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. 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. 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. 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. 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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Summary: 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. 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.