Aviation Taxes and the Airport and Airway Trust Fund
CRS Report for Congress
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. 105-
2), 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.
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. 104-
188). 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.
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...)
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 of4
calendar year 1996 if the fund had not been reauthorized in August 1996. 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
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.
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.
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 fees9
on February 5 and 13, 1997. 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.
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, long-
haul 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.
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.
CRS-9
Table 1. Aviation Excise Tax Provisions in FY1998 Revenue Reconciliation Legislation
Current LawH.R. 2014, RevenueReconciliation Act of 1997 S. 949, Revenue ReconciliationAct of 1997P.L. 105-34, Taxpayer Relief Actof 1997
7.5% tax on all domestic airline10% tax on all domestic airline7.5% tax on all domestic airline
ticketsticketstickets phased in as follows:
657no comparable provision10% tax on domestic segment ofno comparable provision
international flights
iki/CRS-97-no comparable provisiontax on flight segments to “qualified7.5% on domestic airline tickets to
g/wrural airports” is reduced to 7.5%“qualified rural airports”. No
s.orphase in.
leak
Flight segment tax, an additionalno comparable provisionFlight segment tax, an additional
://wikifixed dollar tax is imposed on allfixed dollar tax is imposed on all
httpdomestic flights. A flight segmentdomestic flights. A flight segment
is defined as a “single take-off andis defined as a “single take-off and
single landing”; tax imposed atsingle landing”; tax imposed
time of enactment is $2.00; taxbeginning 10/1/97 is $1.00; tax
increases each calendar yearincreases as follows: 10/1/98; $2
1999 $2.2510/1/99 - 12/31/00; $2.25
2000 $2.50for calendar year
2001 $2.752000; $2.50
2002 $3.002001; $2.75
beginning in 2003; this tax is2002; $3.00
adjusted for inflation on the basisbeginning in 2003; this tax is
of changes in the Consumer Priceindexed for inflation on the basis of
Index (CPI)changes in the Consumer Price
Index (CPI)
CRS-10
Current LawH.R. 2014, RevenueReconciliation Act of 1997 S. 949, Revenue ReconciliationAct of 1997P.L. 105-34, Taxpayer Relief Actof 1997
payments to airlines for right tosame as House, except tax rate ispayments to airlines for right to
award free or reduced rate air10%award free or reduced rate air
transportation subject to 7.5% taxtransportation subject to 7.5% tax
rate, e.g. frequent flyer awardsrate, e.g. frequent flyer awards
based on credit card use. based on credit card use. No
phase in.
657$15.50 international departure tax$8.00 international departure tax$12.00 international departure tax. Indexed to CPI beginning January
iki/CRS-97-$15.50 international arrivals tax$8.00 international arrivals tax$12.00 international arrivals tax.
g/wIndexed to CPI beginning January
s.or1, 1999
leak
same as current lawsame as current lawsame as current law
://wiki
httpsame as current lawsame as current lawsame as current law
same as current lawsame as current lawsame as current law
4.3 cents/gallon tax on aviationno comparable provision4.3 cents/gallon tax on aviation
gasoline and jet fuel deposited ingasoline and jet fuel deposited in
Airport and Airway Trust FundAirport and Airway Trust Fund
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.
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.