Airport and Airway Trust Fund
Financial Outlook Is Positive, but the Trust Fund's Balance Would Be Affected If Taxes Were Suspended Gao ID: GAO-03-979 September 15, 2003The 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.
GAO-03-979, Airport and Airway Trust Fund: Financial Outlook Is Positive, but the Trust Fund's Balance Would Be Affected If Taxes Were Suspended
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Report to Congressional Requesters:
September 2003:
Airport and Airway Trust Fund:
Financial Outlook Is Positive, but the Trust Fund's Balance Would Be
Affected If Taxes Were Suspended:
GAO-03-979:
GAO Highlights:
Highlights of GAO-03-979, a report to the Senate Committee on
Commerce, Science, and Transportation and its Subcommittee on
Aviation
Why GAO Did This Study:
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.
What GAO Found:
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.
www.gao.gov/cgi-bin/getrpt?GAO-03-979.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Gerald Dillingham at
(202) 512-2834 or dillinghamg@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Projected Financial Outlook for the Trust Fund Is Positive but Depends
on Realization of Forecasted Passenger Traffic Levels and Airfares:
Suspending Some or All Taxes Accruing to the Trust Fund Would Reduce or
Eliminate the Trust Fund's Uncommitted Balance:
Agency Comments:
Appendix:
Appendix I: Scope and Methodology:
Tables Tables :
Table 1: Projected Trust Fund Uncommitted Balances at the End of
Fiscal Year 2006, by Tax Holiday and Reauthorization Proposal:
Table 2: Expenditures Scenarios Showing Proposal Authorizations from
the Trust Fund for FAA:
Table 3: Sensitivity Analysis of the Trust Fund's Uncommitted Balance
to Revenue Shortfalls:
Figures:
Figure 1: Trust Fund Revenues Totaled $10 Billion in Fiscal Year 2002:
Figure 2: Trust Fund Expenditures Totaled $12 Billion in Fiscal Year
2002:
Figure 3: Projected Uncommitted Balances of the Trust Fund, Fiscal
Years 2003 through 2006:
Figure 4: The Amount of Forgone Tax Revenues under the Five Potential
Tax Holiday Scenarios, April 1, 2003, through April 1, 2004:
Figure 5: Trust Fund's Projected Uncommitted Balances Based on Tax
Holidays, under the Senate Committee on Commerce, Science, and
Transportation's Proposal:
Figure 6: Trust Fund's Projected Uncommitted Balances Based on Tax
Holidays, under the House Committee on Transportation and
Infrastructure, Subcommittee on Aviation's Proposal:
Figure 7: Trust Fund's Projected Uncommitted Balances Based on Tax
Holidays, under the President's Proposal:
Abbreviations:
AIP: Airport Improvement Program:
AIR-21: Wendell H. Ford Aviation Investment and Reform Act for the 21ST
Century:
FAA: Federal Aviation Administration:
F&E: Facilities and Equipment:
RED: Research, Engineering, and Development:
Letter September 15, 2003:
The Honorable John McCain
Chairman
The Honorable Ernest F. Hollings
Ranking Minority Member
Committee on Commerce, Science, and Transportation
United States Senate:
The Honorable Trent Lott
Chairman
The Honorable John D. Rockefeller, IV
Ranking Minority Member
Subcommittee on Aviation
Committee on Commerce, Science, and Transportation
United States Senate:
The multibillion dollar Airport and Airway Trust Fund (hereafter called
the Trust Fund) provides all of the funding for three out of four of
the Federal Aviation Administration's (FAA) major accounts--Airport
Improvement Program; Facilities and Equipment; and Research,
Engineering, and Development--and a majority of support for the fourth
account, Operations. The Trust Fund relies on a number of taxes for its
revenue, including passenger ticket, fuel, and cargo taxes that are
paid by passengers and airlines.
In fiscal year 2002, the Trust Fund received about $10 billion in
revenue and had expenditures of about $12 billion. Although
expenditures exceeded revenues in fiscal year 2002, since its creation
in 1970, Trust Fund revenues have generally exceeded expenditures--
resulting in a surplus (or an "uncommitted balance" as it is usually
called). For example, at the end of fiscal year 2002, the Trust Fund's
uncommitted balance was nearly $5 billion. The Trust Fund's uncommitted
balance represents money against which there is no outstanding budget
commitment or authority to spend and, subject to congressional
approval, is the amount available to finance FAA accounts in the
future. It was also used to offset forgone revenue when Trust Fund
taxes lapsed in 1996 and to fund new airport security requirements
resulting from the September 11, 2001, terrorist attacks.
Although the Trust Fund's uncommitted balance totaled almost $5 billion
at the end of fiscal year 2002, a number of recent developments have
raised congressional concerns about its financial outlook. First,
domestic passenger traffic has declined over 12 percent over the last 3
years, in part because of a sluggish economy and the public's
reluctance to travel. Second, the airline industry is experiencing
significant financial problems, and the airlines have asked Congress
for tax relief, such as suspending the taxes that support the Trust
Fund, which is known as a "tax holiday." According to Air Transport
Association officials, such relief could lower airline operational
costs, generate additional passenger traffic through lower fares, or
improve yields realized on existing traffic. Third, given that the
current authority--the Wendell H. Ford Aviation Investment and Reform
Act for the 21ST Century--for funding FAA's major programs and
activities expires at the end of fiscal year 2003, Congress will have
to decide what level of expenditures from the Trust Fund is appropriate
to authorize for fiscal year 2004 and beyond. Recently, the Senate
Committee on Commerce, Science, and Transportation; the House Committee
on Transportation and Infrastructure's Subcommittee on Aviation; and
the President presented reauthorization proposals for FAA. The three
proposals differ regarding the amounts authorized from the Trust Fund,
the number of years authorized, and how much would be used to support
FAA programs. In light of these developments, we were asked to address
the following questions:
1. What is the projected financial outlook of the Trust Fund?
2. How would the suspension (i.e., a tax holiday) of various taxes
accruing to the Trust Fund affect its financial status?
To answer these questions, we requested Trust Fund financial
projections from FAA using the expenditure scenarios included in the
following three proposals: (1) the Senate Commerce, Science, and
Transportation Committee's reauthorization proposal, known as the
Aviation Investment and Revitalization Vision Act (S. 824, May 2, 2003,
version, hereafter called the Senate); (2) the House Transportation and
Infrastructure Committee, the Aviation Subcommittee's reauthorization
proposal, known as Flight 100--Century of Aviation Reauthorization Act
(H.R. 2115, May 15, 2003, version, hereafter called the House); and (3)
the President's reauthorization proposal, known as the Aviation
Authorization Act of 2003. Because there is a difference in the number
of years that the three expenditure scenarios would authorize funding
for FAA's accounts, our analysis compares proposed authorizations for
fiscal years 2004 through 2006, which were included in each scenario.
For each of these three proposals, we asked FAA to model the effects of
the following five different tax holidays: a cargo tax holiday, a fuel
tax holiday, a flight segment tax holiday, a passenger ticket tax
holiday,[Footnote 1] and an "all" tax holiday that would include the
four taxes previously mentioned and the international departure/arrival
taxes. We selected these five holidays because they represent a range
of different tax holiday scenarios. At your request, our analysis was
based on a tax holiday hypothetically beginning on April 1, 2003, and
lasting 1 year until April 1, 2004. Although our analysis is based on
hypothetical tax holidays during this period, the results of our
analysis would remain valid if Congress were to decide to implement the
tax holidays retroactive to April 1, 2003, or would be similar if
Congress were to grant a tax holiday at a later time. The information
and analysis presented in this report are based on FAA's most recently
published aviation forecasts, which were made in November 2002.
Appendix I provides additional details on our scope and methodology.
We performed our work from February through August 2003 in accordance
with generally accepted government auditing standards.
Results in Brief:
With no change in tax rates and assuming 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 through fiscal year 2006, with a surplus (or an "uncommitted
balance") under each of the three expenditure proposals we analyzed.
For example, if Congress were to adopt the Senate's or House's
reauthorization proposal, which would authorize over $34 billion from
the Trust Fund, the Fund's uncommitted balances are projected to be
over $4.4 billion each year from 2004 through 2006. In comparison, if
the President's reauthorization proposal to authorize $38 billion from
the Trust Fund were to be adopted, the Fund's uncommitted balance is
projected to decline from $4.8 billion in 2002 to $1 billion in 2006
because it authorizes a higher amount of Fund revenue for FAA's
Operations. However, if passenger traffic and airfares[Footnote 2]
through 2006 are below the levels projected in FAA's November 2002
forecast, Trust Fund revenues may not be sufficient to cover planned
expenditures beginning in 2005. According to FAA officials, as of May
2003, passenger traffic levels and airfares are lower than the
projections made in November 2002.
The suspension of some or all of the taxes that accrue to the Trust
Fund for 1 year would reduce or eliminate the uncommitted balance of
the Trust Fund. As shown in table 1, for example, suspending all taxes
accruing to the Trust Fund for 1 year, starting on April 1, 2003, would
cause the Trust Fund's uncommitted balance to reach zero by October
2003, no matter which legislative proposal were adopted.
Table 1: Projected Trust Fund Uncommitted Balances at the End of Fiscal
Year 2006, by Tax Holiday and Reauthorization Proposal:
Dollars in millions.
All taxes; Senate's proposal: Eliminated as of October 2003; House's
proposal: Eliminated as of October 2003; President's proposal:
Eliminated as of October 2003.
Passenger ticket taxes; Senate's proposal: $1,957; House's proposal:
$1,772; President's proposal: Eliminated as of October 2003.
Flight segment tax; Senate's proposal: 3,608; House's proposal: 3,424;
President's proposal: Eliminated as of April 2004.
Fuel tax; Senate's proposal: 4,237; House's proposal: 4,053;
President's proposal: $135.
Cargo tax; Senate's proposal: 4,412; House's proposal: 4,228;
President's proposal: 495.
Source: FAA.
Notes:
At the end of fiscal year 2002, the Trust Fund's uncommitted balance
was $4.8 billion.
The Senate's reauthorization proposal is the version of S. 824 passed
by the Senate Commerce, Science, and Transportation Committee on May 2,
2003, and the House's reauthorization proposal is the version of H.R.
2115 passed by the House Transportation and Infrastructure Committee's
Aviation Subcommittee on May 15, 2003.
Under an all tax holiday, all taxes accruing to the Trust Fund are
suspended. A passenger ticket tax holiday would suspend the passenger
ticket tax, the rural airport tax, and the frequent flyer tax. A flight
segment tax holiday would suspend the segment tax. A fuel tax holiday
would suspend the commercial aviation, general aviation gasoline, and
general aviation jet fuel taxes. A cargo tax holiday would suspend the
cargo waybill taxes.
[End of table]
In addition, according to FAA officials, an all tax holiday would
require significant spending cuts to FAA's capital programs and could
result in contract termination costs in excess of $1 billion under all
three expenditure scenarios, unless Congress authorized funding from
the General Fund. However, FAA officials stated that air traffic
control services would be maintained if taxes were suspended and the
Trust Fund's uncommitted balance reached zero because such services are
considered an emergency function that involves the safety of human
life. According to FAA officials, to ensure the continued safe
operations of the national airspace system, the agency would use
available Trust Fund revenue to first fund Operations costs, which
primarily support air traffic control activities.
In commenting on a draft of this report, FAA agreed with information
contained in this report and provided some clarifying and technical
comments that we incorporated where appropriate.
Background:
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.[Footnote 3] 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.
Figure 1: Trust Fund Revenues Totaled $10 Billion in Fiscal Year 2002:
[See PDF for image]
[End of figure]
Note: Other revenues to the Trust Fund include the rural airport tax,
the frequent flyer tax, and the collection of fees from other
activities.
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.
Figure 2: Trust Fund Expenditures Totaled $12 Billion in Fiscal Year
2002:
[See PDF for image]
Note: Other expenditures include offsetting collections from the
program accounts to the Trust Fund and appropriations to the Payments
to Air Carriers Program managed by the Department of Transportation.
[End of figure]
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.[Footnote 4]
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.
Table 2: Expenditures Scenarios Showing Proposal Authorizations from
the Trust Fund for FAA:
Dollars in millions.
Airport Improvement Program:
Senate's proposal; Fiscal year: 2004: $3,400; Fiscal year: 2005:
$3,500; Fiscal year: 2006: $3,600; Total: $10,500.
House's proposal; Fiscal year: 2004: 3,400; Fiscal year: 2005: 3,600;
Fiscal year: 2006: 3,800; Total: 10,800.
President's proposal; Fiscal year: 2004: 3,400; Fiscal year: 2005:
3,400; Fiscal year: 2006: 3,400; Total: 10,200.
Facilities and Equipment:
Senate's proposal; Fiscal year: 2004: 2,916; Fiscal year: 2005: 2,971;
Fiscal year: 2006: 3,030; Total: 8,917.
House's proposal; Fiscal year: 2004: 2,938; Fiscal year: 2005: 2,993;
Fiscal year: 2006: 3,053; Total: 8,984.
President's proposal; Fiscal year: 2004: 2,916; Fiscal year: 2005:
2,971; Fiscal year: 2006: 3,031; Total: 8,918.
Research, Engineering, and Development:
Senate's proposal; Fiscal year: 2004: 289; Fiscal year: 2005: 204;
Fiscal year: 2006: 317; Total: 810.
House's proposal; Fiscal year: 2004: 366; Fiscal year: 2005: 410;
Fiscal year: 2006: 462; Total: 1,238.
President's proposal; Fiscal year: 2004: 100; Fiscal year: 2005: 102;
Fiscal year: 2006: 104; Total: 306.
Operations:
Senate's proposal; Fiscal year: 2004: 4,124; Fiscal year: 2005: 4,808;
Fiscal year: 2006: 5,210; Total: 14,142.
House's proposal; Fiscal year: 2004: 4,025; Fiscal year: 2005: 4,480;
Fiscal year: 2006: 4,842; Total: 13,347.
President's proposal; Fiscal year: 2004: 6,000; Fiscal year: 2005:
6,112; Fiscal year: 2006: 6,236; Total: 18,348.
Other:
Senate's proposal; Fiscal year: 2004: 0; Fiscal year: 2005: 0; Fiscal
year: 2006: 0; Total: 0.
House's proposal; Fiscal year: 2004: 5; Fiscal year: 2005: 7; Fiscal
year: 2006: 5; Total: 16.
President's proposal; Fiscal year: 2004: 4; Fiscal year: 2005: 5;
Fiscal year: 2006: 5; Total: 13.
Total authorizations:
Senate's proposal; Fiscal year: 2004: $10,729; Fiscal year: 2005:
$11,483; Fiscal year: 2006: $12,157; Total: $34,369.
House's proposal; Fiscal year: 2004: 10,734; Fiscal year: 2005: 11,490;
Fiscal year: 2006: 12,162; Total: 34,385.
President's proposal; Fiscal year: 2004: 12,420; Fiscal year: 2005:
12,590; Fiscal year: 2006: 12,776; Total: 37,785.
Source: S. 824 (May 2, 2003, version), H.R. 2115 (May 15, 2003,
version), H.R. 586, and the President's reauthorization proposal.
Note: "Other" includes funding for an airline data and analysis
program, and a climate change program, but does not include payments to
air carriers funding. In some cases, the numbers do not add to reported
totals due to rounding.
[End of table]
Projected Financial Outlook for the Trust Fund Is Positive but Depends
on Realization of Forecasted Passenger Traffic Levels and Airfares:
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.
Figure 3: Projected Uncommitted Balances of the Trust Fund, Fiscal
Years 2003 through 2006:
[See PDF for image]
[End of figure]
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.[Footnote 5] 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.
Table 3: Sensitivity Analysis of the Trust Fund's Uncommitted Balance
to Revenue Shortfalls:
[See PDF for image]
Source: FAA.
[End of table]
Suspending Some or All Taxes Accruing to the Trust Fund Would Reduce or
Eliminate the Trust Fund's Uncommitted Balance:
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.
Figure 4: The Amount of Forgone Tax Revenues under the Five Potential
Tax Holiday Scenarios, April 1, 2003, through April 1, 2004:
[See PDF for image]
Note: This figure does not include the amount of Trust Fund interest
that would be forgone.
[End of figure]
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.
Figure 5: Trust Fund's Projected Uncommitted Balances Based on Tax
Holidays, under the Senate Committee on Commerce, Science, and
Transportation's Proposal:
[See PDF for image]
Notes:
This figure includes fiscal years 2002 and 2003 and reflects
expenditures according to AIR-21, which expires on September 30, 2003.
It also includes fiscal years 2004 through 2006, which reflects the
Senate's reauthorization proposal.
The baseline represents FAA's projections of the Trust Fund's
uncommitted balance under the Senate's proposal with no tax holiday.
Under an all tax holiday, all taxes accruing to the Trust Fund are
suspended. A passenger ticket tax holiday would suspend the passenger
ticket tax, the rural airport tax, and the frequent flyer tax. A flight
segment tax holiday would suspend the segment fee. A fuel tax holiday
would suspend the commercial aviation, general aviation gasoline, and
general aviation jet fuel taxes. A cargo tax holiday would suspend the
cargo waybill taxes.
[End of figure]
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.
Figure 6: Trust Fund's Projected Uncommitted Balances Based on Tax
Holidays, under the House Committee on Transportation and
Infrastructure, Subcommittee on Aviation's Proposal:
[See PDF for image]
Notes:
This figure includes fiscal years 2002 and 2003 and reflects AIR-21,
which expires on September 30, 2003. It also includes fiscal years 2004
through 2006, which reflects the House's reauthorization proposal.
The baseline represents FAA's projections of the Trust Fund's
uncommitted balance under the House's proposal with no tax holiday.
Under an all tax holiday, all taxes accruing to the Trust Fund are
suspended. A passenger ticket tax holiday would suspend the passenger
ticket tax, the rural airport tax, and the frequent flyer tax. A flight
segment tax holiday would suspend the segment fee. A fuel tax holiday
would suspend the commercial aviation, general aviation gasoline, and
general aviation jet fuel taxes. A cargo tax holiday would suspend the
cargo waybill taxes.
[End of figure]
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.
Figure 7: Trust Fund's Projected Uncommitted Balances Based on Tax
Holidays, under the President's Proposal:
[See PDF for image]
Notes:
This figure includes fiscal years 2002 and 2003 and reflects AIR-21,
which expires on September 30, 2003. It also includes fiscal years 2004
through 2006, which reflects the President's reauthorization proposal.
The baseline represents FAA's projections of the Trust Fund's
uncommitted balance under the President's proposal with no tax holiday.
Under an all tax holiday, all taxes accruing to the Trust Fund are
suspended. A passenger ticket tax holiday would suspend the passenger
ticket tax, the rural airport tax, and the frequent flyer tax. A flight
segment tax holiday would suspend the segment fee. A fuel tax holiday
would suspend the commercial aviation, general aviation gasoline, and
general aviation jet fuel taxes. A cargo tax holiday would suspend the
cargo waybill taxes.
[End of figure]
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.
Agency Comments:
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 [Hyperlink, http://www.gao.gov.] 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.
Gerald Dillingham
Director, Physical Infrastructure Issues:
Signed by Gerald Dillingham:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
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.[Footnote 6] 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.[Footnote 7] 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.
(540065):
FOOTNOTES
[1] The passenger ticket tax holiday scenario includes the taxes on
domestic airline tickets, rural airport tickets, and frequent flyer
awards.
[2] For forecasting Trust Fund revenues, FAA uses airfares to calculate
yields that measure the average amount of revenue per passenger mile.
[3] Interest refers to the amount of money earned on the Trust Fund's
cash balance.
[4] Although the House's and President's reauthorization proposals
authorize funding through 2007, for comparative purposes, our analysis
includes authorizations for fiscal years 2004 through 2006, which were
included in all three proposals.
[5] Although the House and Senate use the same formulas to determine
how much funding of FAA Operations should come from the Trust Fund, the
total amount of funding in the two proposals differ.
[6] FAA develops financial projections for the Trust Fund in
conjunction with its forecasts of aviation activity.
[7] FAA uses both econometric and spreadsheet models to develop its
financial projections for the Trust Fund. Although we did not do a
comprehensive evaluation of FAA's models, we reviewed them to determine
their appropriateness for this purpose.
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