP was assigned the border inspection functions of the former Immigration and Naturalization Service (INS) and former U.S. Customs Service and the Department of Agriculture’s APHIS program. The new agency’s mission is the following: interdicting illegal drugs and other contraband; apprehending individuals who are attempting to enter the United States illegally; inspecting inbound and outbound people, vehicles, and cargo; enforcing all laws of the United States at the border; protecting U.S. agricultural and economic interests from harmful pests and diseases; regulating and facilitating international trade; collecting import duties; and enforcing U.S. trade laws.

ICE was created by combining the law enforcement arms of the former INS and the former U.S. Customs Service. Its mission is the following: to enforce immigration and customs laws, and to protect the United States against terrorist attacks by targeting illegal immigrants— including the people, money, and materials that support terrorism and other criminal activities.

The APHIS Program remains part of the Department of Agriculture, though the agriculture quarantine inspection functions have now been transferred to CBP. The program’s mission is to protect and promote U.S. agricultural health, and administer certain domestic and wild animal management programs.

Although the inspections were unified in 2002, the Homeland Security Act did not consolidate the corresponding air passenger inspection fees. Thus the previous separate processes for setting, collecting, and distributing the fees remain in place. So, whereas most passengers likely notice only that they pay “fees” when they purchase a ticket, they actually pay—among other charges—three separate inspection user fees: one for the legacy customs inspection, one for the legacy immigration inspection, and one for the legacy agriculture quarantine inspection.

What Is a User Fee?

A user fee is a fee assessed to consumers of goods or services provided by the federal government. User fees generally apply to federal programs or activities that provide special benefits to identifiable recipients above and beyond what is normally available to the public. User fees are normally related to the cost of the goods or services provided. An example of a user fee is a fee for entering a national park. In the narrow budgetary sense, a toll for the use of a highway is considered a user fee because it is related to the specific use of a particular section of highway. Alternatively, highway excise taxes on gasoline are considered a form of user charge in the economic sense, but since the tax must be paid regardless of how the gasoline is used and since it is not directly linked with the provision of the specific service, it is considered a tax.

The Customs Air Passenger Inspection Fee

The customs air passenger inspection is designed to prevent passengers from bringing illegal goods—such as narcotics—into the United States. Passengers pay a customs air passenger inspection fee, currently set in statute at $5.50 per passenger, when they purchase their tickets. The fees are remitted to the government quarterly, after which they reimburse CBP appropriations for a specific set of reimbursable expenses. The air passenger inspection fee is only one of several types of customs inspection fees also known as COBRA fees—named for its authorizing legislation, the Consolidated Omnibus Reconciliation Act of 1985. For example, commercial vessel passengers also pay a customs inspection fee.

The Immigration Air Passenger Inspection Fee

The immigration air passenger inspection is designed to prevent passengers from entering the United States without legal entry and immigration documents. Passengers pay an inspection fee (set in statute at $7 per passenger) when they purchase their tickets. The fees are remitted to the government quarterly, except for the last quarter of the year, when the immigration fees collected to-date are remitted 10 days before the end of the fiscal year, with the remaining fees collected in the fourth quarter remitted along with the first quarter payment of the next fiscal year. The fees are then divided between CBP and ICE according to the costs of the immigration inspection activities for which each agency is responsible.

The immigration air passenger fee is one of two immigration inspection fees, the other being the international passenger commercial vessel fee.

The Agriculture Air Passenger Inspection Fee

The agriculture air passenger inspection is in place to seize prohibited materials and intercept foreign agricultural pests. Passengers pay an inspection fee, set by the agency in regulation at $5.00 per passenger, when they purchase their tickets. The fees are remitted to the government quarterly and are made available to APHIS. The fees are then divided between APHIS and CBP based on the proportion of costs associated with each agency’s agriculture quarantine inspection activities. The air passenger inspection fee is only one of several types of APHIS inspection fees, known as AQI fees. For example, commercial aircraft and vessels also pay AQI fees.

By statute, the authority to collect the three passenger inspection user fees varies from a legislative grant of broad agency discretion to set and collect a full-cost recovery fee, to more restrictive authority to collect a sum- certain amount available for a limited number of purposes. For example, the agriculture inspection statute grants the Secretary of Agriculture broad discretion to prescribe and collect fees sufficient to cover the cost of providing agricultural quarantine and inspection services. APHIS adjusts fees under this authority through the federal regulatory process by public notice and comment on proposed rates and implementing regulations in the federal register. In contrast, the customs passenger inspection fee statute is the most restrictive of these three fee statutes. It limits both the fee that may be charged and the set of activities for which collections may reimburse appropriations. Somewhere between these two margins is the immigration fee statute. It is available to refund any appropriation for expenses incurred in providing immigration inspection and preinspection services, but it limits the fee that may be charged. While both the immigration and customs statutes contain language that fees equal or be reasonably related to the cost of services, the two statutes actually prescribe an exact amount in law to be charged for their respective inspection services. That is, the immigration and customs user fees actually limit cost recovery to a sum certain.

During our audit work, CBP informed us that they are developing a broad legislative proposal that would, among other things, partially consolidate the three passenger inspection user fees and make other changes to address certain administrative challenges. As of August 2007, the legislative proposal had been reviewed by CBP chief counsel but officials were still working on estimates of the cost of ICE’s inspection activities. We have not received, reviewed, or evaluated this proposal, although we have been briefed on elements of it. Because CBP has widely circulated elements of the proposal among key stakeholders, we refer to relevant elements of this proposal throughout this report. Any proposal to consolidate these fees, however, will be considered in an environment of considerable flux and controversy. For example, there are proposals before lawmakers to transfer the agriculture quarantine inspection function back out of DHS and under the Department of Agriculture’s authority.

Separate, Dissimilar Fees Create Administrative, Operational, and Oversight Challenges

The complex process for setting, collecting, and distributing the passenger inspection fees is different for each fee, creating administrative, operational, and oversight challenges for agencies and stakeholders, and oversight challenges for Congress. The fees are still governed by separate, dissimilar authorizing legislation and are administered by multiple executive branch agencies and overseen by multiple congressional committees. Agencies involved face difficulties reimbursing the collections among their various appropriations because there is disagreement on how to divide the receipts among them and because the process of transferring the funds from one agency to another complicates agency budget execution. Finally, airports and airlines play an important role in both facilitating inspections and in fee collection and remittance, but they have limited substantive interaction with the three agencies. This contributes to misunderstandings, skepticism, and confusion about how the fees work and what activities they may fund.

A Complicated Network of Decision Makers Administer and Oversee These Fees

Although the passenger inspections themselves have largely been consolidated, administrative authority remains divided. The Treasury Department, from which the legacy U.S. Customs Service was transferred, retained administrative authority over the customs fee, although most of these duties have been delegated to DHS. The Department of Agriculture’s APHIS retained administrative authority over the agriculture inspection fee, although a majority of the fee collections is transferred to CBP to cover the cost of agriculture quarantine inspections. The administrative authority for the immigration passenger inspection fee was transferred to CBP, but CBP and ICE divide the immigration fee collections.

Table 1 shows the differences in authorizing statute, rate, congressional committees of jurisdiction, and administrative authority.

Although the agencies are required to report to Congress on their respective fees, Congress lacks a comprehensive picture of all three fees because the agencies report separately. Both the Office of Management and Budget (OMB) Circular A-25 and the Chief Financial Officers Act of 1990 (CFO Act) require an agency to review its user fees biennially and make recommendations on topics such as revising the fees to reflect costs incurred. We have previously reported that agencies with shared responsibilities for common outcomes or related functions should reinforce agency accountability for collaborative efforts through common agency planning and reporting. However, when CBP issued its user fee review it only reported on the customs fee, the portion of the agriculture fee it received, and the immigration fee. Further, the information provided about the immigration fee did not include any input from ICE, which did not have cost information about its portion of the immigration fee at that time. APHIS’s review included the entire agriculture fee. As a result, the eight congressional committees that oversee the inspection fees do not have a complete picture as to whether the fees work in concert or conflict with each other.

Agencies Disagree on How to Divide and Distribute the Fees

Although the immigration fee may be used for any immigration inspection activity, ICE officials said that they do not receive sufficient immigration fee collections to cover their reimbursable activities. Principles of effective user fee design suggest that user fees should be set at a rate to cover allowable costs as a way of ensuring the fee is as efficient as possible. Instead, however, ICE officials said they rely on appropriated funds to cover the gap between fee collections and costs. By law, ICE uses appropriated money for fee-reimbursable expenses and then refunds the appropriations when user fees are received. They are also permitted to use appropriations if fees are insufficient to cover inspection costs. ICE officials said that although they have not finalized their activity cost analysis, the preliminary data shows that ICE’s current portion of the fee collections is not sufficient to fully refund the appropriations used and demonstrates that ICE should receive a greater proportion of the immigration user fee funds. CBP officials do not agree with the preliminary assessment. CBP officials told us that the immigration fee collections CBP receives are sufficient to cover the cost of CBP’s immigration-related reimbursable activities. In fact, CBP’s data show that its portion of the immigration fee collections were 1 percent more than CBP’s immigration inspection costs for fiscal year 2006. Until ICE completes its cost analysis, it will not be known whether the immigration fee is set at a rate that covers the total cost of both CBP and ICE’s immigration activities.

CBP and APHIS disagree on how future collections should be estimated and how the fees are subsequently distributed. CBP and APHIS use different rates of passenger volume increases to calculate the costs of covered activities. APHIS—the agency responsible for setting the agriculture fee—estimates future international air passenger volumes by extrapolating historical growth, whereas CBP primarily uses Federal Aviation Administration’s (FAA) passenger volume forecast and collection trends. In the December 2004 interim rule for the January 2005 fee adjustment, for example, APHIS forecast passenger volume to increase by 1.18 percent per year for fiscal years 2005 through 2010, which was the average volume increase for fiscal years 1999 through 2003. In contrast, CBP projected a 4.7 to 4.8 percent annual growth. The resulting higher passenger volume estimate leads to higher total collections estimates by CBP than the one APHIS uses. CBP officials said that in 2004, 2005, and 2006 actual collections were higher than APHIS’s forecast by $17 million, $11 million, and $12 million, respectively. CBP officials said 2007 collections to-date are also $13 million higher than forecasted, and APHIS officials told us they would make additional transfers to CBP to distribute the extra collections. CBP officials said that if the agriculture fee estimates tracked actual collections better, CBP would receive more money earlier in the year rather than toward the end of the fiscal year, which would allow CBP to better plan for its use. However, APHIS officials said the more conservative forecasting approach was appropriate since they do not receive appropriations for these activities and must be able to provide the services even if fee collections should decline. Table 2 shows the bimonthly transfers for November 2005 through August 2006, and the additional year-end transfer of additional fees.

Agencies divide and distribute the fees as specified in memoranda. CBP and APHIS, and CBP and ICE signed a memorandum of agreement (MOA) / memorandum of understanding (MOU) establishing a process for fee distribution. The Homeland Security Act of 2002 requires an agreement between the Secretaries governing the transfer of agriculture user fee funds from the Department of Agriculture to DHS for DHS’s agriculture quarantine inspection activities. The most recent MOA, dated 2007, documents the fee distribution: 60.64 percent of total agriculture passenger inspection fees were allotted to CBP and 39.36 percent to APHIS. Per the MOA, APHIS transfers CBP’s portion via a bimonthly transfer. Although we reported in May 2006 that APHIS did not always make regular transfers to CBP, we found that these issues have generally been resolved. The CBP/ICE memo allotted 82.63 percent of total immigration fee collections to CBP and 17.37 percent to ICE, and required CBP to submit monthly warrants to the Treasury to initiate the distribution of the immigration fees between ICE and CBP.

However, the extent, quality, and results of agency coordination differ. The CBP/APHIS MOA requires the agencies to periodically exchange cost information. Specifically, CBP is required to submit to APHIS at the end of each quarter an accounting of the costs of its agriculture quarantine inspection activities. APHIS is also required to submit to CBP a quarterly and annual report on both agriculture user fee collections by activity and associated costs of the agriculture quarantine inspection fees. Officials told us that these requirements are important to help them address issues such as changing workloads and costs, and the MOA has been updated accordingly. CBP and APHIS’s experience is consistent with our past work on agency coordination, which states that optimal coordination requires agencies to establish compatible policies and procedures and communicate frequently. Such communication is critical, as evidenced by our recent report on APHIS and CBP management coordination issues, which found that the agencies’ coordination problems sometimes result in operational weaknesses that increase the vulnerability of United States agriculture to foreign pests and disease. In contrast, the CBP/ICE MOU is much less specific and lacks important elements present in the CBP/APHIS MOA. For example, the CBP/ICE MOU only states that, “ICE and CBP agree to provide each other reports on the total amounts of immigration user fees received to ensure that such receipts are equitably split.” ICE officials said the MOU was primarily intended to set up the initial transfer of immigration fee collections from the newly formed ICE to CBP and was not designed to address how CBP and ICE would regularly coordinate on the immigration fee.

Even if agencies generate complete cost data and agree on how to divide collections between them, the precise activities associated with inspections—and the costs of those activities—can change over time. Legislation, regulations, or agency agreements governing a fee should ideally contain a mechanism for adjusting user fee rates that is flexible and timely enough to allow for periodic review and, as appropriate, adjustment. The CBP/APHIS MOA requires both agencies to appoint Chief Budget Liaisons who must hold “quarterly and annual face-to-face meetings where both parties would share and analyze their respective program costs … ” so that the proportions can be reviewed and adjusted as appropriate. Through this coordination, CBP received an additional 1.31 percent in agricultural passenger inspection fees, pursuant to approval by both agencies, after actual fee collections exceeded projections. ICE officials told us that, at the time of the transition to DHS, ICE requested that the MOU be renegotiated every 2 years; however, the CBP/ICE MOU does not include any provision to renegotiate, and CBP and ICE officials have not regularly met to discuss potential adjustments to each agency’s portion of the fee.

Distributing Fees among Agencies Has Implications for Agency Budget Execution

Airlines remit collections of the customs and immigration user fees to CBP and the agriculture fees to APHIS. The three fees are remitted to the government quarterly, except for the last quarter, when the immigration fees collected to-date are remitted 10 days before the end of the fiscal year, with the remaining fees collected in the fourth quarter remitted along with the first quarter payment of the next fiscal year. By law, each of the three passenger inspection fees is deposited into a separate account. Therefore CBP must transfer ICE’s portion of the immigration fees to reimburse ICE’s appropriations, and APHIS must transfer CBP’s portion of the agriculture passenger inspection fee to reimburse CBP’s appropriations. CBP officials told us that CBP has more flexibility in spending customs fees than immigration and agriculture fees, partly because of the fees’ budgetary treatment and partly because of the interagency transfer process for the APHIS fee. The customs fee is subject to an automatic warrant process, wherein within 5 business days Treasury confirms the total amount remitted and then the fees are directly reimbursed to CBP appropriations to spend from right away. In contrast, CBP’s immigration and agriculture activities are funded on a reimbursable basis by CBP’s portion of the respective fees. Therefore, CBP initially uses appropriations to cover the cost of the agriculture quarantine and immigration inspections and then reimburses the appropriations accounts from the immigration and agriculture user fee accounts. To ensure that they reimburse from the correct fee account, CBP officers track time spent on customs, agriculture quarantine, and immigration activities, respectively.

CBP officials said that the quarterly remittance schedule—which is exacerbated by the fourth quarter remittance schedule for the immigration fee—contributes to a several-month delay between use of the appropriated funds and receipt of the reimbursement from the immigration and agriculture user fee accounts, which has delayed CBP’s ability to spend funds on critical mission areas such as hiring personnel, purchasing equipment, or travel. For example, CBP officials told us of instances where they had to delay entering into a contract because of cash-flow issues resulting from the delay in fee reimbursement. They also said transferring funds between budget accounts creates administrative rework. To address these challenges, CBP told us it is requesting in its draft legislative proposal direct reimbursement authority for the immigration and agriculture quarantine activities it conducts.

Inconsistent Passenger Exemptions among the Fees and Record-Keeping Requirements for Airlines Complicate Remittance and Verification

Inconsistencies in passenger exemptions and definitions across the three fees make administering the fees difficult. Each statute specifies the same standard passenger exemptions for each fee, but there are additional exemptions for the customs fee. Passengers from Canada, Mexico, and U.S. territories and adjacent islands are exempt from the customs fee but not from the immigration or agriculture fees. (See table 3). For instance, a passenger arriving from the Bahamas must pay the immigration and agriculture fee, but not the customs fee. Aspects of a fee, such as country of origin exemptions, may promote certain policy goals. However, complex fee structures—like the variations in passenger exemptions—can increase administrative costs and potential for error and complicate the audit process since CBP must reconcile the remittance for a single passenger with different exemptions rules. It is important to understand the likely administrative and operational consequences of a fee’s design in order to address and mitigate challenges.

CBP officials said its draft legislative proposal recommends eliminating the customs-specific country of origin exemptions. The airline industry officials we spoke with generally support this change and said the administrative transition costs would be minimal, since calculations are automated and could be easily adjusted to accommodate this type of change.

In response to Treasury Inspector General recommendations, the audit function was consolidated before the inspection functions themselves were consolidated, creating efficiencies and simplifying the process for government and industry alike by having only one agency audit all three fees concurrently. However, the improvement was limited because the regulations for each of the fees still specify different airline record-keeping requirements for audit purposes. Airlines must retain customs documentation for 5 years and immigration documentation for 2 years. There is no time period specified for airline documentation for the agriculture fees. Both CBP and airline officials said inconsistent record- keeping requirements impose an unnecessary administrative burden on both parties. Airline officials told us that the custom fee’s 5-year document retention requirement is especially burdensome.

Air Travel Stakeholders Play an Important Role in the Process, but Mechanisms for Ensuring Substantive Stakeholder Communication and Information Exchange Are Fragmented and Reportedly Insufficient

The administering agencies use separate, different processes for communicating with stakeholders, including soliciting stakeholder feedback on proposed adjustments to the fees, an area of great interest to stakeholders. However, stakeholders report that these disjointed mechanisms for two-way communication are insufficient. CBP uses the Airport and Seaport Inspections User Fee Advisory Committee (Advisory Committee) to solicit stakeholder perspectives, but limits the breadth of the Advisory Committee by discussing only the customs fee and CBP’s portion of the immigration and agriculture fees. ICE is not included in planning these Advisory Committee meetings even though the legacy Department of Justice immigration fee advisory committee was combined with the customs advisory committee when immigration functions were transferred to DHS. ICE officials said they were not aware that a meeting had been scheduled and were not consulted on the agenda, even though their user fee statute specifies that they meet regularly with stakeholders. ICE officials attended the June 2007 Advisory Committee meeting but did not participate in the presentations and had not been involved in the planning or agenda-setting for the meeting. APHIS is also not included in planning Advisory Committee meetings. APHIS officials said issues pertaining to the agricultural inspection fee are handled by CBP’s liaison to APHIS, but no one from this office attended the June 2007 meeting. CBP officials said CBP met the notification requirements of the Federal Advisory Committee Act by publishing notice of the meeting date and the agenda in the Federal Register.

APHIS provides information about inspection costs and receives stakeholder input on proposed changes to the agriculture fee through public notice and comment under the federal rule-making process. APHIS officials also told us that they meet informally with stakeholders when issues arise, particularly in the field, and that this informal consultation is sufficient for their purposes, but our audit work indicates otherwise. For the past two adjustments, however APHIS has adjusted the fees through interim final rules, an option within the regulatory process that allows an agency, for “good cause” to make a rule change effective before receiving public comment. That is, the increase took effect before stakeholders had an opportunity to comment. For example, on December 9, 2004, APHIS published an interim final rule in the Federal Register proposing to increase the agriculture passenger inspection fee from $3.10 in 2004 to $4.95 in 2005 and to $5.00 per passenger for 2006 to 2010. The change was effective January 1, 2005, although comments received by February 7, 2005, would be considered before the final rule was issued. In another instance, APHIS eliminated the fee exemption for passengers originating in Canada by means of an interim final rule published in the Federal Register in August 2006, which stated that it was effective November 24, 2006, and comments received by November 24, 2006, would be considered.

APHIS’s use of the “good cause” exemptions to issue interim final rules limits stakeholder input. Stakeholders said they do not feel their comments are taken into account since the Department of Agriculture adjusts the fee before even soliciting feedback and the final rule matches the interim one regardless of stakeholder feedback. Furthermore, we have previously reported that nonfederal stakeholders believe relying solely on notice and comment through the Federal Register is insufficient for obtaining stakeholder input. When agencies do not effectively communicate their analysis and results, they miss the opportunity to obtain meaningful comments that could affect the outcome of their regulatory changes. Without showing the underlying analysis, the agencies’ conclusions may lack credibility.

ICE and APHIS officials told us that air travel stakeholders have little information on their respective activities and fees and generally do not understand how these fees work or what they are intended to fund. As we will discuss in the next section, CBP stakeholders also do not have a clear understanding of how the customs fee works and what activities it may fund. For example, officials said the agriculture quarantine inspection function has become less transparent to air passengers and stakeholders since CBP officers all wear the same uniform and conduct the primary customs, immigration, and agriculture quarantine inspections—and not all passengers are identified for an agriculture-related secondary inspection. Similarly, many of the inspection activities retained by APHIS and ICE are not visible to most passengers or stakeholders during the actual inspection process.

Stakeholders said the Advisory Committee meetings had declined in value since INS ran them because cost and full time equivalent (FTE) information is no longer provided. CBP officials said that in the post- September 11 environment, airport inspector staffing information is “law- enforcement sensitive” and therefore not shared with airports and airlines. Airport, airline, and industry officials said they have requested information about passenger inspection activities or the cost of these activities. As a result, they feel they lack data necessary to know whether the passenger inspection fees are set fairly or accurately, or are being spent on the appropriate activities.

Specific Aspects of the Individual Passenger Inspection Fees Should Be Addressed Prior to or in Concert with Any Consolidation Effort

Some difficulties with these fees arise not because the fees are separate but because of factors that are specific to the individual passenger inspection fees. First of all, by statute, the customs fees are available for limited purposes. Not all of these purposes are associated with conducting inspections, and not all inspection activities are reimbursable. Even if all the costs were reimburseable, according to CBP, the fees collected still would not cover the full inspection costs. This misalignment, coupled with the problems in stakeholder communication described in the previous section, have created confusion and misunderstandings, and in some cases the misimpression among stakeholders that CBP in particular is using the air passenger fee collections inappropriately. Furthermore, the collection process itself is complex and presents challenges for CBP and the airlines. Finally, the tools provided to the agencies to ensure the airlines’ compliance are not applied consistently and, contrary to strategies associated with effective incentives and penalties, do not provide progressively stronger disincentives for noncompliance (i.e., a graduated penalty system).

There Is a Disconnect between What Customs User Fees Can Pay for and Activities Involved in Customs Inspections

The activities that can be funded by passenger inspection collections vary among the fees and are specified in statute. Principles of effective user fee design suggest that fees should be aligned with the costs of the activities for which the fee is collected. The agriculture and immigration statutes generally permit the Secretaries of Agriculture and Homeland Security to cover costs associated with agricultural and immigration inspection activities. In contrast, the customs user fee collections are available for limited purposes. Under the customs authorizing statute, passenger inspection fee collections are only available to reimburse appropriations for a limited, prioritized set of activities, including general deficit reduction, overtime and premium pay, retirement and disability contributions, preclearance services, and foreign language proficiency awards. Customs inspection-related activities that occur while a CBP officer is earning overtime, premium pay, or during preclearance can be funded by the user fees, but the customs fee is not authorized to fund customs-inspection activities that occur beyond these times. Moreover, the customs air passenger fee can be used for overtime and premium pay as well as retirement and disability contributions for CBP officers for time spent conducting inspections regardless of whether the CBP officers are inspecting passengers at air, sea, or land ports of entry. Therefore, under current law not all activities that may be funded from the customs fee (see table 4) are necessarily associated with conducting air passenger inspections (see table 5), and not all inspection activities are reimbursable, that is, can be covered by funds from the user fee account.

50 full-time equivalent inspectional positions to provide preclearance services.

Airlines Collect Fees When Tickets Are Sold Rather Than When Passengers Travel, Which Makes It Difficult for Agencies to Verify Collection and Payment

Despite a unified collection process for the three fees, CBP faces challenges in verifying individual passenger payment and accurately determining each airline’s liability. By law, the ticket seller (i.e., the airline or ticket agent) must collect the applicable passenger inspection fees from the passenger at the time the ticket is sold. Tickets can be sold up to a year in advance, and CBP has no independent documentation on which to calculate liability. Therefore, CBP cannot match the fees paid to individual passengers. The only way CBP can independently confirm that passengers traveling to the United States have paid the requisite inspection fees is through postremittance audits. To remedy this, CBP would like to move to a system wherein airlines remit fees based on the passengers transported into the United States. CBP could then track the remittances to the number of passengers per flight by comparing them to the airplane manifest data and “onboard” counts that airlines already provide to CBP. According to CBP officials, if the fees were remitted based on passengers transported, there would be little need for auditing carrier remittance since CBP would be able to automatically calculate and verify airline liability.

Airline and Air Transport Association (ATA) officials with whom we spoke said that changing from a ticket-based collection system to a passenger- transported collection system poses challenges to airlines. First, the airline that transports the passenger is not always the airline that sold the ticket. This means that in a manifest-based system the airline responsible for remitting a fee might not be the airline that collected it from the passenger. Nearly all United States airlines use the “interlining” system, in which one airline can contract with another to provide transportation for one or more segments of a passenger’s journey. Under the current ticket-based collection system, on an interlined ticket the airline that sells the ticket remits the fee, regardless of which airline transports the passenger into the United States. For example, a passenger who purchases a Madrid-Paris- New York ticket from ABC airline pays the fee to ABC airline even if he flies ABC from Madrid to Paris and XYZ from Paris to New York. Airline ABC is liable for the fee and remits it to the U.S. government. However, under CBP’s original proposed passenger-transported system, the liability for remitting the fee would fall on airline XYZ—the airline that brought the passenger into the country—even though ABC airline sold the ticket and collected the fee. As a result, airline XYZ—the airline that transported the passenger into the United States—would have to ensure not only that ABC paid airline XYZ for the ticket but also that it collected and transferred the correct fees.

According to CBP officials many foreign-owned airlines already remit the fees based on passengers transported, though these payments are in violation of the statute, and the International Air Transport Association (IATA) reports that the manifest-based remittance system is common in other countries that collect similar fees. Nevertheless, airlines and ATA officials said that transition costs would be significant—though limited to the first year—because airlines begin selling tickets for a flight 1 year in advance, and as a result they would have to maintain two separate remittance systems—ticket-based and passenger-transported-based—for a full year. Airlines question the need for such a change. Officials from two major airlines noted that CBP’s audits put their remittance error rate at less than 1 percent. CBP officials concur that for the six to seven major domestic airlines the remittance error rate is extremely low, but as we will discuss, error and timely remittance rates for small and medium-sized airlines are more problematic. A shift to a passenger-transported system would, they argue, increase the ability of CBP’s finance office to determine the compliance of smaller airlines and potentially reduce CBP’s audit costs.

In addition, the airlines also see fee collection as a cost they incur over and above the cost of the audits. To help offset collection costs, airlines are permitted to keep the “interest float”—that is, the interest income that accrues between the quarterly remittances. Airline representatives view this as minimal for two reasons. First, in the recent era of low interest rates, the interest float is small; airline officials told us that it covered as little as 38 percent of collection costs. This would decline even further if CBP moves to monthly remittance as it suggests it will in its legislative proposal. Second, airline and airline industry officials said credit card transaction fees averaging 2.15 percent on the total transaction—including taxes and fees as well as the ticket price—further reduce the benefit. Another user fee collected by airlines on behalf of the government—the passenger facility charges (PFC)—has a provision that is designed to compensate for the actual cost of collections, in addition to the interest float. The airlines told us they would prefer this type of direct compensation for their collection role, similar to the PFC.

Compliance Tools Do Not Provide a Graduated Penalty System to Encourage Airline Remittance

The tools used to ensure airline compliance do not provide optimal incentives for airlines to make accurate and timely payments. We have previously reported that rewards and penalties should correspond to performance. Although each fee contains enforcement mechanisms meant to encourage airlines to remit the correct fee amount on time— namely the carrier bond associated with the customs fee, the denial of landing rights for the customs and immigration fees, and the penalties and interest associated with the agriculture and immigration fees—none are designed in this manner. For the customs fee, CBP is authorized to require airlines to maintain a carrier bond, which is used both to enforce payment of inspection fees and to encourage airlines to comply with inspection- related requirements, such as submitting complete Advance Passenger Information System (APIS) data prior to takeoff. In addition, airlines that do not remit the customs fee timely—or not at all—are charged liquidated damages for breach of bond conditions that are equal to twice the fee amount owed for each violation, whether it is the first violation or a repeat violation. CBP officials said they have issued liquidated damages against 20–25 airlines on average per quarter since 2003 for late payment or nonpayment.

For the immigration and agriculture fees, the agencies may require airlines to pay interest and penalties because of late payment or nonpayment. CBP officials said the interest and penalty rates charged for late payments are set by the Treasury Department and do not provide for increasing interest or penalty rates, or both, for repeated instances of late or nonpayment. Thus an airline that repeatedly pays late—or not at all—is charged the same interest and penalty amount each time, which may just offset the interest the airline earned by not remitting user fee collections in the first place. Therefore, CBP officials said the penalty is not high enough to discourage violations.

CBP is also authorized to deny landing rights if the airline does not remit customs and immigration fees. However, this tool suffers from the very opposite design flaw: it is perceived to be too severe to invoke. CBP officials said that denying landing rights is such a severe penalty that its very existence—infrequent application notwithstanding—is effective enough to discourage late payment or nonpayment of passenger inspection fees by the airlines. However, even in cases of carrier nonremittance or chronic late remittance, CBP officials said CBP has threatened to use this authority to deny landing rights on four occasions— twice against the same airline—in nearly 20 years. Three of these instances occurred in 2007. We have previously reported that penalties may lose their effectiveness and credibility over time if they are not executed consistently.

CBP Does Not Employ a Systematic Process for Selecting Airlines for Audit

Officials said there is no standard set of criteria used to guide the selection of airlines for audit. The audit function for all three inspection fees is consolidated within CBP’s Office of Regulatory Audit, and all audits cover all three fees. Approximately 385 airlines remit immigration and agriculture fees, and 290 airlines remit the customs fee. CBP audits about 50 carriers annually to test for compliance. CBP’s Office of Finance recommends airlines for audit based on a number of factors, including whether a carrier’s remittance dropped substantially from one quarter to the next, news articles about changes in flights or airline financial issues, and prior audit findings. Experience and judgment also come into play. Officials are responsible for processing the same airlines’ payments every quarter and become “experts” on those airlines and the normal trends in their remittances. Although this flexibility and individualized understanding of the airlines is important, we have previously reported that developing internal controls is key to minimizing the risks that may prevent an agency from meeting its objective. Documenting selection criteria could also protect the agency when experienced officials leave the agency. CBP officials told us that although the larger airlines generally present a much lower risk of noncompliance or incomplete remittance, they are audited every couple of years because the record-keeping requirements are so burdensome. In addition, if CBP audited a large airline only once every 5 years, the audit would be very resource-intensive. Nevertheless, the fact that there is significantly more volatility in compliance by small and mid-sized airlines and those offering seasonal flights means they require more audit attention. For context, in a 5-year sample of 16 airlines, the 11 airlines with the smallest passenger volume rate remitted the passenger inspection fees late 35 times. These 11 airlines represented 14.6 percent of total international passenger volume—slightly larger than that of the single largest airline in the sample.

Certain Elements Have the Potential to Undermine Any Effort to Consolidate the Fees

As we have discussed, the challenges related to the passenger inspection user fees result both from inconsistencies among the fees—making them difficult to administer—and from specific design elements within the individual fees. For example, agencies face difficulties distributing the fee collections, both because they disagree on how to allocate the receipts among them, and because the process of transferring the funds from one agency or appropriation to another complicates agency budget execution. Moreover, the statutory structure does not permit the administering agencies to easily verify collection and payment, and the customs fee does not permit reimbursement for many activities directly associated with air passenger inspections. These issues should be considered regardless of whether the fees are consolidated.

As discussed earlier, we have previously reported on a number of principles that could inform efforts such as these to redesign or consolidate these fees. Understanding the trade-offs inherent in various fee design elements and the likely consequences of various design choices with respect to efficiency, equity, revenue adequacy and administrative burden can help policy makers carefully weigh the likely effects of various policy decisions and move discussion and debate to a more informed plane.

Conclusions

Although the need to address some of the user fee challenges presented in this report may appear obvious, how to accomplish this is less clear. Any changes made to one fee should be designed to complement rather than conflict with the other two fees. Moreover, although whether and how to consolidate the international passenger inspection fees is ultimately a policy decision Congress must make, it is important to note that consolidating the passenger inspection fees absent other changes will not eliminate some of the administrative and operational challenges agencies and stakeholders currently encounter. In some cases the origins of these challenges lie in the statutory structure of the fees themselves, and not their lack of consolidation.

Any consolidation effort that neglects to consider these issues is unlikely to have the desired effect: Unless agencies present a comprehensive picture of the three fees, including the full scope of inspection activities and their costs, Congress will lack a complete picture of whether the fees work in concert or conflict with each other, which could hamper oversight. Furthermore, agencies will be less able to develop and maintain the partnerships necessary to collect and distribute the fees as efficiently and effectively as possible.

The lack of complete cost data and regular, formal opportunities to share such information can prevent the agencies from addressing existing issues, including differences in forecasting assumptions and lack of agreement on activity costs, standardized audit selection criteria, and the design and implementation of a graduated penalty system to encourage and enforce airline compliance.

More broadly, if agencies cannot determine whether these fees are recovering costs, Congress cannot be sure that resources are allocated to the activities it most values.

Likewise, without substantive, transparent coordination between agencies and stakeholders, agencies will not be able to effectively address administrative burdens such as disparate airline record-keeping requirements among the fees.

The principles of effective user fee design discussed earlier in this report can both offer a framework for considering the implications of various statutory structures and help clarify and illuminate the trade-offs associated with various policy choices available to Congress associated with amending the individual statutes related to passenger inspection fees or consolidating all or part of them into a single passenger inspection fee. Such a framework could also provide the basis for future reviews of federal user fees as Congress works to ensure that user fee financing mechanisms remain relevant and up-to-date.

Recommendations for Executive Action

We recommend that the Secretaries of Agriculture and Homeland Security take the following seven actions: direct CBP, ICE, and APHIS to make information on the estimated cost of inspections as well as the basis for these cost estimates readily available to affected parties to improve the transparency and credibility—and hence the acceptance by stakeholders and payers—of the processes for setting, collecting, and distributing the fees; direct CBP, ICE, and APHIS to collaborate on agendas, presentations, and discussions with stakeholders for the CBP Airport and Seaport Inspections User Fee Advisory Committee (Advisory Committee) meetings in order to improve the usefulness of these meetings for both agencies and fee stakeholders; consolidate reporting of the passenger inspection fees, to include the activities and proportion of fees for which CBP, ICE, and APHIS are each responsible to provide a comprehensive picture of the user fees supporting the passenger inspection process; develop a legislative proposal in consultation with Congress on a consolidated, graduated penalty system that reflects airline payment history and includes specific administrative procedures regarding when penalties should be invoked in order to improve the effectiveness of the tools for enforcing payment of passenger inspection fees; develop a legislative proposal in consultation with Congress on a single, common set of airline record-keeping requirements for all three passenger inspection fees that reflects the consolidated audit function for these fees and reduces the administrative burden on airlines; develop a legislative proposal in consultation with Congress to eliminate key differences among the fourth quarter remittance requirement for the immigration fee; and develop and implement common assumptions used to forecast the collections of agriculture quarantine inspection activities in order to more closely tie the fee rate to CBP’s and APHIS’s agriculture fee distribution to actual collections.

Further, we make the following three recommendations to the Secretary of Homeland Security: develop and implement formal written guidance on factors to be considered in selecting airlines for audit, including factors intended to reflect the risk of non- or incomplete payment; complete development of and report on ICE’s activity costs to ensure the immigration fee is divided between ICE and CBP according to their respective proportion of immigration inspection activity costs. Further, if the study shows that immigration activity costs exceed collections, develop a legislative proposal in consultation with Congress to adjust the immigration fee to recover costs as closely as possible, per statute; and direct CBP and ICE to develop and implement a fee-sharing memorandum of understanding (MOU) to include time frames for when funds would be transferred and to provide for periodic review and update.

Matter for Congressional Consideration

harmonizing the passenger exemption and statutory definitions across the eliminating the differences among the three fees in the authority to set fee whether it wishes the customs fee to be a full cost recovery fee, and reviewing the activities that may be reimbursed by the customs fee collections.

Agency Comments & Our Evaluation

We provided a draft of this report to the Secretaries of the Departments of Homeland Security (DHS) and Agriculture for review and received comments from both agencies that are reprinted in appendixes II and III. In addition, DHS provided technical corrections, which were incorporated as appropriate. DHS and USDA concurred with our recommendations, and provided additional comments for our consideration. We also provided portions of the report for non-federal stakeholder review and made technical corrections where appropriate.

While DHS concurred with our recommendations to work with Congress to (1) develop a graduated penalty system, (2) develop a common set of airline record-keeping requirements, (3) eliminate the differences in the fourth quarter remittance requirements for airlines, and, if needed, (4) increase the immigration passenger inspection fee, by developing legislative proposals to address these issues, DHS officials said implementing these individually could take several years and only address the challenges in the air passenger environment. In recommending these separately we did not intend to imply that they should be addressed separately and recognize that the agencies could address these issues in a single legislative proposal. Further, since this engagement only reviewed air passenger inspection fees we limited our recommendations to those fees.

We are sending copies of this report to the Secretaries of Homeland Security and Agriculture and interested congressional committees. We will also make copies available to others on request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9142 or irvings@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff making major contributions to this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to identify how the three separate passenger inspection user fees are set, collected, and distributed and the benefits and challenges of this process for agencies and stakeholders, and implications of consolidating these fees under the Department of Homeland Security (DHS).

To meet these objectives, we reviewed the passenger inspection user fee legislation and guidance, agency documents, and literature on user fee design and implementation characteristics, and interviewed officials responsible for managing user fees at the Customs and Border Protection (CBP) offices in Washington, D.C., and from the New York/New Jersey, Miami and Seattle Regional Offices, Immigration and Customs Enforcement (ICE), and Animal and Plant Health Inspection Service (APHIS). We observed the inspections process and interviewed CBP officials responsible for port management and certain airport and airline officials involved with international passenger processing or the three passenger inspection fees. We did not assess the effectiveness of these inspections. We reviewed audit and cost data related to air passenger inspection activities. We also asked questions about CBP’s and APHIS’s internal controls for the data we used and determined that the data are sufficiently reliable for the purposes of this report. However, it was beyond the scope of this report to evaluate the reliability of the cost data for purposes beyond this report.

We also interviewed APHIS, CBP, and ICE officials responsible for managing the user fees and auditing the user fee collections at DHS and the Department of Agriculture.

We also met with officials from Continental Airlines, American Airlines, Air Transport Association, International Air Transport Association, Airports Council International-North America, Miami-Dade County International Airport, New York/New Jersey Port Authority, Bush Houston-Intercontinental International Airport, Dallas-Fort Worth International Airport, San Francisco International Airport, and Seattle- Tacoma International Airport. We also met with and reviewed documents from the travel industry organization, the Discover America Partnership.

To select the airlines and airports to meet with, we reviewed Bureau of Transportation Statistics data on the volume of international air passengers and number of international flights and consulted with officials from government and industry associations. To select industry stakeholders to meet with, we consulted government agency officials and reviewed CBP’s Airport and Seaport User Fee Advisory Committee membership.

We performed our work from October 2006 through August 2007 in accordance with generally accepted government auditing standards.

Appendix II: Comments from the Department of Homeland Security

Appendix III: Comments from the Department of Agriculture

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

Jacqueline M. Nowicki (Assistant Director) and Chelsa Gurkin managed this assignment. Robin Freshwater and Amy Rosewarne made key contributions to all aspects of the report. Susan Etzel, Terrance N. Horner Jr., Jessica Nierenberg, Kathleen Padulchick, and Jack Warner also provided assistance. In addition, Carlos Diz and Pedro Briones provided legal support and Donna Miller developed the report’s graphics.