Airport and Airway Trust Fund: Financial Outlook Is Positive, but
the Trust Fund's Balance Would Be Affected If Taxes Were	 
Suspended (15-SEP-03, GAO-03-979).				 
                                                                 
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.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-979 					        
    ACCNO:   A08462						        
  TITLE:     Airport and Airway Trust Fund: Financial Outlook Is      
Positive, but the Trust Fund's Balance Would Be Affected If Taxes
Were Suspended							 
     DATE:   09/15/2003 
  SUBJECT:   Financial management				 
	     Funds management					 
	     Future budget projections				 
	     Strategic planning 				 
	     Taxes						 
	     Trust funds					 
	     Airport and Airway Trust Fund			 

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GAO-03-979

                                       A

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

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

Abbreviations

AIP Airport Improvement Program AIR- 21 Wendell H. Ford Aviation
Investment and Reform Act for the 21 st Century

FAA Federal Aviation Administration F& E Facilities and Equipment RED
Research, Engineering, and Development

This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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copyright holder may be necessary if you wish to reproduce this material
separately.

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 21 st 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, 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.

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 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.

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

Tabl e 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

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. 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.

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.

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.

Tabl e 2: Expenditures Scenarios Showing Proposal Authorizations from the
Trust Fund for FAA

Dollars in millions

Fiscal year 2004 2005 2006 Tot al 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.

Projected Financial Over the next 3 years, the Trust Fund is projected to
have sufficient

Outlook for the Trust revenue to fund authorized spending and end each
year with an

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
Depends on

passenger traffic levels and airfares. As shown in figure 3, under the
Realization of

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

Forecasted Passenger President*s proposal, the Trust Fund*s year- end
uncommitted balance is

Traffic Levels and projected to range between $2.9 billion in 2004 and $1
billion in 2006.

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

Act for the 21 st 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.

Tabl e 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

All Taxes Accruing to 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 Trust Fund Would

The amount of Trust Fund revenues forgone under the other tax holiday
Reduce or Eliminate

scenarios would range from approximately $447 million if the cargo tax the
Trust Fund*s were suspended to nearly $5.2 billion if the passenger ticket
taxes were

suspended. Uncommitted Balance

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.

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

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

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 AIR21
funding formula for Operations.

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

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 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

Appendi Appendi xes x 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. 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.

 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)

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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.

Amount of Forgone Tax Revenues under Five Potential Tax Holiday Scenarios,
April 1, 2003, through April 1, 2004

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.

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. Highlights of GAO- 03- 979, a report to the

Senate Committee on Commerce, Science, and Transportation and its
Subcommittee on Aviation

September 2003

AIRPORT AND AIRWAY TRUST FUND

Financial Outlook Is Positive, but the Trust Fund*s Balance Would Be
Affected If Taxes Were Suspended

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

Contents

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Appendix I

Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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