Aviation Taxes and the Airport and Airway Trust Fund

Order Code 97-657 E

CRS Report for Congress

Received through the CRS Web

Aviation Taxes and the

Airport and Airway Trust Fund

Updated August 12, 1997

John W. Fischer

Specialist in Transportation

Economics Division

Congressional Research Service ˜ The Library of Congress

Aviation Taxes and the Airport and Airway Trust Fund

Summary

Reauthorization of excise tax revenues for the airport and airway trust fund has

been a contentious issue for the last two years. Most of the concern during this

period was about future funding needs for the Federal Aviation Administration

(FAA). The issue, somewhat unexpectedly, became an element of the tax plans

embedded in House and Senate FY1998 budget reconciliation proposals. The House

proposed a major structural change in how aviation taxes would be imposed. The

Senate proposed a tax regime closer to the existing system of taxation.

The Taxpayer Relief Act of 1997 (P.L. 105-34) imposes a new system of

taxation effective October 1, 1997. This system is a compromise that adopts the

structural elements of the House proposal at financial levels that reflect Senate

interests. The new taxes will raise an additional $ 3 billion during the next 5 years,

over what might have been expected if the current system had been reauthorized

without change.

Authority to collect taxes for the airport and airway trust fund expired twice in

the last two years, on January 1, 1996 and January 1, 1997. The first expiration lasted

almost 8 months and cost the trust fund approximately $4.0 billion in revenues. The

second expiration was much briefer, about two months, costing the trust fund an

additional $1 billion. Under the existing taxation system any stoppage equates to a

loss of about $500 million in each month when revenues are not collected. The taxes

would have expired again on September 30, 1997, without further reauthorization.

Prior to the inclusion of this issue in the reconciliation process, it was expected that

Congress would take up the revenue issue after receiving a report on the financial

needs of the FAA by the National Civil Aviation Review Commission (NCARP). The

NCARP report was expected in late summer 1997.

Contents

Origins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Trust Fund Balances and Outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Budget Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

The User Fee Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

The User Fee Proposal of the Coalition for Fair FAA Funding . . . . . . . . . . 5

The Revenue Reconciliation Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Effects of the Taxpayer Relief Act of 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

List of Tables

Table 1. Aviation Excise Tax Provisions in FY1998 Revenue

Reconciliation Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Aviation Taxes and the Airport and Airway

Trust Fund

Reauthorization of excise tax revenues for the airport and airway trust fund has

been a contentious issue for the last two years. Most of the concern during this

period was about future funding needs for the Federal Aviation Administration

(FAA). The issue, somewhat unexpectedly, became an element of the tax plans

embedded in House and Senate FY1998 budget reconciliation proposals. The House

proposed a major structural change in how aviation taxes would be imposed. The

Senate proposed a tax regime closer to the existing system of taxation.

The Taxpayer Relief Act of 1997 (P.L. 105-34) imposes a new system of

taxation effective October 1, 1997. This system is a compromise that adopts the

structural elements of the House proposal at financial levels that reflect Senate

interests. The new taxes will raise an additional $ 3 billion during the next 5 years,

over what might have been expected if the current system had been reauthorized

without change.

Authority to collect taxes for the airport and airway trust fund expired twice in

the last two years, on January 1, 1996 and January 1, 1997. The first expiration lasted

almost 8 months and cost the trust fund approximately $4.0 billion in revenues. The

second expiration was much briefer, about two months, costing the trust fund an

additional $1 billion. Under the existing taxation system any stoppage equates to a

loss of about $500 million in each month when revenues are not collected.

The Airport and Airway Trust Fund Tax Reinstatement Act of 1997, (P.L. 1052), enacted February 28, 1997, had provided for the most recent reinstatement of

aviation excise taxes. That reauthorization, however, provided taxing authority only

through September 30, 1997. The reauthorization period in the Act was specifically

chosen to insure that the tax issue would have to be taken up prior to the beginning

of FY1998. Prior to the inclusion of this issue in the reconciliation process, it was

expected that Congress would take up the revenue issue after receiving a report on

the financial needs of the FAA by the National Civil Aviation Review Commission

(NCARP). The NCARP report was expected in late summer 1997.

The 1996 and 1997 lapses in tax collection provided an economic windfall for

the many airlines. According to one source, “the U.S. major airlines gain $182.0

million per month while the ticket tax is dormant.”1 As a result, many airlines were

viewed as less than anxious for the renewal of any tax regime, even on a short-term

basis.

1

Ticket Tax Could Return More Quickly With Trust Fund Shortfall Analysts Say. Aviation

Daily. February 3, 1997. p. 187.

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Origins

The airport and airway trust fund was created by the revenue title of the Airport

and Airway Development Act of 1970 (P.L. 91-258). The “aviation trust fund,” as

it is also known, was established to provide funding for capital improvements to the

nation’s airport and airway system. The scope of the aviation trust fund, like the

highway trust fund on which it was modeled, has been expanded over time. The most

recent reauthorization of the fund, prior to passage of the Taxpayers Relief Act of

1997, occurred in the aforementioned Airport and Airway Trust Fund Tax

Reinstatement Act of 1997. A temporary extension of the taxes also occurred in

August 1996 as part of the Small Business Job Protection Act of 1996 (P.L. 104188). Prior to these temporary extensions, the last regular reauthorization of the fund

occurred with passage of Federal Aviation Administration Authorization Act of 1994

(P.L. 103-305). The most recent change in the levels of revenue dedicated to the trust

fund occurred as part of OBRA 90.2

The aviation trust fund receives the majority of its funding from a 10% tax on

domestic airline tickets. Other funding is obtained from a 6.25% cargo waybill tax,

a $6 international departure tax, and taxes on aviation fuels used by general aviation

– 15 cents/gallon on aviation gasoline and 17.5 cents/gallon for jet fuel. The trust

fund receives significant revenue each year from interest on the balance in the fund,

which is held in U.S. Treasury securities.

In FY1996, the trust fund provided approximately 70% of all funding for FAA

activities and programs. The remainder of funding was provided from Treasury

general funds. In some previous fiscal years the trust fund had provided as much as

75% of the FAA’s total funding. The FAA budget is viewed as having four major

components: operations and maintenance (O&M); facilities and equipment (F&E);

research, engineering, and development (RE&D); and the airport improvement

program (AIP).

The distribution of total federal funding for these programs and activities is

shown in figure 1. For three of these programs (F&E, RE&D, and AIP) all of the

funding is from the trust funds. For O&M, the trust fund contribution has been

somewhat fluid. Since FY1991, however, the trust fund O&M contribution has been

in the neighborhood of 50% of the total.

2

P.L. 101-508. Omnibus Budget Reconciliation Act of 1990. November 5, 1990. Title XI.

Section 11213.

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Trust Fund Balances and Outlays

Figure 2 shows trends in trust fund revenues and outlays for the period FY1989

to FY1996; outlays from the fund increased in most of the years, and did so even in

years where revenues deposited in the fund decreased.

The aviation trust fund had an uncommitted balance of $5.1 billion at the end of

FY1995. This uncommitted balance dropped dramatically in FY1996 due to the

temporary lapse in revenue collections for the fund. The uncommitted balance in the

fund is sometimes, and controversially, referred to as the “surplus.” The existence of

this balance has been a continuing source of controversy between congressional

authorizing and appropriating committees.3 This was particularly the case prior to

3

The surplus issue is a major component of an ongoing congressional initiative to change the

budgetary treatment of the transportation trust funds. A more detailed discussion of this issue

(continued...)

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FY1996 when the uncommitted balance was quite large. Authorizing committees,

supported by the aviation community, view the surplus in the fund as a breach of

contract with those paying the taxes. They contend that the taxes are collected solely

to improve the national aviation system. Appropriators, however, take the view that

aviation taxes are part of the unified budget system and that federal spending for

aviation activities must be done in accordance with the establishment of overall budget

priorities.

The almost 8-month lapse in authority to collect taxes for the aviation trust fund

during 1996 had a significant effect on the balances in this fund. By some estimates,

over $4 billion in revenues were not collected during this period. Spending from the

fund, however, did not diminish. The 2-month lapse in 1997 cost the funds an

additional $1 billion. These stoppages have had an obvious net effect of dramatically

reducing the unexpended balance in the fund. According to an April 1996 GAO

report, the existing balance in the trust fund would have been depleted by the end of

calendar year 1996 if the fund had not been reauthorized in August 1996.4 Similar

predictions were made for 1997 prior to the fund’s reinstatement.

Budget Implications

The insecurity surrounding trust fund revenues during the last 2-years had some

serious potential short-term implications. The Department of Transportation and

Related Agencies Appropriations Act, 1997 (P.L. 104-205), for example, assumes

that the taxes will be collected at a level sufficient to fund the FAA and its programs

during the year.5 The assumptions in FY1998 appropriations discussions to date also

assume continuation of the trust fund. With passage of the Taxpayer Relief Act of

1997 these issues have more-or-less disappeared.

The User Fee Issue

There is a longstanding debate in the aviation community about the usefulness

and/or desirability of user fees as a mechanism for funding the FAA. The existing tax

3

(...continued)

can be found in: U.S. Library of Congress. Congressional Research Service. Transportation

Trust Funds: The Off-Budget Debate Continues. CRS Report 96-989, by John W. Fischer.

updated May 9, 1997. 20 p.

4

U.S. General Accounting Office. Airport and Airway Trust Fund: Effects of the Trust Fund

Taxes’ Lapsing on FAA’s Budget. GAO/RCED-96-130. Washington, U.S. Govt. Print. Off.,

April 1996. p. 1.

5

For a discussion of transportation appropriations for FY1997 see: U.S. Library of Congress.

Congressional Research Service. Transportation and the FY1997 Budget. CRS Report

96-453, by John W. Fischer. Updated October 4, 1996. 16 p., for a discussion of

transportation appropriations for FY1998 see: U.S. Library of Congress. Congressional

Research Service. Appropriations for FY1998: Department of Transportation and Related

Agencies, CRS Report 97-208, by Paul F. Rothberg and Duane Thompson. May 12, 1997.

14 p.

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system is certainly based on collections from users, but this system is viewed by many

observers as a less than perfect proxy for a user fee system. The ticket tax, for

example, is collected on the basis of a wide range of fares charged by airlines for what

is essentially a standard product, an airline seat. The operating requirements of the

air traffic control (ATC) system, however, are based on the movement of aircraft. A

200-seat aircraft and a 20-seat aircraft, operating under ATC control, require a similar

level of ATC services, but obviously pay into the trust fund at very different rates.6

The debate about how best to charge users was an important element of

discussion in the process that led to passage of the Federal Aviation Reauthorization

Act of 1996 (1996 Act)(P.L. 104-264). During consideration of this legislation the

House took the position that user fees should be studied as an FAA funding

mechanism, but that for the short term it would be expedient to reinstate the excise

taxes in the pre-existing system for 3 years. The Senate originally called for a shorter

reinstatement of the tax system, 18 months. The compromise in the 1996 Act is the

establishment of a 21-member “National Civil Aviation Review Commission” (Review

Commission). The Review Commission, which began meeting in the late spring of

1997, is tasked with proposing a new user fee financing system for the FAA. The

1996 Act also called for an independent assessment of the FAA’s financial

requirements through the year 2002. The outside assessment was completed earlier

this year. 7 The 1996 Act gives the Commission 6 months to formulate its

recommendations following completion of this outside assessment. The Commission

is expected to make these recommendations in late summer 1997.

The User Fee Proposal of the Coalition for Fair FAA Funding

It is said that nature abhors a vacuum. A similar effect might be observed in the

discussion about renewal of aviation taxes. The absence of a clear prospect of

renewal of excise taxes that occurred in early 1996 encouraged proposals from

individuals and groups seeking an alternative to the current system of taxation.

Prior to 1996, most of the debate about user fees centered on whether general

aviation aircraft pay a proportionate share for their use of the system. The airline

industry typically had been seen as an interested, but basically non-participant party

in this debate.

In late May 1996, seven major airlines and the Regional Airline Association

began actively promoting a replacement user fee system. Operating as “The Coalition

for Fair FAA Funding” (Coalition), this grouping put forward a proposal that would

replace the airline ticket tax element of the current system with a new user fee system.

6

For a historical perspective on the user fee issue see: U.S. Library of Congress.

Congressional Research Service. Reorganization of the Federal Aviation Administration:

Safety and Efficiency Issues. CRS Report 94-371, by John W. Fischer, J.Glen Moore, and

Pamela Hairston. April 28, 1994. p. 16 - 18.

7

Coopers & Lybrand. Federal Aviation Administration Independent Financial Assessment:

Final Report. February 28, 1997. Some information in this report is considered proprietary

by its authors. The report is available to congressional requestors from the Federal Aviation

Administration.

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Instead of a ticket tax, fees would be collected on each one-way domestic airline flight

on the following basis: a $2 fee per airplane seat ($1 for commuter aircraft), $4.50 for

each passenger origination, and $.005 per nonstop revenue passenger mile (one

passenger flying one mile). According to documents prepared by the Coalition, this

proposal would raise just slightly less on an annual basis than the current tax

structure.8 The Coalition views its proposal as a fairer approach to funding than the

ticket tax, because it would charge for actual use of the aviation system. The

Coalition acknowledges that a certain group of airlines (i.e., Southwest, America

West, Reno Air, and Valujet) would contribute more to the trust fund under their

proposal than they had previously.

Not surprisingly, Southwest and some other smaller airlines disagree with the

specifics of the Coalition proposal. They view it as an attempt to raise their costs and,

hence, their fares, thereby affording Coalition airlines a certain competitive advantage.

The position of these smaller carriers has been bolstered by the findings of the GAO’s

previously mentioned December 1996 report on trust fund issues. The report

suggests that a user fee system for funding the FAA could be desirable if properly

structured. The report, however, finds that the Coalition’s proposals raise a number

of competitive issues, because of the way in which additional costs would be imposed

on smaller airlines.

Throughout the remainder of 1996, and well into 1997, the Coalition was unable

to obtain significant support for its proposal from the Clinton Administration or

congressional sources. They did, however, keep the user fee issue in front of

Congress and the Clinton Administration. The Administration is on record as

supporting a greater role for user fees in funding the FAA, and included $300 million

of unspecified user fees in its FY1998 budget submission for the FAA.

Congress looked at the aviation tax issue early in the 1st Session of the 105th

Congress in a couple of different forums. The Aviation Subcommittee of the House

Committee on Transportation and Infrastructure held hearings on aviation user fees

on February 5 and 13, 1997.9 This hearing occurred during the period in which the

aviation taxes had lapsed, but the hearing also discussed the long-term user fee issue.

Also, the House Committee on Ways and Means, at the direction of Chairman Archer,

formed a transportation tax task force to examine all transportation taxes, including

those for aviation. This task force met several times early in the session. It did not

produce any specific formal recommendations on aviation user fees. The task force,

however, is known to have collected substantial information about various possible

tax implementation scenarios.

8

Roberts Roach & Associates. Air Traffic Control User Fees. Washington, June 7, 1996.

p. 13.

9

U.S. Congress. House. Committee on Transportation and Infrastructure. Subcommittee on

Aviation. Proposals to Establish User Fees for Federal Aviation Administration Services.

Hearing. February 5 and 13, 1997. Washington. U.S. Govt. Print. Off. 307 p.

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The Revenue Reconciliation Process

The needs of the budget reconciliation process captured the aviation tax issue.

As part of their respective plans to accommodate significant tax cuts and at the same

time, establish a glide path to a balanced budget in FY2002, both the House

Committee on Ways and Means and the Senate Committee on Finance addressed the

long-term structure of the aviation tax system in their revenue reconciliation

proposals. In each instance, the Committees chose to raise aviation tax levels, and

hence, revenues. They also provided taxing authority for 10 years. Both of these

actions could be viewed as, at least in part, removing the long-term assumption of a

linkage between aviation taxes and FAA funding needs.

The revenue reconciliation process, vis-a-vis aviation taxes, has focused on the

issue of providing additional revenues for the budget in the years ahead. The

approaches chosen by the House and Senate to meet this goal were significantly

different, but the net budgetary effects were similar. The revenue projections in the

House proposal showed aviation tax revenues of approximately $34.2 billion over 5

years. Senate revenue projections were comparable.

The specifics of the House and Senate proposals are shown in table 1. The

House proposal made the more dramatic changes to the aviation taxation system of

the two. The House has, in part, adopted the proposals of the Coalition and

established a flat tax on airline flight segments. To accommodate this change in

taxation the House reduced the ticket tax and established a new flat rate segment

tax.10 The net effect of this action is to reduce taxation levels on higher fare, longhaul domestic flights in some instances and at the same time, increase taxes on some

lower fare, short-haul flights. Southwest Airlines, not surprisingly, launched a major

public relations and advertising campaign against this initiative.

Both proposals aggressively increased taxation on international air travel. The

high departure and arrivals charges imposed in the House bill, may or may not, be

comparable in dollar terms to the new tax on the domestic segment of international

flights imposed by the Senate in conjunction with its lower departure and arrivals

taxes. Airlines do not typically publish separate fares for the domestic portion of an

international trip.11 As a result, it is difficult to know with any precision how airlines

would charge for this portion of the trip. The increased taxation of international

travel will raise the cost of this travel. Whether, and how much, this will affect

international travel remains to be seen. International travel is known to be price

sensitive, but other factors, such as exchange rates and physical security in destination

countries, also affect the decision to travel outside the United States.

A controversial element in the both proposals was the application of the ticket

tax (7.5% House, 10% Senate) to “amounts paid for right to award free or reduced

10

This tax is also being called a “head tax” by some. This is a confusing usage because the

already existing airport passenger facility charge is also sometimes referred to as a head tax.

11

The Senate bill provides instructions for airlines as to how the international segment tax is

to be computed.

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rate air transportation.” This tax would apply to frequent flyer awards earned as part

of credit card use, rental car use, and other programs tied to the airlines frequent flyer

programs. These widely used programs have not been subject to taxation in the past.

The House bill also diverted the existing 4.3 cent/gallon tax on aviation gasoline

and jet fuel to the airport and airway trust fund. This would provide the trust fund

with a significant increase in revenue. The Senate bill did not have the same

provision, but the Senate bill did redirect the portion of the 4.3 cents/gallon tax on

highway fuels to the highway trust fund and to a new intercity rail trust fund.

Effects of the Taxpayer Relief Act of 1997

The aviation tax provisions of the Taxpayer Relief Act of 1997 are a compromise

between the House and Senate proposals. Structurally, Congress adopted the House

proposal on airline passenger taxation. As a result, many observers are suggesting

that the views of the Coalition representing the 7 largest U.S. airlines prevailed in the

debate. This view is only partially true. The Coalition originally proposed a system

that was entirely based on user charges. The reduction of 2.5% in the general

passenger ticket tax is a movement in that general direction, but is a far cry from its

elimination. In addition, future growth of the segment tax could, over time, mitigate

the effect of the percentage reduction and could lead to higher total dollar levels of

taxation on some airline fares. For example, a $240 round trip fare from Washington

National to Denver on a major airline, involving 4 segments, is currently taxed at a

rate of $24. When the new system is fully implemented, and the segment fee has

reached the $3 level, this same trip will be taxed at a rate of $30.

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Table 1. Aviation Excise Tax Provisions in FY1998 Revenue Reconciliation Legislation

Current Law

H.R. 2014, Revenue

Reconciliation Act of 1997

S. 949, Revenue Reconciliation

Act of 1997

P.L. 105-34, Taxpayer Relief Act

of 1997

10% tax on all domestic airline

tickets

7.5% tax on all domestic airline

tickets

10% tax on all domestic airline

tickets

7.5% tax on all domestic airline

tickets phased in as follows:

10/1/97 - 9/30/98; 9%

10/1/98 - 9/30/99; 8%

10/1/99 - 9/30/07; 7.5%

no comparable provision

no comparable provision

10% tax on domestic segment of

international flights

no comparable provision

no comparable provision

no comparable provision

tax on flight segments to “qualified

rural airports” is reduced to 7.5%

7.5% on domestic airline tickets to

“qualified rural airports”. No

phase in.

no comparable provision

Flight segment tax, an additional

fixed dollar tax is imposed on all

domestic flights. A flight segment

is defined as a “single take-off and

single landing”; tax imposed at

time of enactment is $2.00; tax

increases each calendar year

1999 $2.25

2000 $2.50

2001 $2.75

2002 $3.00

beginning in 2003; this tax is

adjusted for inflation on the basis

of changes in the Consumer Price

Index (CPI)

no comparable provision

Flight segment tax, an additional

fixed dollar tax is imposed on all

domestic flights. A flight segment

is defined as a “single take-off and

single landing”; tax imposed

beginning 10/1/97 is $1.00; tax

increases as follows: 10/1/98; $2

10/1/99 - 12/31/00; $2.25

for calendar year

2000; $2.50

2001; $2.75

2002; $3.00

beginning in 2003; this tax is

indexed for inflation on the basis of

changes in the Consumer Price

Index (CPI)

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H.R. 2014, Revenue

Reconciliation Act of 1997

S. 949, Revenue Reconciliation

Act of 1997

P.L. 105-34, Taxpayer Relief Act

of 1997

no comparable provision

payments to airlines for right to

award free or reduced rate air

transportation subject to 7.5% tax

rate, e.g. frequent flyer awards

based on credit card use.

same as House, except tax rate is

10%

payments to airlines for right to

award free or reduced rate air

transportation subject to 7.5% tax

rate, e.g. frequent flyer awards

based on credit card use. No

phase in.

$6 international departure tax

$15.50 international departure tax

$8.00 international departure tax

$12.00 international departure tax.

Indexed to CPI beginning January

1, 1999a

no comparable provision

$15.50 international arrivals tax

$8.00 international arrivals tax

$12.00 international arrivals tax.

Indexed to CPI beginning January

1, 1999

6.25% cargo waybill tax

same as current law

same as current law

same as current law

15 cents/gallon tax on general

aviation use of aviation gasoline

same as current law

same as current law

same as current law

17.5 cents/gallon tax on general

aviation use of jet fuel.

same as current law

same as current law

same as current law

4.3 cents/gallon tax on aviation

gasoline and jet fuel deposited in

U.S. Treasury General Funds

4.3 cents/gallon tax on aviation

gasoline and jet fuel deposited in

Airport and Airway Trust Fund

no comparable provision

4.3 cents/gallon tax on aviation

gasoline and jet fuel deposited in

Airport and Airway Trust Fund

Current Law

a

Includes special provisions for Alaska and Hawaii travel retaining applicability of $6 departure tax equivalent. This rate is subject to CPI indexing

beginning 1/1/99.

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It is true that some low-fare airlines will experience greater tax burdens and that

these will likely translate into higher fares. It would not appear, however, that the

increase in tax levels for this carrier group is so great vis-a-vis the potential effects on

its competitors that the low-fare airlines might be put at a major competitive

disadvantage.

The new tax system raises costs dramatically for two groups of travelers;

international travelers and frequent flyer program participants whose milage is earned

by non-flying activities, such as credit card use. For the international traveler the

effect will be immediate and visible. The $18 per round trip increase in arrival and

departure taxes is probably not, however, sufficient in and of itself to cause any large

change in travel behavior. For frequent flyer program participants the effect of the

new tax system is likely to take some time to implement and may be somewhat

invisible to program participants. This is because the tax is imposed at what might be

thought of as the wholesale level. This puts the onus of how to change these

programs on the program operators who may choose a variety of different ways to

pass on their additional costs, some of which might be quite subtle.

Finally, the imposition of a new aviation tax regime at this time will likely make

it more difficult for those seeking a new financial structure for funding federal aviation

activities. Additional revenues in the trust fund do not necessarily equate to additional

funding for aviation. In fact, the balanced budget agreement allows for only modest

increases in overall transportation spending in the years ahead. As a result, it is

possible that the tax increases in the Taxpayer Relief Act will become a new issue in

the context of the long standing congressional discussion of the budgetary status of

all transportation trust funds.