oversight

Airport and Airway Trust Fund: Financial Outlook Is Positive, but the Trust Fund's Balance Would Be Affected If Taxes Were Suspended

Published by the Government Accountability Office on 2003-09-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              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
                 a
                                                September 2003


                                                AIRPORT AND AIRWAY TRUST FUND

                                                Financial Outlook Is Positive, but the
Highlights of GAO-03-979, a report to the       Trust Fund’s Balance Would Be Affected
Senate Committee on Commerce,
Science, and Transportation and its             If Taxes Were Suspended
Subcommittee on Aviation




The multibillion dollar Airport and             Over the next 3 years, with no change in tax rates and assuming that FAA’s
Airway Trust Fund (Trust Fund)                  passenger traffic and airfare projections are valid, the Trust Fund is
provides most of the funding for                expected to continue to have sufficient revenue to cover authorized
the Federal Aviation                            spending and end each year with a surplus, or an “uncommitted balance” as
Administration (FAA). The Trust                 it is usually called, under each of the three expenditure scenarios we
Fund relies on revenue from 10
taxes, including passenger ticket,              analyzed. For fiscal years 2004 through 2006, the potential uncommitted
fuel, and cargo taxes. Concerns                 balances would range from over $4.4 billion (if Congress adopted either the
about the financial outlook of the              House or the Senate proposal) to $1 billion, if the President’s proposal were
Trust Fund have emerged recently                adopted.
given the downturn in passenger
air travel, requests from the airlines          Suspending some or all of the taxes that accrue to the Trust Fund for 1 year
to suspend some of the Trust Fund               would reduce or eliminate the Trust Fund’s uncommitted balance. As
taxes, and the need to reauthorize              depicted below, if all taxes accruing to the Trust Fund were suspended,
FAA’s major programs in 2003.                   effective April 1, 2003, almost $10 billion in tax revenue would be forgone
GAO was asked to determine (1)                  and the uncommitted balance would be eliminated by October 2003. The
the projected financial outlook of              status of the Trust Fund would also differ according to the reauthorization
the Trust Fund and (2) how a 1-
year suspension of various taxes                proposal adopted and the taxes suspended. For example, suspending the
accruing to the Trust Fund (i.e., a             passenger ticket tax and adopting either the House or Senate proposal would
tax holiday), would affect its                  reduce the uncommitted balance to $1.8 billion and $2 billion, respectively,
financial status. We were asked to              in 2006. However, suspending the same tax and adopting the President’s
assess five potential tax holidays              proposal would eliminate the uncommitted balance by October 2003. The
that would have begun on April 1,               budgetary consequences of the remaining potential tax holidays would vary
2003, and ended on April 1, 2004.               substantially. FAA officials stated that under the President’s proposal, a
                                                passenger ticket tax holiday might require spending cuts to its capital
GAO used a model developed by                   programs, while a cargo tax holiday would require few if any spending cuts
FAA that made financial                         to its programs. In its comments on a draft of this report, FAA agreed with
projections for the Trust Fund                  the report’s findings and provided some clarifying comments that we
using expenditure assumptions that
were based on (1) the Senate                    incorporated where appropriate.
Committee on Commerce, Science,
and Transportation’s May 2, 2003,               Amount of Forgone Tax Revenues under Five Potential Tax Holiday Scenarios, April 1, 2003,
and the House Subcommittee on                   through April 1, 2004
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.


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.
Contents



Letter                                                                                               1
                         Results in Brief                                                            4
                         Background                                                                  5
                         Projected Financial Outlook for the Trust Fund Is Positive but
                           Depends on Realization of Forecasted Passenger Traffic Levels
                           and Airfares                                                             11
                         Suspending Some or All Taxes Accruing to the Trust Fund Would
                           Reduce or Eliminate the Trust Fund’s Uncommitted Balance                 13
                         Agency Comments                                                            20


Appendix
           Appendix I:   Scope and Methodology                                                      21


Tables                   Table 1: Projected Trust Fund Uncommitted Balances at the End of
                                  Fiscal Year 2006, by Tax Holiday and Reauthorization
                                  Proposal                                                           5
                         Table 2: Expenditures Scenarios Showing Proposal Authorizations
                                  from the Trust Fund for FAA                                       10
                         Table 3: Sensitivity Analysis of the Trust Fund’s Uncommitted
                                  Balance to Revenue Shortfalls                                     13


Figures                  Figure 1: Trust Fund Revenues Totaled $10 Billion in Fiscal Year
                                   2002                                                              7
                         Figure 2: Trust Fund Expenditures Totaled $12 Billion in Fiscal
                                   Year 2002                                                         8
                         Figure 3: Projected Uncommitted Balances of the Trust Fund,
                                   Fiscal Years 2003 through 2006                                   11
                         Figure 4: The Amount of Forgone Tax Revenues under the Five
                                   Potential Tax Holiday Scenarios, April 1, 2003, through
                                   April 1, 2004                                                    14
                         Figure 5: Trust Fund’s Projected Uncommitted Balances Based on
                                   Tax Holidays, under the Senate Committee on
                                   Commerce, Science, and Transportation’s Proposal                 15
                         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                                              16
                         Figure 7: Trust Fund’s Projected Uncommitted Balances Based on
                                   Tax Holidays, under the President’s Proposal                     18



                         Page i                                GAO-03-979 Airport and Airway Trust Fund
Contents




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

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Page ii                                        GAO-03-979 Airport and Airway Trust Fund
A
United States General Accounting Office
Washington, D.C. 20548



                                    September 15, 2003                                                              Leter




                                    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



                                    Page 1                                   GAO-03-979 Airport and Airway Trust Fund
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?




Page 2                                   GAO-03-979 Airport and Airway Trust Fund
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,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.




1
 The passenger ticket tax holiday scenario includes the taxes on domestic airline tickets,
rural airport tickets, and frequent flyer awards.




Page 3                                           GAO-03-979 Airport and Airway Trust Fund
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 airfares2
                   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.




                   2
                    For forecasting Trust Fund revenues, FAA uses airfares to calculate yields that measure the
                   average amount of revenue per passenger mile.




                   Page 4                                           GAO-03-979 Airport and Airway Trust Fund
Table 1: Projected Trust Fund Uncommitted Balances at the End of Fiscal Year 2006, by Tax Holiday and Reauthorization
Proposal

Dollars in millions
Tax holiday scenarios          Senate’s proposal                    House’s proposal                        President’s proposal
All taxes                      Eliminated as of October 2003        Eliminated as of October 2003           Eliminated as of October 2003
Passenger ticket taxes         $1,957                               $1,772                                  Eliminated as of October 2003
Flight segment tax             3,608                                3,424                                   Eliminated as of April 2004
Fuel tax                       4,237                                4,053                                   $135
Cargo tax                      4,412                                4,228                                   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.


                                          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



                                          Page 5                                                   GAO-03-979 Airport and Airway Trust Fund
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.




Page 6                                   GAO-03-979 Airport and Airway Trust Fund
In fiscal year 2002, the Trust Fund received about $10 billion in revenue
from these taxes and interest.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




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.



3
Interest refers to the amount of money earned on the Trust Fund’s cash balance.




Page 7                                                  GAO-03-979 Airport and Airway Trust Fund
Figure 2: Trust Fund Expenditures Totaled $12 Billion in Fiscal Year 2002




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.


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.




Page 8                                               GAO-03-979 Airport and Airway Trust Fund
Table 2 breaks down the distribution of the funding among FAA programs
for each of the three expenditure scenarios through 2006.4 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.




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.




Page 9                                          GAO-03-979 Airport and Airway Trust Fund
Table 2: Expenditures Scenarios Showing Proposal Authorizations from the Trust
Fund for FAA

Dollars in millions
                                                                                Fiscal year
                                                                       2004               2005             2006                Total
Airport Improvement Program
Senate’s proposal                                                   $3,400             $3,500            $3,600           $10,500
House’s proposal                                                      3,400              3,600            3,800             10,800
President’s proposal                                                  3,400              3,400            3,400             10,200
Facilities and Equipment
Senate’s proposal                                                     2,916              2,971            3,030               8,917
House’s proposal                                                      2,938              2,993            3,053               8,984
President’s proposal                                                  2,916              2,971            3,031               8,918
Research, Engineering, and
Development
Senate’s proposal                                                       289                204               317                    810
House’s proposal                                                        366                410               462              1,238
President’s proposal                                                    100                102               104                    306
Operations
Senate’s proposal                                                     4,124              4,808            5,210             14,142
House’s proposal                                                      4,025              4,480            4,842             13,347
President’s proposal                                                  6,000              6,112            6,236             18,348
Other
Senate’s proposal                                                           0                  0                 0                    0
House’s proposal                                                            5                  7                 5                   16
President’s proposal                                                        4                  5                 5                   13
Total authorizations
Senate’s proposal                                                 $10,729            $11,483           $12,157            $34,369
House’s proposal                                                    10,734             11,490            12,162             34,385
President’s proposal                                                12,420             12,590            12,776             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.




Page 10                                                                GAO-03-979 Airport and Airway Trust Fund
Projected Financial     Over the next 3 years, the Trust Fund is projected to have sufficient
                        revenue to fund authorized spending and end each year with an
Outlook for the Trust   uncommitted balance under each of the three expenditure proposals. This
Fund Is Positive but    positive financial outlook depends on the realization of FAA’s forecasted
                        passenger traffic levels and airfares. As shown in figure 3, under the
Depends on              Senate’s and House’s proposals, the Trust Fund’s year-end uncommitted
Realization of          balance is projected to be over $4.4 billion over the next 3 years. Under the
Forecasted Passenger    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.
Traffic Levels and
Airfares
                        Figure 3: Projected Uncommitted Balances of the Trust Fund, Fiscal Years 2003
                        through 2006




                        The primary reason that the Trust Fund’s uncommitted balance would be
                        higher under the Senate’s and House’s proposals is that they use the
                        formula created in the Wendell H. Ford Aviation Investment and Reform



                        Page 11                                    GAO-03-979 Airport and Airway Trust Fund
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 2006.5 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.




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.




Page 12                                       GAO-03-979 Airport and Airway Trust Fund
                        Table 3: Sensitivity Analysis of the Trust Fund’s Uncommitted Balance to Revenue
                        Shortfalls

                        Dollars in millions
                                                                                      Fiscal year
                        Revenue scenario                   Proposal                2004      2005      2006
                        Baseline projections               Senate                $4,565    $4,630    $4,651
                        as of November 2002.               House                   4,500    4,502     4,467
                                                           President               2,878    1,744     1,003
                        If revenues are 5 percent less     Senate                  4,098    4,167     4,195
                        than projected.                    House                   4,033    4,039     4,010
                                                           President               1,874      143          0
                        If revenues are 10 percent less    Senate                  3,631    3,704     3,738
                        than projected.                    House                   3,566    3,576     3,553
                                                           President                871         0          0
                        Source: FAA.




Suspending Some or      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
All Taxes Accruing to   taxes would result in almost $10 billion in forgone Trust Fund revenues.
the Trust Fund Would    The amount of Trust Fund revenues forgone under the other tax holiday
                        scenarios would range from approximately $447 million if the cargo tax
Reduce or Eliminate     were suspended to nearly $5.2 billion if the passenger ticket taxes were
the Trust Fund’s        suspended.
Uncommitted Balance




                        Page 13                                     GAO-03-979 Airport and Airway Trust Fund
Figure 4: The Amount of Forgone Tax Revenues under the Five Potential Tax Holiday
Scenarios, April 1, 2003, through April 1, 2004




Note: This figure does not include the amount of Trust Fund interest that would be forgone.


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.




Page 14                                               GAO-03-979 Airport and Airway Trust Fund
Figure 5: Trust Fund’s Projected Uncommitted Balances Based on Tax Holidays,
under the Senate Committee on Commerce, Science, and Transportation’s Proposal




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.


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



Page 15                                                 GAO-03-979 Airport and Airway Trust Fund
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




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.


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



Page 16                                                GAO-03-979 Airport and Airway Trust Fund
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.




Page 17                                  GAO-03-979 Airport and Airway Trust Fund
Figure 7: Trust Fund’s Projected Uncommitted Balances Based on Tax Holidays,
under the President’s Proposal




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.


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



Page 18                                                GAO-03-979 Airport and Airway Trust Fund
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




Page 19                                  GAO-03-979 Airport and Airway Trust Fund
                  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
                  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




                  Page 20                                    GAO-03-979 Airport and Airway Trust Fund
Appendix I

Scope and Methodology                                                                                      AA
                                                                                                            ppp
                                                                                                              ep
                                                                                                               ned
                                                                                                                 n
                                                                                                                 x
                                                                                                                 id
                                                                                                                  e
                                                                                                                  x
                                                                                                                  Iis




             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.1 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.2 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:




             1
              FAA develops financial projections for the Trust Fund in conjunction with its forecasts of
             aviation activity.
             2
              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.




             Page 21                                          GAO-03-979 Airport and Airway Trust Fund
Appendix I
Scope and Methodology




• 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



Page 22                                  GAO-03-979 Airport and Airway Trust Fund
           Appendix I
           Scope and Methodology




           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)   Page 23                                 GAO-03-979 Airport and Airway Trust Fund
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