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43–385 CC



before the





FEBRUARY 5, 1997

Serial 105–9

Printed for the use of the Committee on Ways and Means


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BILL ARCHER, Texas, Chairman

BILL THOMAS, California
E. CLAY SHAW, Jr., Florida
NANCY L. JOHNSON, Connecticut
WALLY HERGER, California
JIM McCRERY, Louisiana
DAVE CAMP, Michigan
JIM RAMSTAD, Minnesota
PHILIP S. ENGLISH, Pennsylvania
J.D. HAYWORTH, Arizona

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ROBERT T. MATSUI, California
WILLIAM J. COYNE, Pennsylvania
JIM McDERMOTT, Washington
RICHARD E. NEAL, Massachusetts
JOHN S. TANNER, Tennessee

A.L. Singleton, Chief of Staff

Janice Mays, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined. The electronic version of the hearing record does not include materials which were not submitted in an electronic format. These materials are kept on file in the official Committee records.
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    Advisory of February 3, 1997, announcing the hearing


    U.S. Department of the Treasury, Hon. Donald C. Lubick, Acting Assistant Secretary, Tax Policy
    U.S. Department of Transportation, Hon. Louise Frankel Stoll, Assistant Secretary, Budget and Programs, and Chief Financial Officer; accompanied by Hon. Monte Belger, Acting Deputy Administrator, Federal Aviation Administration


    National Business Aircraft Association, Inc., John W. Olcott, statement and attachments


House of Representatives,
Committee on Ways and Means,
Washington, DC.

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    The Committee met, pursuant to notice, at 2:03 p.m., in room 1100, Longworth House Office Building, Hon. Bill Archer (Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]



CONTACT: (202) 225–1721


February 3, 1997

No. FC–2

Archer Announces Hearing on

the Solvency of the Airport and

Airway Trust Fund

    Congressman Bill Archer (R–TX), Chairman of the Committee on Ways and Means, today announced that the Committee will hold a hearing on the solvency of the Airport and Airway Trust Fund (Trust Fund). The hearing will take place on Wednesday, February 5, 1997, in the main Committee hearing room, 1100 Longworth House Office Building, beginning at 2:00 p.m.
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    In view of the limited time available to hear witnesses, oral testimony at this hearing will be heard from invited witnesses only. Witnesses will include representatives from the U.S. Department of the Treasury and the Federal Aviation Administration (FAA). However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing.
    Historically, the Trust Fund has been financed through Federal excise taxes on passenger tickets, air freight, international departures, and noncommerical fuels. More recently, the Small Business Job Protection Act of 1996 (P.L. 104–188) renewed the Trust Fund taxes for the period August 27 through December 31, 1996. As an administrative matter, Trust Fund tax receipts are first deposited in the General Fund, and then transferred to the Trust Fund. On January 1, 1997, statutory authority to allow the transfer of aviation excise tax receipts from the General Fund to the Trust Fund elapsed.
    Recently, it was discovered that the Treasury Department had credited to the Trust Fund approximately $1.2 billion of aviation excise taxes which have not yet been deposited in the General Fund. This was based upon Treasury's assumption that the airlines had been depositing excise taxes attributable to travel in September, October, and November 1996. However, the airlines appear to have been relying on a current tax law safe harbor rule which permits the deposits of these taxes in February 1997. When these excise taxes are deposited by the airlines in February in the General Fund, a transfer to the Trust Fund cannot occur because the Trust Fund transfer authority has already expired.
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    Previously, the FAA had estimated that the uncommitted balance of the Trust Fund would reach zero in July of 1997. The FAA now estimates that it will not be able to enter into new capital contracts as early as March. Furthermore, the FAA contends it may have to begin notifying contractors of its intent to terminate multiple phase contracts on March 1, 1997, or earlier, absent legislative action.
    In announcing the hearing, Chairman Archer stated: ''I am anxious to have from the Administration a complete explanation of the events leading up to the error giving rise to this situation and its recommendations for rectifying the funding shortfall in the Trust Fund. More importantly, we need to know the full extent of what these new developments mean to FAA programs and operations so that the Committee can respond both appropriately and responsibly.''
    The Committee will receive testimony from the Administration regarding the solvency of the Trust Fund and the impact of the Trust Fund shortage on FAA programs.
    Any person or organization wishing to submit a written statement for the printed record of the hearing should submit at least six (6) copies of their statement and a 3.5-inch diskette in WordPerfect or ASCII format, with their address and date of hearing noted, by the close of business, Wednesday, February 19, 1997, to A.L. Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. If those filing written statements wish to have their statements distributed to the press and interested public at the hearing, they may deliver 200 additional copies for this purpose to the Committee office, room 1102 Longworth House Office Building, at least one hour before the hearing begins.
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    Each statement presented for printing to the Committee by a witness, any written statement or exhibit submitted for the printed record or any written comments in response to a request for written comments must conform to the guidelines listed below. Any statement or exhibit not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee.
    1. All statements and any accompanying exhibits for printing must be typed in single space on legal-size paper and may not exceed a total of 10 pages including attachments. At the same time written statements are submitted to the Committee, witnesses are now requested to submit their statements on a 3.5-inch diskette in WordPerfect or ASCII format.
    2. Copies of whole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee.
    3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments by the Committee, must include on his statement or submission a list of all clients, persons, or organizations on whose behalf the witness appears.
    4. A supplemental sheet must accompany each statement listing the name, full address, a telephone number where the witness or the designated representative may be reached and a topical outline or summary of the comments and recommendations in the full statement. This supplemental sheet will not be included in the printed record. The above restrictions and limitations apply only to material being submitted for printing. Statements and exhibits or supplementary material submitted solely for distribution to the Members, the press and the public during the course of a public hearing may be submitted in other forms.
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    Note: All Committee advisories and news releases are available on the World Wide Web at 'HTTP://WWW.HOUSE.GOV/WAYS_MEANS/'.

    The Committee seeks to make its facilities accessible to persons with disabilities. If you are in need of special accommodations, please call 202–225–1721 or 202–225–1904 TTD/TTY in advance of the event (four business days notice is requested). Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.


    Chairman ARCHER. The Committee will come to order.
    Good afternoon. We appreciate our witnesses from the administration being with us today, particularly on such short notice. But in light of recent events, I think we can all agree that the health of our Nation's air transportation system deserves immediate attention.
    This hearing has been called to address a $1.2 billion shortfall in the Aviation Trust Fund initially discovered by the Joint Committee on Taxation and now confirmed by the Department of the Treasury. The shortfall appears to have evolved from a combination of events, starting with the safe harbor rule which enabled the airlines, with the IRS' approval, to put off deposits of excise taxes until February. This was further complicated by the expiration of authority to transfer from the general fund to the Aviation Trust Fund aviation taxes received by the Treasury.
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    Unfortunately, if we leave this ignored, this problem could have serious ramifications.
    While we have been assured by FAA, the Federal Aviation Administration, that air traffic control operations will be fully funded, the same cannot be said for aviation capital programs. These concerns will be the focus of testimony from representatives of the Department of Transportation and the FAA.
    Now that the shortfall has been identified, it is time to hear from the administration. Yesterday Treasury Secretary Rubin wrote to me with two recommendations. The first recommendation is to restore Treasury's authority to transfer aviation tax collections from the general fund to the Airport and Airway Trust Fund. The second recommendation is that we renew the Aviation Trust Fund taxes through the end of this fiscal year, September 30, 1997.
    It is important for the Committee to have a clear understanding of the basis for these recommendations so that we can act responsibly and in a manner which will reassure the flying public that essential programs can continue without serious disruptions.
    [The information follows:]
    [The official Committee record contains additional material here.]

    Chairman ARCHER. I now turn to the minority for any opening statement that they would like to make.
    Mr. Cardin.
    Mr. CARDIN. Thank you, Mr. Chairman.
    First, let me thank you for holding this hearing and for acting very promptly on a circumstance that has been brought to our attention, and that is an additional $1.2 billion shortfall in the Aviation Trust Fund that we thought was in the fund.
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    Let me emphasize one point. You have put together a task force that has been working on some of the transportation funding issues, and we have had a chance to be briefed on this issue. Let me make a couple of points, if I might.
    It is now projected that the Aviation Trust Fund will go insolvent sometime by March and that it would be necessary to take action almost immediately in order to stop some essential programs from going forward that are funded through the Aviation Trust Fund. Even if the $1.2 billion were in the fund, we would run insolvent in that trust fund by mid-summer, by July, and we would need to take action very shortly in order to stop necessary capital programs that are financed through the Aviation Trust Fund.
    So the recommendation that is being made here, if I understand it, is a straight extension of the ticket tax through the end of this fiscal year in an effort to avoid the current problem that we have of making sure needed programs go forward.
    But I know I can speak for the members of the task force that you have put together. We are very anxious to take a look at the Aviation Trust Fund and its funding source, and hopefully come together with recommendations on that trust fund for action before the end of this fiscal year so that we will have a recommendation to the Committee.
    Also, we would hope we would be able to work with the Senate and the administration so we do not have to again confront a situation where the tax expires and act in a crisis mode.
    But I really want to thank you very much for conducting this hearing so promptly so that we could move forward with legislation.
    Chairman ARCHER. Thank you, Mr. Cardin. Mr. Collins, would you like to make an opening statement, as chairman of our task force?
    Mr. COLLINS. Mr. Chairman, I want to report to you that Mr. Cardin is right, we did meet yesterday as a task force to be briefed by Ken Kies. We fully concur with you on holding this hearing to move forward with the problem that exists with transfer of funds within the trust fund. And based on this hearing and the outcome of the information and the evidence we receive here today and your decision to move forward with any further action.
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    Thank you, Mr. Chairman.
    [The opening statement of Mr. Ramstad follows:]
    [The official Committee record contains additional material here.]

    Chairman ARCHER. Mr. Lubick is with us today representing the Treasury. Welcome back. You are no stranger to this Committee, and we are delighted to have you with us again. We are ready to receive your testimony, if you would like to proceed.


    Mr. LUBICK. Thank you, Mr. Chairman. It is a pleasure to be working with you again. I remember the very fine times we had together and am looking forward to more of them. We have had some private conversations on that subject, too.
    Mr. Chairman and Members of the Committee, I am very pleased to be here today representing the Treasury Department on the solvency of the Airport and Airway Trust Fund. I would like to focus my remarks on two important issues and urge prompt action on these measures.
    First, we urge Congress to correct a technical defect in the Code that denies authority to pay to the trust fund amounts collected for the trust fund on account of travel during the period for which the tax applied, but which are not received until after the lapse of the tax. Without this correction, these amounts will remain in the general fund and cannot be used for the purpose for which they were assessed and paid. At the present time, it appears this inability to match collections to the dedicated purpose is about $1.2 billion.
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    Second, we also urge Congress to renew the lapsed taxes temporarily through at least the end of September, so that the operations and funding of improvements of the airport and airways system can continue as planned for this fiscal year. In the meantime, we hope to be able to work with you to plan the appropriate long-range funding of these activities.
    Let me just briefly discuss each of these two matters. In general, in order to ensure transfer of excise taxes to their dedicated trust funds as promptly after their receipt as is possible, the statutory framework requires taxpayers to deposit excise taxes they collect on a semimonthly basis and then requires Treasury to transfer these deposited taxes to the various trust funds monthly, based on experience rated estimates. The transfers are then adjusted after the end of the quarter to reconcile to the actual amounts received as identified when the taxpayer files its quarterly excise tax return and pays the balance of its tax liability.
    Let me state and make clear that all of the excise taxes are deposited in one very large pool and the Treasury estimating staff determines actuarially, based upon past experience, what amount is approximately appropriate to be transferred to particular trust funds and what should remain with the general fund.
    The statutory system reasonably achieves the objective of transferring the collected amounts and allocating them between the funds while ensuring the proper amount ultimately is credited to each fund.
    The aviation excise taxes lapsed at the end of December 1995. They were renewed again temporarily from late August 1996 until December 31, 1996, when they lapsed again. The tax liabilities imposed for the renewal period were expected to equal about $1.7 billion. Of that amount, Treasury estimated about $1.4 billion was received during 1996, and thus we paid that amount over to the trust fund.
    Unbeknownst to the Treasury, however, the airlines did not pay over to the IRS in interim deposits approximately $1.2 billion of the taxes they collected in 1996. Instead, the airlines relied on a regulatory safe harbor that allowed them to make interim deposits based on their tax liability which arose during the second previous calendar quarter with a final reckoning after the close of the quarter.
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    Because of the lapse of the taxes during the first two quarters of 1996, a retrospective lookback of two quarters gave the airlines a zero tax base for making deposits. Thus, as the airlines and the IRS branch with whom they communicated read the regulation, the airlines essentially were not required to make any deposits during the quarter.
    Now here is where a mistake or a default was made. I should mention that no one communicated the fact that no current payments were being made to higher authorities at the IRS or to us at Treasury, so that we could have considered an amended procedure under which at least some of the $1.2 billion would have been deposited in 1996.
    I should also state that we have already taken measures to put out a new regulation this week which will mean that this cannot happen again.
    Separately, our estimators at the Treasury did not independently notice the shortfall. Why did they not notice the shortfall? The pool of excises that was collected from all these various sources, which are not separately identified when they come in, was because of collections above the expected or forecast amounts of the other excise taxes—alcohol, tobacco, gasoline—higher than forecast. So the total amount of the trust fund taxes, as far as the estimators could see, was within their normal range of forecasting. So therefore, they were not alerted to the fact there was a shortcoming. The shortfall was masked.
    In any event, we are required to reverse the $1.2 billion which was transferred mistakenly because it was not based upon actual deposits, take it back from the trust fund to the general fund. Now the actual aviation taxes collected have come into the Treasury or are about to come in. But the problem is the legislation that lapsed the tax also lapsed our authority to pay the money over to the trust fund. Thus, while the government has or will shortly have all of the money, without a change in the statute—and it applies, as I understand it, only to this particular trust fund and not the others—without getting that authority to transfer the $1.2 billion which we have, we will not be able to put it back in the trust fund.
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    The situation is, of course, that in any event, there would have been a significant problem. Even in normal circumstances, approximately 20 percent of the taxes on air travel during a calendar quarter are deposited after the end of the quarter or paid with the quarterly tax return. In any event, our authority to transfer that amount, about 20 percent of the $1.2 billion, would have expired at the end of 1996. And in fact, at the end of 1995 we were unable to transfer approximately $300 million of aviation taxes until you, in August, retroactively gave us that authority.
    So I would hope to prevent this from happening in the future, and I encourage you not only to extend our authority to make transfers to the trust fund, but to make sure the statute works properly and allows transfers to be made to the fund to which they were dedicated at the time of collection.
    Very briefly, the second question involves the state of finances of the FAA generally. My colleague from the Department of Transportation will speak to the details of the finances available. In general, there are funds sufficient to continue operations to the end of the year—security, controllers, and other personnel. To do so will require an earlier termination of capital programs designed to improve airports and the airway systems in every part of the country.
    These programs are really vital to the safety and efficiency of the system. They are things like antiquated radar replacement, wind shear detection, antiexplosive detection, and deicing. As Mr. Cardin has indicated, in any event, by summer there is going to be a problem in these areas.
    So we urge a temporary reinstatement of the lapsed taxes quickly, until at least the end of September, so that the safe and efficient operation of the system can proceed as planned while the consideration of long-term financing continues.
    That concludes Treasury's part of it, and the last points will be elaborated on more by Assistant Secretary Stoll.
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    [The prepared statement follows:]

Statement of Hon. Donald C. Lubick, Acting Assistant Secretary, Tax Policy, U.S. Department of the Treasury

    Mr. Chairman and Members of the Committee:
    I am pleased to present the views of the Treasury Department on the measures necessary to assure the continued solvency of the Airport and Airway Trust Fund (Trust Fund). I will discuss the Trust Fund excise taxes, including their structure, the revenue raised from the taxes, the administrative problems with the taxes, and proposals to modify the domestic passenger ticket tax or substitute an alternative funding system. First, however, I would like to bring to your attention a much more pressing issue.
    As you know, when Congress extended the aviation excise taxes through December 31, 1996, it similarly extended our authority to transfer to the Trust Fund only those taxes that were actually received by the IRS by the end of 1996. Thus, we are not permitted to transfer to the Trust Fund taxes that are received in 1997, even if those taxes relate to air transportation that occurred in 1996.
    This lack of extended authority is greatly exacerbated by the recent revelation that the airlines did not deposit until 1997 the vast majority of the taxes imposed in 1996. As a consequence, we have concluded that approximately $1.2 billion transferred to the Trust Fund based on initial estimates should have remained in the General Fund and thus must be withdrawn. Given that the level of funding for the Trust Fund was already of serious concern, this adjustment to the Trust Fund forces us to focus immediately on ways to ensure the continued high standards for aviation safety. For the reasons I will discuss briefly below, the Administration urges an immediate extension of the Treasury Department's authority to transfer to the Trust Fund all of the revenues collected from these taxes, regardless of when they are received, together with an immediate reinstatement, through at least the end of September 1997, of the taxes dedicated to the Trust Fund.
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    The excess transfers to the Trust Fund occurred because the Treasury office Fund did not know that the airlines (relying on IRS advice) were not making anticipated deposits.(see footnote 1) Thus, our estimates, and our transfers to the Trust Fund, were much higher than actual deposits.

    We have concluded that it is necessary to correct this error by transferring the $1.2 billion excess back to the General Fund. But now that the actual tax payments by the airlines have been or are about to be made, we lack authority to transfer the monies from the General Fund to the Trust Fund.
    Parenthetically, you may wonder why the airlines did not make full deposits in 1996 of taxes collected in that year. In large part it was because of reliance on the administrative procedure set up in the regulation governing deposits, which allowed payment under a safe harbor measured by the taxpayer's liabilities in the second previous quarter. IRS attorneys in the excise tax branch agreed with the airline industry's position that the regulation should be construed to permit current deposits based upon zero actual liability for the second previous quarter when the tax had lapsed. They were not aware of the inability to transfer post year-end receipts to the Trust Fund, since that was not an IRS function. Had top officials of the IRS and the Treasury been advised that the airlines were largely deferring payment of tax collections, we might have been able to alter that outcome, including, if necessary, by revising the deposit regulation quickly to require earlier deposit of much, but not all, of the 1996 tax liabilities.(see footnote 2)

    The second aspect of the problem is the urgency of extension of the lapsed taxes. Even with the renewal of authority to transfer after-collected taxes, some Federal aviation capital programs will, absent a reinstatement of these aviation excise taxes, run out of money in the near future. Such programs include the replacement of antiquated radar systems and airport grants. Although the ability to continue such programs will end in March 1997, or a few months later if the technical correction described above is made, earlier notices to contractors, in many cases almost immediately, will be necessary to avoid liability on projects where funds will run out without extension of the lapsed taxes. The FAA will be able to explain to you their exact financial situation.
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    We therefore urge, in addition to the technical modification to the Treasury Department's authority to make transfers of aviation excise taxes to the Trust Fund, the immediate short-term reinstatement of those taxes through at least the end of September of this year, while the Administration works with Congress to devise a long-term solution.

Structure of Taxes

    The Airport and Airway Trust Fund was created in 1970 to finance Federal aviation programs, including services provided by the FAA and grants for airport improvement. Since its creation, the Trust Fund has been supported, in large part, by Federal excise taxes on commercial air passenger and air freight transportation and on noncommercial aviation fuel. These taxes expired on December 31, 1995. The Small Business Job Protection Act of 1996 reinstated the taxes beginning on August 27, 1996, but the taxes expired again on December 31, 1996.
    Before the expiration of these taxes at the end of last year, the tax on domestic air passenger transportation was 10 percent of the amount paid for the transportation, the tax on international air passenger departures was $6 per person, and the tax on domestic air freight transportation was 6.25 percent of the amount paid for the transportation. The tax on noncommercial aviation fuel, to the extent dedicated to the Trust Fund, was 15 cents per gallon in the case of gasoline and 17.5 cents per gallon in the case of fuel other than gasoline.(see footnote 3)

Revenues from Taxes

    The table below shows total liabilities and the composition of those liabilities for the taxes that fund the Airport and Airway Trust Fund for FY 1993 through FY 1996.(see footnote 4) The table shows that liabilities from the aviation excise taxes increased from $4.9 billion in FY 1993 to $5.7 billion in FY 1995, and then decreased to $1.8 billion in FY 1996. The reduction in liabilities reflects the lapse in the aviation excise taxes from January 1, 1996 through August 26, 1996.
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    The table also shows that the tax on domestic air transportation accounts for most of the liabilities from the aviation excise taxes (87.5 percent). The other aviation excise taxes account for 12.5 percent of total liabilities, as follows: the tax on domestic air freight transportation (5.8 percent), international air passenger departures (4.5 percent), aviation fuels other than gasoline (2.0 percent), and gasoline (0.2 percent).(see footnote 5)

Table 1

Administrative Problems with Taxes

    The IRS has identified various administrative problems with the current tax. Some of these problems are attributable to the fact that the taxes on air transportation are imposed on the person purchasing the transportation rather than the transportation provider. Although the transportation provider is required to collect the tax and remit the amounts collected to the Treasury, the IRS may have no effective remedy when the transportation provider does not collect and remit the tax. In those cases, the IRS must either establish that the transportation provider's failure was willful or attempt to collect a small amount of tax from each of the persons to whom transportation was provided. Additional difficulties arise when the tax expires or is reinstated. For example, the expiration of the tax at the end of 1995 resulted in numerous small refund claims from individual passengers who purchased tickets in 1995 for travel during 1996.
    The differing tax treatment of commercial and noncommercial aviation is also a source of difficulty. When the same aircraft is used to transport passengers or property for hire and to transport employees or property of the owner (or the affiliated group to which the owner belongs), the tax that applies is determined on a flight-by-flight basis. In the case of flights that transport passengers or property for hire, tax is imposed on the amount paid for the transportation, but the fuel used is exempt from tax (other than the 4.3 cent general fund tax). Dual-use aircraft, however, are likely to use fuel that has already been taxed at the full rate, necessitating a claim for refund. In addition to the administrative burden of filing and processing refund claims, the rules relating to dual-use aircraft can result in inappropriate revenue losses because a flight is treated as commercial aviation (and not subject to the Trust Fund fuel tax) if it carries a single fare-paying passenger. In other words, a substantial fuel tax can be avoided by paying a relatively small tax on a single passenger's fare.
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    The administrative problems discussed above do not result in significant revenue losses. We would, nevertheless, be pleased to work with Congress to develop legislation that would address the IRS concerns.
    We also note that the air transportation taxes may lead to allocation disputes. This occurs because express delivery services generally involve a combination of air transportation and ground services. In such cases, only the amount paid for the air transportation is subject to tax, and it is therefore necessary to determine the extent to which the total amount paid is allocable to air transportation. The IRS believes that some taxpayers are taking advantage of these rules by allocating an inflated amount to ground services to avoid the tax. This problem is inherent in a tax imposed on amounts paid for taxable services that are commonly bundled with other services. The IRS believes, however, that its concerns can be minimized by appropriate changes to its regulations and is currently studying this issue.

Proposals to Modify Taxes or Substitute an Alternative Funding System

    The Administration is also represented at this hearing by Louise Frankel Stoll of the Department of Transportation. Her testimony will discuss in greater detail the allocation and funding issues as they affect the FAA's programs and operations. As you know, Congress has directed further study of the issues relating to FAA financing. The Federal Aviation Reauthorization Act of 1996 (P.L. 104–264) requires an assessment by an independent contractor of FAA's funding needs and the costs imposed by each segment of the aviation industry on the airport and airway system. This assessment, which is due later this month, should provide a useful starting point for efforts to develop a secure funding source for Federal aviation programs. The Reauthorization Act also creates a National Civil Aviation Review Commission to study how best to finance the FAA in light of this assessment of funding needs and system costs. The Commission is scheduled to report its findings and conclusions to the Secretary of Transportation by August 1997. In addition, by October 1997, the Secretary of Transportation, after consultation with the Treasury Department, is required to provide Congress with the Administration's recommendations for funding the needs of the aviation system through 2002.
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    We believe it would be inappropriate to propose a specific system of new fees or taxes without the benefit of the Commission's recommendations. The Administration will, of course, be pleased to work with this Committee to develop a long-term financing solution when the study is complete and the Secretary of Transportation has reported his recommendations to Congress.
    Mr. Chairman, this concludes my written testimony. I will be pleased to answer any questions you or other members of the Committee may have.


    Chairman ARCHER. Thank you, Mr. Lubick.
    Our next witness represents the U.S. Department of Transportation as its Chief Financial Officer and Assistant Secretary for Budget and Programs, Louise Stoll. We are pleased to have you with us, and you may proceed.
    If you can try to limit your oral testimony to 5 minutes, we would appreciate it. And any lengthier written testimony, without objection, may be inserted in the record in full.
    You may proceed, Ms. Stoll.


    Ms. STOLL. Thank you, Mr. Chairman, Members of the Committee. I welcome the opportunity to appear before you today, to discuss the solvency of the Airport and Airway Trust Fund. Joining me today is Monte Belger, here to my left, the Acting Deputy Administrator of FAA, the Federal Aviation Administration.
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    We appreciate the Committee's timely decision to hold this hearing. It is essential Congress act promptly to renew the aviation excise taxes and Treasury's authority to transfer receipts to the trust fund in order to prevent unacceptable funding conditions in aviation which I do not have to tell you is one of the Nation's most significant industries.
    For nearly three decades, the FAA has been funded largely by aviation excise taxes through the Aviation Trust Fund. These include partial funding for FAA operations and full funding for facilities and equipment, airport grants and research. As you know, those taxes lapsed on December 31. Every day the taxes are not collected results in a loss of approximately $18 to $20 million in revenue to the trust fund. This is nearly $600 million a month lost to the trust fund.
    We had previously projected, as you already know, that at the current rate of spending, the uncommitted balance in the trust fund would be depleted around July 1 of this year. However, as we have all recently learned, the revenue collected through December 1996 will not be transferred to the trust fund without a change in legislative authority.
    At this time, the uncommitted balance in the trust fund is $1.9 billion. That is all we have left for the remainder of the 1997 fiscal year. Funds for the FAA capital programs will be depleted in March at the current obligation rates.
    Unless Congress acts promptly to reinstate the taxes, the impact on the FAA, and particularly its capital programs, will be imminent and also severe. In light of the situation, it is incumbent upon us to carefully consider our options and to move forward in a way that is both prudent and responsible.
    Let me be more specific. Of the FAA's 1997 appropriation of $8.6 billion, $5.3 billion was to have come from the trust fund and the remainder from the general fund. The uncommitted trust fund balance for all of 1997 was $3 billion. As of January 31, $1.1 billion had been obligated, leaving—as I earlier stated—an uncommitted balance of $1.9 billion in the fund.
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    If the FAA is to live within trust fund limits and retain all its air traffic controllers, its regulatory, safety, and security staffs—basically its essential operations—through the end of the year absent the reinstatement of the ticket tax, we find ourselves now with only $500 million to spend on capital programs and research for the remainder of the year, about one-quarter of the normal amount.
    This $500 million is what we would have available for FAA capital programs, such as airport safety and security improvements, safety and security equipment purchases, and research efforts. The amount such programs normally obligate in 2 months would be the total available for the rest of the fiscal year. That means, of necessity, severe limits on new obligations.
    Pending a review of all outstanding and anticipated obligations for capital, no new contracts or grants will be entered into. We have begun work to prioritize both contracts under our facilities and equipment programs and airport grants. Safety and security will, of course, be our top priorities in making these assessments.
    Let me also say that in our airport programs we have already announced approximately $338 million in projects at airports throughout the country for which grant agreements have not yet been signed. Given the shortfall in funding, we have to evaluate these announced but not yet awarded grants also, to determine whether or to what extent we can proceed with funding in individual cases. And we are working to develop specifics at this time.
    We are aware this course of action is painful, but because our operational functions are our first priority, if the taxes are not restored, we do not believe we have a choice. Furthermore, the FAA cannot delay in taking these preliminary steps and reviews of all programs are already underway.
    Interrupting funding of the FAA's capital programs also has repercussions beyond the FAA much like a ripple effect. Direct benefits provided for millions of people who rely on air travel each year will be interrupted, but so also will be aviation and related industries which contribute almost 6 percent of our gross domestic product and employ nearly 9 million people.
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    Before closing, Mr. Chairman, let me reiterate that we are here today to urge quick action to reinstate the aviation excise taxes and renew Treasury's authority to transfer the receipts into the trust fund. I have tried to give you a feel for what absence of doing that could mean to the FAA and to the users of the system. It does mean serious consequences for air travelers, delays caused in bringing online much-needed modernization programs that indeed are needed to enhance the overall efficiency, system, and system capacity.
    That concludes my prepared statement.
    [The prepared statement follows:]

Statement of Hon. Louise Frankel Stoll, Assistant Secretary, Budget and Programs, and Chief Financial Officer, U.S. Department of Transportation; Accompanied by Hon. Monte Belger, Acting Deputy Administrator, Federal Aviation Administration

    Mr. Chairman and Members of the Committee:
    I welcome the opportunity to appear before you to discuss the solvency of the Airport and Airway Trust Fund. Joining me today is Monte Belger, Acting Deputy Administrator of the FAA. We appreciate the Committee's timely decision to hold this hearing as it is essential that Congress act quickly to renew the aviation excise taxes and extend Treasury's authority to make transfers to the Trust Fund in order to prevent unacceptable funding conditions in aviation, one of the nation's most significant industries.

Airport and Airway Trust Fund Balance

    For nearly three decades the FAA has been funded largely by aviation excise taxes through the Airport and Airway Trust Fund. These include partial funding for FAA operations and full funding for facilities and equipment, airport grants and research. Those taxes lapsed on December 31 of last year. We urge this Committee to support their short-term renewal as promptly as possible, and to include the authority necessary to transfer taxes paid in January and February. Every day that the taxes are not collected results in a loss of approximately $20 million in revenue to the Trust Fund.
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    We had previously projected that at the current rate of spending, the uncommitted balance of the Trust Fund would be depleted around July 1 of this year. However, we have recently learned that revenue collected through December 1996 will not be transferred to the Aviation Trust Fund without a change in legislative authority. So the uncommitted balance in the Trust Fund, $1.9 billion, is all we have left for the remainder of fiscal year (FY) 1997. Funds for FAA capital programs will be depleted in March at current obligation rates. Thus the need for Congressional action is even more urgent. Unless Congress acts promptly to reinstate the taxes, the impact on the FAA, particularly its Capital Programs will be imminent and severe.
    In light of these recent developments I have described above, we have carefully considered our options with the goal of moving forward in a manner that is both prudent and responsible.
    Let me provide a complete explanation: $5.3 billion of FAA's FY 1997 appropriation of $8.6 billion was to come from the Trust Fund, and the remainder from the General Fund and overflight fees. The uncommitted Trust Fund balance available for FY 1997 was $3 billion, and $1.1 billion had been obligated as of January 31, leaving an uncommitted balance of $1.9 billion in the Trust Fund. If the FAA is to live within Trust Fund limits and retain all its air traffic controllers and its regulatory, safety, and security staffs through the end of the fiscal year, action must be taken absent the reinstatement of the Ticket Tax. We have decided to dedicate the remaining uncommitted funds to pay for these essential operations until the fiscal year end, and to reduce drastically the agency's capital accounts to make that possible. Dedicating funds for the regulatory, safety and security staffs would leave only $500 million available for FAA capital programs, such as airport safety and security improvement grants, safety and security equipment purchases, and research efforts. The amount such programs normally obligate in 2 months, would be the total available for the rest of the fiscal year. That means severe limits on new obligations, Airport Improvement Program (AIP) grants will be halted, and existing contracts will be reviewed to determine whether stop work notices must be issued.
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    We are very aware that the results of this option are painful, but because our operational functions are our first priority, if the taxes are not restored we have no choice. The FAA will have to prepare to take steps almost immediately. Actions such as interrupting funding of FAA's capital programs could have repercussions beyond the FAA. The importance of aviation as a vital part of our nation's economy is clear. This is true not only in terms of the direct benefits provided for the millions of people who rely on air travel each year, but also in terms of the indirect benefits aviation provides. It has been estimated that aviation and related industries contributed almost six percent of our gross domestic product, and employed 8.8 million people in 1993. No one would deny the impact that aviation has on the efficiency and productivity of many businesses, in all sectors of the economy, that depend on the rapid and reliable service provided by the national air transportation system.
    The results of the anticipated shortfall in funding if the taxes are not restored will not be just a temporary cessation of work, but will instead have a ''ripple effect.'' This ripple effect can perhaps best be understood in the context of airport grants. If Trust Fund revenues are not restored, the delay in issuing AIP grants could cause airport sponsors, especially in the northern part of the country, to miss some or all of the 1997 construction season. The loss of the construction season would lead to increased costs for these projects and disruptions of existing construction schedules for phased projects. We urge prompt reinstatement of the taxes to permit the agency to continue carrying out its capital programs.
    Before closing, Mr. Chairman, let me emphasize that we are here today to urge quick action to reinstate the aviation excise taxes, not to advance a particular legislative solution for FAA's long-term financing needs. Aviation is a dynamic industry, and virtually all indicators suggest that it will continue to grow. Failure to restore the aviation excise taxes would have severe consequences for the nation's air travelers, causing delays in bringing on line much-needed modernization programs that will enhance the system's overall safety, efficiency and capacity. An immediate renewal of the authority for the Department of the Treasury to transfer receipts into the Trust Fund, and a short-term extension of the taxes would be the best way to avoid costly and disruptive interruptions to FAA and the aviation industry.
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    That concludes my prepared statement. I would be pleased to respond to any questions you may have at this time.


    Chairman ARCHER. Thank you, Ms. Stoll.
    Our last witness representing the FAA, the Acting Deputy Administrator, Monte Belger.
    Mr. Belger, you may proceed, welcome.
    Mr. BELGER. I have no statement, sir.
    Chairman ARCHER. Thank you very much, you have helped to move our timeframe along.
    The Chair intends to exercise its prerogative today of recognizing Members in reverse order of seniority.
    Mr. Hulshof.
    Mr. HULSHOF. Thank you, Mr. Chairman. I appreciate the opportunity to be here, especially the way you have brought us together in a timely fashion.
    Mr. Lubick, because my time is short as well, let me get to the quick. You said a technical defect in the Code would need to be corrected. Can you be a little more explicit about what technical defect in the Code and when it was first discovered to be a defect in the Code?
    Mr. LUBICK. The technical defect, Mr. Hulshof, is the inability, the lack of authority, to transfer airport and aviation excise taxes to the trust fund when they were collected for the purpose of going to the trust fund, but the authority lapses when the tax is no longer in effect.
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    In other words, in the other trust funds, a number of other trust funds, oil spill and so on, the fact that the tax is no longer in force does not preclude the transfer of after collected moneys to that trust fund to which they were dedicated. So it is simply—I believe this is the only trust fund where that is a problem and it arises because it was enacted that way in about 1970.
    Mr. HULSHOF. How is it that it is just now coming to light that this was a technical defect?
    Mr. LUBICK. It normally would not come to light if the tax had not lapsed. It did come to light actually at the end of 1995 because we were unable to transfer $300 million, but that was corrected by the reinstatement of the authority beginning in August 1996. So yes, at that stage when it was being reinstated and we were drafting the language for you on the reinstatement, if we had thought back to the beginning of the year and known we were only reinstating the tax for a short time, we could have corrected it at that time. We missed it.
    Mr. HULSHOF. You mentioned, sir, that earlier this week or perhaps last week a new regulation or regulations was promulgated to correct the situation. Can you elaborate on that for me, please?
    Mr. LUBICK. Yes. That is a regulation which allows the airlines to use a safe harbor of their second previous quarter for making current payments. The idea is that they do not have to be down to the exact nickel when they are paying over the deposits. Basically, they are allowed to—they are free from penalty if they contribute 95 percent of their actual liability. And the safe harbor is in case there are uncertainties as to their actual liability, they can look back to their historical experience.
    We, in our regulation, would deny them the ability to use that safe harbor if the tax was not in effect for that second previous quarter.
    Mr. HULSHOF. Mr. Lubick, as we are here somewhat close to the 11th hour, as far as you mention the capital fund being depleted by the end of March or thereabouts, how is it that it is just now coming to our attention at this late hour? Perhaps let me restate the question in another way.
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    Why was there not better communication perhaps between the departments, the IRS, the Treasury Department, so that this would have come to light much earlier than now?
    Mr. LUBICK. The system has worked virtually problem free until we had this concurrence of a number of unusual circumstances that masked it. Our estimators were not alerted to the fact that aviation taxes were not coming in because the size of the whole excise pool was within their range, so they did not understand that until they got into working out actual figures and discovered this. It was probably last week, I think, when they first came to me.
    What we are going to try to do is see if we can reexamine our procedures to make sure that, even in this very aberrational set of circumstances, there are some fail-safes that will alert us to problems like this.
    This particular problem, I can assure you, will not be one, and we will look around and see if there are other problems under whatever aberrational circumstances we can envision might take place. But since 1970, everything has worked in a copacetic way. Here we had—the stars were ill-crossed.
    Chairman ARCHER. The gentleman's time has expired.
    Mr. RANGEL. Mr. Chairman, may I make an inquiry?
    Chairman ARCHER. Mr. Rangel, I was going to recognize Mrs. Thurman, but if she would like to yield to you.
    Mr. RANGEL. Mine is a point of inquiry, Mr. Chairman.
    Chairman ARCHER. The gentleman is recognized.
    Mr. RANGEL. I was just going to ask, Mr. Chairman, since you chair as a result of the seniority system, could you share with us why you are dispensing with it at this point, as relates to the recognition of our Members?
    Chairman ARCHER. Because the Chair has decided to use that prerogative. I think it is fair to, once in a while, start from the bottom up instead of from the top down. So the Chair will——
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    Mr. RANGEL. I accept that, since you are already on top.
    Chairman ARCHER. Mrs. Thurman.
    Mrs. THURMAN. Mr. Chairman, with that discussion, I am not so sure I should not yield my time to the Ranking Member, Mr. Rangel.
    Chairman ARCHER. The gentlelady is free to do that, if she wishes to do so.
    Mrs. THURMAN. Ms. Stoll, in your testimony there were some issues you talked about because of the depletion of funds and that you would spend your dollars basically, I guess, on operating just to keep the general, every day kinds of things going. But you also mentioned there were existing contracts that would be reviewed to determine whether we would have to stop work and notices to be issued.
    Could there potentially be a cost related to that?
    Ms. STOLL. Potentially, there is a cost related to it. The day-to-day operations are, of course, the air traffic control system and keeping the airlines flying safely. If we are forced to, for instance, not take advantage of options to existing contracts, options for which we have to make determinations in this period of time, obviously to reestablish, to set back in place again those same contracts for important research or equipment, safety equipment will be costly.
    Delays of any kind in a situation like this are bound to have a repercussion. We cannot give you a dollar amount now, but that is part of what we are trying to do because, in a way, it is a kind of a triage as we see what our options are and which contracts will be the least costly to delay, which are the most critical to have accomplished not just from a cost point of view.
    Mrs. THURMAN. How many projects do you believe are out there today of these funds that are not available that would be helping? I mean, how many airports might we be talking about that are trying to have updated safety, security, wind shear?
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    Ms. STOLL. Let me ask my colleague, Mr. Belger, to answer this.
    Mr. BELGER. Well potentially, it is every airport in the country. I suspect there is some type of either airport grant program activity or FAA facilities and equipment type of activity at airports throughout the country. So it is virtually and potentially every airport in the country.
    Mrs. THURMAN. So potentially we are really putting some of our travelers out there at risk if we are not diligent in our work in getting this reinstated?
    Mr. BELGER. If we do not fix this problem, you are absolutely correct.
    Mrs. THURMAN. Thank you. If Mr. Rangel would like, he could have the rest of my time. I would yield my time to you, Mr. Rangel.
    Thank you, Mr. Chairman.
    Chairman ARCHER. Mr. Weller may inquire.
    Mr. WELLER. Thank you, Mr. Chairman. As one of the new guys, I appreciate the opportunity to ask questions in this hearing. Thank you very much.
    I would like to direct my first question to Mr. Lubick. I am trying to get a handle on essentially a $1.2 billion matter. When did you discover that somehow $1.2 billion had fallen through the cracks and ended up in the wrong place?
    Mr. LUBICK. Last week, Mr. Weller. Basically, the total amount of excise taxes that came in in the quarter was about $13 billion. As I indicated, the receipts from alcohol, tobacco, gasoline were higher than we had forecast.
    I guess what happened, as I understand it, the Joint Committee staff was talking to somebody in the Service and asked some questions which led to it. I just discovered it when——
    Mr. WELLER. So from what you are saying, your own agency did not—your own department did not catch this mistake, but it was actually as a result of questions from the Joint Committee?
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    Mr. LUBICK. I believe that is right.
    Mr. WELLER. It is my understanding that previously there was some sort of clerical error that occurred affecting the Highway Trust Fund. What are the similarities between that previous clerical error and this particular error that affects the Aviation Trust Fund?
    Mr. LUBICK. The similarities are that there was an error, but beyond that I think this is a different situation. That was an error of misallocation of funds that came in to the various States. This is a situation in which the actual error was the deposit of money from the general fund into the trust fund, a deposit that was not supported by receipts from the tax. But behind that was a failure to know that the taxes were not being deposited. Behind that was the fact that, under the regulation, a safe harbor was plausibly being granted which we as a matter of policy would not grant if we were looking at the situation ab initio or de novo.
    Therefore, by that situation not having been called to our attention, we did not have the chance to do what we are doing this week, which is changing that regulation to change the rules of the game under which the airlines operate to preclude, in any event, their having the use of funds which should properly belong to the trust fund.
    Mr. WELLER. So you feel then that this new regulation is going to give you the checks and balances to prevent this from happening again?
    Mr. LUBICK. It will prevent this situation from recurring.
    Mr. WELLER. I see my time has expired.
    Thank you, Mr. Chairman.
    Chairman ARCHER. Mr. Hayworth.
    Mr. HAYWORTH. Thank you, Mr. Chairman, and thanks to the panel for coming today to talk about this problem.
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    Acting Secretary Lubick, I think I need to pursue more of what my colleague from Illinois has talked about. When a mistake is made and it needs to be rectified, we can all appreciate that. And I do not know if this comes under the definition of culpability or responsibility. Let us use the latter, responsibility.
    Was this a combination of a mathematical problem, if you will, a problem of computation, or was this more of a people problem, communication specifically among those who are supposed to know and alert people? How would you classify it?
    Mr. LUBICK. I think there was a failure of a system that normally worked perfectly properly. In this situation, when the IRS personnel that read the regulation as it applied quite literally allowed the airlines to keep the funds essentially for a quarter, there was a personal human failure of judgment in not bringing that to the attention of responsible officials to rectify what could be an unintended way of adopting a withholding and payment policy.
    Mr. HAYWORTH. Let us follow that for 1 second, Mr. Secretary. Because people in the Sixth District of Arizona, indeed people nationwide, read press accounts about problems with computers at the IRS, and I do not want to get far afield but I think it is symptomatic of, in part, what we are discussing here today.
    Are the lines of communication such that officials of Internal Revenue are keeping you apprised of the problems that develop? Because what I think is so dangerous for us is to have a lack of communication. This may have been the first time since 1970 we have had this occurrence here, but there is such a concern on the part of the American public with the IRS and its very difficult and demanding job, in terms of getting information to people.
    Are you satisfied that officials at IRS are properly notifying you of all the implications of their computations?
    Mr. LUBICK. We are never satisfied, Mr. Hayworth, unless we get 100 percent of the information we want to get. We do not always get 100 percent of the information we want to get. I think this was an aberrational situation. These matters, there are hundreds and hundreds and hundreds of these matters that have to be processed by the IRS and there is an intake. Every matter cannot come to the Commissioner of Internal Revenue to pass on.
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    It is important we alert the people who are at the intake level that if things appear to be unusual or out of line, that they communicate that fact to their superiors and, in some cases, people are not going to appreciate that this is a situation that is out of line. I think it is regrettable that it happened. We are trying to do our best to make sure these things do not happen.
    A lack of communication between the IRS and the Treasury Department as to hot questions or difficult questions is not normal. It is not normally a problem we face. This is unusual, in my experience in similar jobs in the Treasury three times. This is a first for me.
    Mr. HAYWORTH. I appreciate your coming to grips with this today and sharing some time with us and, Mr. Chairman, I thank you for the opportunity to ask these questions.
    Chairman ARCHER. Mr. Kleczka.
    Mr. KLECZKA. Mr. Chairman, I will pass to a more senior Member on the Committee.
    Chairman ARCHER. Mr. Cardin.
    Mr. CARDIN. Let me thank my friend from Wisconsin for passing.
    Mr. Lubick, I want to follow up on the questioning here. If I understand, the failure to transfer this money, has that affected any of the collections of the dollars that are owed to this country under the ticket tax?
    Mr. LUBICK. We have or will shortly have all of the money. Some of it will be at a later time than we could have had it, had we had an opportunity to revise this regulation. But the ultimate dollars collected will be all of those that the statute provided up to the date of its lapse.
    Mr. CARDIN. So the Treasury will receive the moneys that are due. If I understand, the problem was created because of the lapse in the ticket tax which is the primary funding source for the Aviation Trust Fund?
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    Mr. LUBICK. That is the original source of the train of events, the lapse in December 1995.
    Mr. CARDIN. If there was no lapse in that revenue source, we would not have the problem that we are referring to today?
    Mr. LUBICK. That is correct, sir.
    Mr. CARDIN. I am referring to table 3, which was prepared by the Joint Tax Committee on the revenues. I do not know if you have it in front of you or not, but I think Ms. Stoll was referring to it, also.
    If I understand it, your obligations through the rest of this year are about $3.25 billion for the normal operations of the FAA. Is that the amount that you need in order to cover the day-to-day operations of the agency?
    Ms. STOLL. We are checking to find that report.
    Mr. CARDIN. It is page 28, it looks like, on the report that we are looking at. It comes after page 27.
    The cumulative amount that you are going to need through the end of the year appears to be approximately $3.24 billion.
    Ms. STOLL. I believe this was a chart we prepared. And so we will take you through this now, if you want us to.
    [Background information on Federal air transportation excise taxes and the Airport and Airway Trust Fund prepared by the Joint Committee on Taxation is being retained in the Committee's files.]
    Mr. CARDIN. You have $1.9 billion remaining in the trust fund and $2.1 billion in general funds for a total of $4 billion. You need to guarantee at least $3.25 billion in order to finance the normal operations of the agency?
    Ms. STOLL. That is correct because that would cover the operational end of it.
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    Mr. CARDIN. Operational?
    Ms. STOLL. That is right, the operations, but that leaves $500 million for the entire rest of the year for the capital.
    Mr. CARDIN. That is the point I am bringing up. You do not have adequate funds for facilities and equipment, research and development, and airport improvement. That is not included in the $3.25 billion?
    Ms. STOLL. That is correct.
    Mr. CARDIN. If you would have transferred all the funds that you were eligible to have collected, you would have had another $1.2 billion in the trust fund but you still would have run out of money in these other accounts before the end of this fiscal year; is that not correct?
    Ms. STOLL. Had we been spending and obligating at the normal rate, we would have been able to have gone until July, we estimated, across the board for all of our services.
    Mr. CARDIN. And if Congress would not have extended the tax by July, you would then, sometime before July, have to start calling in contracts and making arrangements to terminate with minimal disruption to the program and cost to the Federal taxpayer for prematurely terminating contracts?
    Ms. STOLL. I think prior to that, a hearing like this would have been held, but new arrangements would not have had to happen at quite the accelerated pace with which this has happened.
    Mr. CARDIN. So it would not have been in February, our meetings might have been a couple of months later?
    Ms. STOLL. Right.
    Mr. CARDIN. But we still would have had the same problem before the end of the fiscal year?
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    Ms. STOLL. That is right.
    Mr. CARDIN. Could you just briefly tell us, what type of projects are affected by this? What is in the facilities and equipment account and the airport improvement account? What type of projects are we talking about, that are jeopardized?
    Mr. BELGER. Three major categories: Facilities and equipment—those are the moneys that the FAA uses to pay for the development and the purchase of new equipment. All of the air traffic control modernization equipment which we are now on the verge of being very successful with is paid for out of that account. All of the installation money is paid for out of that account.
    The second major area is the airport improvement program. These are grants that are given to airports out of the trust fund moneys. Those grants go for things like security improvements at airports, safety improvements at airports, runway and taxiway repairs, the construction of new runways, new taxiways, the construction of terminal buildings and airport expansion types of projects, deicing equipment, a whole range of airport safety, security, and capacity projects.
    The third area is the research and development account, and those moneys go for the research activities that the FAA has responsibility for. Those range from everything from airport security research activities to aging aircraft research activities, noise research and modeling activities, and a variety of others. But that is basically what the money goes for.
    Mr. CARDIN. Thank you.
    Chairman ARCHER. The gentleman's time has expired.
    Mr. Portman.
    Mr. PORTMAN. Thank you, Mr. Chairman. First, I want to say that I commend you for having this hearing and doing so in an expeditious fashion, and I do support going ahead with renewal of the aviation excise taxes and extending Treasury's authority to make the proper transfers into the fund.
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    Let me get back, Mr. Lubick, if I can, to some of the earlier questions with regard to how this happened, and I want to do so because I think it is instructive for us as we move forward.
    You have had a distinguished career of public service at the Treasury, and you made an interesting comment earlier. You said that, in your experience at Treasury, this kind of lack of communication between IRS and the Treasury is not normal, and this is a first for you. Having spent 6 months as Cochairman of the Commission on Restructuring the IRS, and Bill Coyne is also on that Commission, I cannot claim the kind of expertise and experience that you have had, but certainly I would say it is surprising to hear someone say this is a first, to have this kind of communication breakdown because we have seen it on a number of occasions where we do not have the kind of communication we would like to see between the Service and the Treasury Department.
    Recently, we have also seen with Social Security, a lack of communication as to where funds are being deposited. In essence, in my view, the IRS process is subsidizing Social Security because the IRS cannot tell us what funds are going from the payroll tax to Social Security and what funds are coming in through income tax.
    I guess my first comment is simply that I was surprised to hear you say that, if you mean that in a blanket sense. If you mean it in terms of this specific problem, perhaps that would be more understandable. Do you have a response to that?
    Mr. LUBICK. Generally, I have been operating in the tax policy area and when there is a tax policy problem, the organization of the Service is such that they share it with us. We do review all their published rulings. We participate with them in writing the regulations. When taxpayers——
    Mr. PORTMAN. But operationally.
    Mr. LUBICK. Operationally, rarely does our office get involved in that sort of thing.
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    Mr. PORTMAN. So maybe the reason this is new is that on the tax policy level perhaps there has been good communication. But in terms of the operational side of it, and this would be a case in point, there appears to be not only a lack of communication between Treasury—which is, after all the political branch here and the oversight branch—and within the IRS.
    You say in your testimony, in fact, that what should have happened—at least this is what I infer from what you said—is that someone at the IRS who made a decision as to the applicability of the safe harbor provision should have kicked that upstairs to someone at the IRS. And you indicate that if higher-ups at IRS had known about it, then a $1.2 billion mistake would not have been made. Is that your sense?
    Mr. LUBICK. I am sure if this had been kicked up to the Chief Counsel of the Internal Revenue Service, he would have been on the telephone to me in an instant to say that this regulation needs revision.
    Mr. PORTMAN. You also said that every matter cannot come to the Commissioner to act on. My only response to that would be I do not think this Committee or the taxpayer is expecting every matter to go to the Commissioner. He or she is overburdened as it is, in part because of our oversight here. But certainly we are expecting that on these kinds of decisions.
    But it really is incredible to me that a relatively low-level decision, I take it from what you said, was made about $1.2 billion not going into the trust fund, in essence, although it was credited as such by Treasury, and that that was not kicked upstairs.
    I guess what I would say is, and I see my time is running out, I know you believe that the modification of the safe harbor regulation will help. You say it will never happen again. Those were your words earlier. What I would encourage Treasury to do is to look more broadly at the question of communication within the Service going up, so that this sort of thing cannot happen. And obviously, between Treasury which has the oversight responsibility and the specific responsibility here to properly credit the fund.
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    Mr. LUBICK. We are working with your Commission, as well, to improve those areas, so we certainly heed your words.
    Mr. PORTMAN. We appreciate your working with us, and maybe this is just another example that will encourage us to remedy a larger problem that many of us, I think, would agree exists.
    Thank you for your testimony.
    Chairman ARCHER. Mr. Collins.
    Mr. COLLINS. I will pass, Mr. Chairman.
    Chairman ARCHER. Ms. Dunn.
    Ms. DUNN. No questions, Mr. Chairman.
    Chairman ARCHER. Let me try the other side here, maybe we can get some takers.
    Mr. Coyne.
    Mr. COYNE. Thank you, Mr. Chairman.
    Mr. Lubick, what would the effect have been if we had extended through the Small Business Job Protection Act of 1996 the statutory authority for transferring money from the general fund to the Airport and Airway Trust Fund? Would we have run into this problem had we done something in that act?
    Mr. LUBICK. Well, we could have run into it because the safe harbor regulation was still in effect, but the authority that we are asking for, that we had wished had been in the earlier enactment, would allow us to transfer the money which we had after the lapse of the tax.
    I regret to say we would not have known about this particular underpayment that was based upon the second previous quarter, which was a zero safe harbor for the airlines.
    Mr. COYNE. So that would not have alleviated the situation that we find ourselves in now?
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    Mr. LUBICK. It would not have done anything to accelerate the payment, but simply give us the authority to make the transfer.
    Mr. COYNE. What if Congress were to pass stand-alone legislation that would temporarily extend statutory authority for transferring the money to the trust fund from the general fund? Could we do that?
    Mr. LUBICK. Yes, if you did that, we would be able to put the $1.2 billion in.
    Mr. COYNE. Do you know of any reason why we would not do that?
    Mr. LUBICK. I think that should be done. I also think that we should renew and continue the ticket tax in effect until September 30, at least, so that we can maintain the continuous flow of funds into the trust fund, which it needs to continue its very vital operations.
    Mr. COYNE. So we, in Congress, have the ability to correct the problem even now?
    Mr. LUBICK. Yes, sir.
    Mr. COYNE. Thank you.
    Chairman ARCHER. Mr. English.
    Mr. ENGLISH. Thank you, Mr. Chairman.
    Mr. Lubick, I have been intrigued by some of your testimony today, and I appreciate your recommendation to the Committee that it give you the authority to transfer back the $1.2 billion, and also that it look to a renewal of the excise tax. Recognizing that you have indicated there are going to be new regulations in place, I am still intrigued. Your comment that your examiners were not alerted to the lack of revenues collected, I wanted to follow through on Mr. Hayworth's line of questioning.
    Is the IRS specifically required to inform the Treasury in instances like this of a shortfall of revenue? And is it a requirement that they do so promptly?
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    Mr. LUBICK. The IRS examiner that arrived at this conclusion, which was a plausible reading of the regulation, would not have called it a shortfall because the ruling which was sought by the airline industry and which was contended for by them as their reading, and which was accepted under the reading, was what they were entitled to do.
    Mr. ENGLISH. I understand your point, but let me follow through though from a different direction. In making a ruling that has obvious immediate revenue impact, is the IRS required to inform you?
    Mr. LUBICK. I do not know of any absolute requirement. In this type of situation, there was going to be a reckoning at the close of the quarter, in any event, so there would have—there was a procedure set up to make sure the information got there. The problem arises out of a delay in the receipt of the revenue, and then the consequent disability of the Treasury because of the statute to repay it.
    Mr. ENGLISH. I understand, Mr. Lubick, and you have in place a system of revenue measurement and internal controls that obviously informs you when there is a potential problem. Does that system conform to GAGAS, general accepted government auditing standards, or something similar?
    Mr. LUBICK. Mr. English, I cannot answer that question. I assume it does, but that is not within my realm of experience or responsibility.
    Mr. ENGLISH. And I appreciate that. Let me just say that as a former internal auditor in a midsized city with a $60 million budget, which obviously pales in comparison to the numbers we are talking about, I have little experience in this and it mystifies me that a problem like this could evolve, even if it was an unanticipated one.
    What I would like you to do is to provide our Committee with a description of the existing internal controls, and I would like an opportunity to examine that. I appreciate your testimony today, and the testimony on the part of the witnesses, and I have no further questions.
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    Thank you.
    [The following was subsequently received:]

September 19, 1997

The Honorable Philip S. English
U.S. House of Representatives
Washington, D.C. 20515

    Dear Mr. English:

    This letter responds to your request for a description of the Department of the Treasury's internal controls on trust fund excise tax collections and transfers. Before discussing these matters, however, I apologize for the delay in our response. As described more fully below, various offices in the Treasury Department are responsible for excise tax collections and transfers. Thus, preparation of a complete and accurate description of current procedures and problem areas and the development of appropriate remedies required substantial assistance from and coordination with those offices, precluding an earlier response to your request.
    In our response, we will first outline the mechanisms by which excise taxes are collected and transferred to the various trust funds under current law and administrative procedures. We will then describe the manner in which certain problems contributed, in two recent cases, to incorrect transfers to the Highway Trust Fund and the Airport and Airway Trust Fund. Finally, we will describe the actions we have already taken, or will soon take, to remedy these problems and prevent a recurrence of the errors.

Collection and Transfer of Excise Taxes
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    The Internal Revenue Service (IRS) collects approximately 50 separate excise taxes on behalf of the federal government.(see footnote 6) In FY 1996, the IRS assessed approximately $54 billion of excise tax liabilities. The excise taxes are initially deposited with Treasury in the general revenue fund. Treasury then transfers the appropriate amount (under current law approximately half of the total) to various trust funds that have been established by statute. The remainder is retained in the general revenue fund and is not earmarked for any specific purpose. The Trust Fund Code (Internal Revenue Code sections 9501 et seq.) establishes eleven trust funds.(see footnote 7) It also prescribes the extent to which any specific excise tax is transferred to a trust fund and the fund to which the tax is to be transferred.

    Taxpayers remitting excise taxes to the IRS are generally required to report those taxes on a quarterly excise tax return (Form 720). Most of the tax is actually remitted, however, through Federal Tax Deposits (FTDs) on a semimonthly basis. Under the FTD system, taxes are remitted to the Department of the Treasury through financial institutions and Federal Reserve Banks. The depositor must provide the following information with the deposit: the taxpayer identification number of the depositor, the amount of the deposit, and the category of tax to which the deposit relates. For this purpose, all taxes deposited by FTD are divided into 11 categories, one of which consists of the approximately 50 separate excise taxes that are reported on Form 720.(see footnote 8) The information provided with the deposit is reported to the IRS and posted to the taxpayer's master file.

    The current procedures limit the burden imposed on depositors by not requiring them to identify with each FTD which of the separate taxes within a category are being deposited. Thus, when a deposit relates to a category that includes more than one specific tax, the IRS is not able to identify the specific tax or taxes that are being deposited.
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    Detailed information regarding liability for each specific excise tax is provided on the Form 720. Depending on the specific taxes for which a taxpayer is liable, the Form 720 must be filed within either one month or two months after the end of the quarter. The information reported on Form 720, including information regarding the taxpayer's liability for each specific excise tax and the amount of any remittance received with the Form 720, is also posted to the taxpayer's master file.
    After information regarding liability for specific excise taxes is posted to taxpayer master files, the IRS aggregates this information to determine the total liability for each excise tax. In the case of excise taxes dedicated to a trust fund, the total tax liability for the quarter is then reported to the Financial Management Service (FMS), the Office of Tax Analysis (OTA) within the Department of the Treasury's Office of Tax Policy, and the program administrator. This occurs approximately three to four months after the return due date for the quarter.
    Excise tax liability is reconciled with deposits and other payments in the taxpayer's master file. If there is a discrepancy between tax liability and the amount paid or a failure to satisfy the minimum deposit requirements, a notice is sent to the taxpayer. If the taxpayer's response to the notice is not satisfactory, the case is turned over to Collections. Before FY 1997, information concerning underpayments of tax liabilities and underdeposits was not provided to either FMS or OTA. However, beginning in FY 1997, the IRS quarterly trust fund certifications will report information on excise taxes actually received in the Treasury.(see footnote 9)

    Section 9601 of the Code provides that excise taxes dedicated to a trust fund must be transferred at least monthly from the general revenue fund to the trust fund on the basis of estimates made by the Secretary of the Treasury. Then, proper adjustments must be made in the amounts transferred to the extent prior estimates were in excess of or less than the amounts required to be transferred. This statutory framework is intended to ensure that dedicated excise taxes are transferred to the appropriate trust funds promptly after their receipt and that the proper amount is ultimately credited to each fund.     In the Department of the Treasury, OTA is responsible for making the estimates required by section 9601. OTA bases these monthly estimates on historical data, statutory and regulatory deposit and payment requirements, and the forecast regarding the level of taxable activity during the relevant period. Actual deposits of excise taxes are not taken into account for this purpose because, as noted above, depositors do not identify the specific excise taxes to which their deposits relate.
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    OTA's monthly estimates are forwarded to FMS. FMS transfers the estimated receipts from the tax receipt accounts in the general revenue fund to the appropriate trust fund and prepares accounting documentation in the form of a journal voucher, which is forwarded to the Bureau of the Public Debt (BPD). BPD also receives the IRS certification of total tax liability (or, beginning in FY 1997, actual receipts) on a quarterly basis and adjusts the trust fund
balance through a journal voucher to reflect the actual tax liability (or, beginning in FY 1997, actual receipts) for the quarter.
    BPD manages the trust funds and transfers amounts from the trust funds to the agencies administering trust fund programs based on their financial requirements. In addition, BPD makes trust fund investments in accordance with the authorizing statutes and maintains the trust funds' books. Recent Transfer Problems.
    The incorrect transfer to the Highway Trust Fund was the result of a clerical error. In 1993, OTA asked IRS to change the format in which it reported liabilities for excise taxes dedicated to the Highway Trust Fund. Instead of combining all liabilities in a single column, IRS was asked to report amounts dedicated to the trust fund's Mass Transit Account (two cents of the tax on each gallon of highway motor fuel) in a separate column. IRS made this change beginning with the report for the quarter ending June 30, 1993. Believing that coordination with FMS had already taken place, IRS did not notify FMS of theports to make the required quarterly adjustments to the Highway Trust Fund, but did not take into account liabilities reported in the newly separated Mass Transit Account column for the period April 1-December 31, 1993. Consequently, the FMS adjustments understated the Highway Trust Fund's income for the period by approximately $1.6 billion.
    The incorrect transfer to the Airport and Airway Trust Fund resulted from extraordinary and unique circumstances. As a result of the failure to reach a budget agreement for fiscal year 1996, the aviation excise taxes lapsed at the end of 1995. The taxes were then renewed temporarily from late August 1996 until the end of the year, when they again lapsed. During the renewal period, the deposit regulations contained a safe harbor provision that allowed deposits to be based on tax liability in the second previous quarter (adjusted, if necessary, to reflect subsequent increases in the tax rate). The airlines, after obtaining informal guidance from the IRS (in the form of a letter responding to an Air Transport Association inquiry), relied on this safe harbor to base their deposits for the fourth quarter of 1996 on their tax liability in the second quarter of 1996 (a period when the tax was not in effect). Thus, the airlines deposited only a very small amount of their liability for the renewal period. OTA was not aware of the unpublished guidance provided by the IRS to the Air Transport Association, nor of the airlines' actions in depositing a very small amount of taxes. Therefore, OTA assumed that deposits would follow normal, historic patterns and estimated that approximately $1.4 billion in aviation excise taxes would be received in the fourth quarter of 1996. As a result, FMS transfers to the trust fund, based on OTA's estimates, exceeded actual fourth quarter receipts by approximately $1.2 billion.
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Treasury's Corrective Actions

    The Highway Trust Fund and the Airport and Airway Trust Fund errors have both been corrected.(see footnote 10) We have also reviewed OTA, FMS, BPD, and IRS procedures for accounting for excise taxes and transferring those taxes to the various trust funds, so as to prevent similar errors in the future.

    Our review of this area indicates that, in the extraordinary and unique circumstances involved, the immediate and narrow cause of both errors was a lack of communication among Treasury offices. Accordingly, we are taking the following actions to improve communications between Treasury offices and prevent future occurrences of similar problems.
    1. Representatives from all offices involved in the collection and transfer of trust fund excise taxes (IRS, FMS, OTA, and BPD) will evaluate and suggest improvements in communications among those offices. The specific deficiencies that led to the recent errors will be addressed by adoption of the following procedures: a. IRS will provide OTA with copies of all written excise tax guidance (taxpayer information deleted) that it provides to persons outside the Executive branch at the same time the guidance is released. b. IRS will provide FMS and BPD with explanations of changes in IRS's reporting format. 2. Responsibility for trust fund accounting was transferred from FMS to BPD on March 10, 1997, in order to centralize the government's management of its outstanding debt obligations. 3. Procedures have been reviewed, strengthened, and documented to control the flow of communications between FMS, which transfers money from the general revenue fund to the trust funds, and BPD, which invests the funds in government securities. 4. As noted above, beginning in FY 1997, IRS trust fund certifications will report information on excise taxes actually received in the Treasury (rather than the amount of taxes assessed). 5. The trust funds will be audited annually by an independent accounting firm in accordance with the Chief Financial Officers Act. The audit for fiscal year 1996 is being conducted by Price Waterhouse.
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    Thank you for your interest in the trust funds and Treasury's trust fund collection and accounting procedures. I hope this information will be helpful to you as we and the Congress continue our work to provide a stable, long-term source of financing for Federal trust fund programs.

Donald C. Lubick
Acting Assistant Secretary (Tax Policy)

CC: The Honorable Bill Archer
    The Honorable Charles B. Rangel


    Chairman ARCHER. Mr. Watkins.
    Mr. WATKINS. I have no questions, Mr. Chairman.
    Chairman ARCHER. Mr. Lewis.
    Mr. McDermott.
    Mr. Rangel.
    Mr. RANGEL. Thank you, Mr. Chairman. In the spirit of bipartisanship, I want to congratulate you for this innovative way of making inquiries by the Members. After you and I have reviewed the rules, I assume this is not something we will want to try later, unless we change the rules.
    Having said that, from what I have heard asked and from what I heard of the responses, it appears there was a bookkeeping error made by your department, Mr. Lubick.
    Mr. LUBICK. The error was in crediting money to the trust fund that should not have been credited, and that error has to be reversed.
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    Mr. RANGEL. The answer will be, Yes, there was a bookkeeping error and, as a result, I think you are saying it is corrected and that things have been locked into place so something like this cannot happen in the future?
    Mr. LUBICK. Yes, sir.
    Mr. RANGEL. And I think it is safe to say that if this Committee had not allowed the law to expire, you never would have had the problem in the first place?
    Mr. LUBICK. Yes, sir.
    Mr. RANGEL. It has been great having you here to explain all of this. [Laughter.]
    Thank you, Mr. Chairman.
    Chairman ARCHER. Mr. McCrery.
    Mr. MCCRERY. No questions.
    Chairman ARCHER. Mrs. Johnson.
    Mrs. JOHNSON. No questions.
    Chairman ARCHER. Mr. Herger.
    Mr. HERGER. No questions.
    Chairman ARCHER. Mr. Johnson.
    Mr. JOHNSON. Thank you, Mr. Chairman.
    You made the statement that there is no requirement, Mr. Lubick, for the IRS to talk to you in any specific timeframe. Do they talk to you on a general basis?
    Mr. LUBICK. They talk to us all the time, Mr. Johnson. What I said is I was not aware of a formalized rule that required—I mean, obviously there are some things that we have to be notified of. I cannot list them. But in general, we work very closely with the IRS and we have scheduled weekly meetings between our office and the chief executives of the Internal——
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    Mr. JOHNSON. Weekly meetings. So then it should not have taken 4 months for you to find out that something like this happened if they made a ruling of that nature.
    Mr. LUBICK. Mr. Johnson, the people that we meet with were not informed. It did not——
    Mr. JOHNSON. Let me ask you a further question. Do you have an IG system in the Treasury? An IG system, Inspector General system.
    Mr. LUBICK. Yes, sir.
    Mr. JOHNSON. Do they oversee the IRS as well?
    Mr. LUBICK. Yes, sir.
    Mr. JOHNSON. Are they involved in this issue?
    Mr. LUBICK. No, sir.
    Mr. JOHNSON. Why?
    Mr. LUBICK. I do not think there is any basis for involving the Inspector General. There has been no—there has not been wrongdoing.
    Mr. JOHNSON. Well, if you have a malfunction in your system—and you just told Mr. Rangel it could happen again—would you not think you would want the IG to go look at it and figure out what is wrong with your system?
    Mr. LUBICK. I do not think this is generally a systemic error. I think it is a situation where an IRS official ruled on a legal matter that was not terribly sensitive as a matter of policy if one were constructing a set of rules.
    Mr. JOHNSON. So a couple of billion dollars is not a sensitive issue in your case?
    Mr. LUBICK. Mr. Johnson, in fairness, the issue is not $1.2 billion, because it was a question of—because that money is in the general fund. The government has the money. It has not lost $1.2 billion. The money was not paid timely. So the question is, should this particular official have alerted his higher-ups that this money was going to be later than anticipated.
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    Mr. JOHNSON. Yes, but you are saying that because it is later—it is not that much later, is it, 3 months? Is that not what it is?
    Mr. LUBICK. That is about correct.
    Mr. JOHNSON. How can you say it is going to impinge air safety if we do not do something about it?
    Mr. LUBICK. It is going to impinge on air safety because now that we have the money, the statute has lapsed our authority to put it where it belongs. Therefore, it requires a grant from you of legislative authority to let us take this money that is swimming around in our coffers and——
    Mr. JOHNSON. Yes, but what you are telling me is you cannot move money around, and you and I both know you do it all the time.
    Let me take a question to the FAA before my time runs out, please. Can you tell me whether or not you prioritized your system to the point where if you were not going to have the dollars, you could protect the system without failure?
    Ms. STOLL. Yes. The answer is yes, we can protect the safety and security of the air traffic control operations. But the $500 million, which is all we would have left for the entire capital investment until the end of the year, means that many of the pieces of equipment and the systems development that relate to safety and security would be stopped. Obviously, we would do what we could to keep the most critical ones going. But that is less, just about one-quarter of what we would normally have to spend on these in the course of a year.
    Mr. JOHNSON. Is your organization opposing or approving privatization of some airports; i.e., management contracts to run airports?
    Ms. STOLL. I am afraid I am not prepared to answer that at this time.
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    Chairman ARCHER. The gentleman's time has expired.
    Mrs. Kennelly.
    Mrs. KENNELLY. Thank you. Mr. Lubick, it is the float we are talking about, is it not, in layman's terms? We have not lost any money.
    Mr. LUBICK. Exactly, Mrs. Kennelly, it is the float.
    Mrs. KENNELLY. Thank you. Mr. Chairman, before this goes any further, I just wanted to ask you a procedural question. I have introduced some legislation concerning the taxation of frequent flier miles, which I think is germane to the subject that we are discussing today. I know we have this bill coming up fairly soon and I was just wondering, will this bill be open for amendments?
    Chairman ARCHER. Under the Committee rules, all bills that we consider are open for amendments. However, I would strongly discourage any amendments because of the urgency of the passage of this bill and the need to keep it clean. I am terribly concerned about what might happen in the Senate already. So the Chair would be constrained to oppose any amendments, but amendments procedurally would be in order under the rules of the Committee.
    Mrs. KENNELLY. Chairman Archer, I ask this question because the taxation of frequent flier miles is really going to be a nightmare for the taxpayer. I wonder, do you think there will be a possibility for me to bring it up later in the year?
    Chairman ARCHER. Certainly when we get into reconciliation, I expect we will have a comprehensive tax bill and there will be, I assume, a lot of amendments offered at that time.
    Mrs. KENNELLY. Thank you, Mr. Chairman.
    Chairman ARCHER. Does the gentlelady yield back her time?
    Mrs. KENNELLY. I do. Thank you, sir.
    Chairman ARCHER. Mr. Neal.
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    Mr. NEAL. Thank you, Mr. Chairman. Mr. Lubick, I apologize for being late and you might have in your introductory remarks already touched upon the topic. Why don't you concisely explain to me exactly how this problem happened.
    Mr. LUBICK. Yes, sir. The airlines are required to pay over 95 percent of their collected excise taxes during each quarter to avoid penalties. They are allowed under our regulation a safe harbor that rather than paying over 95 percent of the actual collections, they pay over their collections in the second previous quarter. The tax expired at the end of 1995, so for the second quarter of 1995, the liability of the airlines was zero. A lookback from the last quarter of 1996, after the tax had been restored, to the second previous quarter produced a zero.
    The airlines asked for guidance from the IRS that it was appropriate for them to follow that safe harbor in the regulations of zero, and they received guidance from an official of the IRS to that effect; that they could do it.
    In the meantime, the Treasury Department, which focuses upon the allocation of excise tax receipts to the various trust funds and to the general fund on the basis of estimates, did not know of this advice and did not realize that airline money was not coming in. The reason it did not realize it is that all excise tax deposits are made in one pool during the quarter and then are accounted for on the filing of returns at the close of the quarter. The excise taxes received from alcohol, tobacco, gasoline were much higher than normal; enough to mask the shortfall in the aviation taxes.
    So not realizing that $1.2 billion of aviation taxes had not been deposited by the airlines, the Office of Tax Policy estimated and authorized a payment of $1.2 billion to the Aviation Trust Fund, having assumed it was coming in. When it was discovered it had not come in, which was just recently, the money had to be withdrawn, legally, because it was an unauthorized deposit.
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    Now the money has come or is about to come into the Treasury, and it would normally be redeposited so that the fund would be made whole for the $1.2 billion. However, with the lapse of the taxes on December 31, 1996, the authority to make transfers, even though those were moneys that were dedicated to the airline, also lapsed. Therefore, we have the $1.2 billion but we cannot put it back in the trust fund.
    Now that means the trust fund, as the FAA said, if it provides for its operations for the whole year, will not be able to make further commitments by the end of March for improvements to the system which are vital to maintain its safety.
    It is for that reason that we ask the Committee to do two things. One is to renew our authority to make the payment of the aviation taxes that related to 1996 travel to the trust fund, to restore the $1.2 billion. And further, to prevent the fund from being depleted later this fiscal year, to extend temporarily the taxes through at least September 30 so that the system can continue to operate, making the improvements that are vital, as planned. It is hoped that in budget reconciliation some further solution will arise so that we can have an uninterrupted flow of these taxes into the fund.
    Mr. NEAL. Thank you for clearing that up for me, Mr. Lubick.
    Chairman ARCHER. Mr. Lewis, we called your name earlier and would be glad to recognize you now.
    Mr. LEWIS. Thank you, Mr. Chairman, for being so kind. I am sorry I had to leave the Committee room for a moment—well, a little longer than a moment.
    Thank you, Mr. Chairman, for holding this hearing. When do you think the Committee will act to extend the taxes, Mr. Chairman?
    Chairman ARCHER. I do not know at this moment. As a result of this hearing, it is very possible we will have a markup next week.
    Mr. LEWIS. If I could further ask you, Mr. Chairman, when will you have a hearing on the airlines' idea for restructuring this tax?
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    Chairman ARCHER. I am not sure exactly what the Committee will decide as far as what it wishes to do with the ticket tax. But it would be the Chair's desire to have ultimately a formula that would be different than the current one, that would move toward, as much as possible, equity in the way the tax is levied. That was the purpose for which the Chair created the transportation task force, which the gentleman wanted to serve on and is a member of. The Chair is awaiting a recommendation from that task force.
    Mr. LEWIS. I thank the Chair for his response and I will be governed accordingly.
    Mr. CARDIN. Would the gentleman yield?
    Mr. LEWIS. Mr. Chairman, I yield to my colleague and friend from Maryland.
    Mr. CARDIN. I appreciate your yielding. Let me, if I could, underscore the Chairman's point. I would hope we could take up a clean extension through June 30 without anything else in the legislation in an effort to take care of this immediate problem. There clearly is a need to take a look at the underlying formula and other issues concerning the Aviation Trust Fund. But there are other concerns, as the gentlelady from Connecticut has pointed out, in aviation taxation.
    But I would hope, Mr. Chairman, and I would hope there would be support on both sides of the aisle to mark this matter up quickly and get it moving to take care of this immediate problem, and to deal with the underlying issues that our task force is looking at, to have the time that we could deliberate in our Committee in a more orderly way.
    I thank my colleague from Georgia.
    Chairman ARCHER. I appreciate the input from both gentlemen. The Chair will be announcing very shortly its intentions as to a possible markup for next week at which time the Committee will be able to deliberate what it wishes to do.
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    Is there anyone else who wishes to be recognized?
    If not, thank you very much. There being no further business before the Committee, the Committee will stand adjourned.
    [Whereupon, at 3:18 p.m., the hearing was adjourned.]
    [A submission for the record follows:]

Statement of John W. Olcott, President, National Business Aircraft Association, Inc.


    On behalf of the more than 4,500 Member Companies of the National Business Aircraft Association, Inc., I commend Chairman Archer for holding this important hearing on the solvency of the Airport and Airway Trust Fund. Ensuring adequate funding for the operation of the FAA and the nation's air traffic control system is critical to our Members and the entire nation. In light of that fact, NBAA urges this committee to act as soon as possible to reinstate the expired aviation excise taxes for as long as possible.
    NBAA Member Companies are the world's most active users of general aviation for business transportation as well as extensive users of the airlines, purchasing more than $11 billion in tickets annually. NBAA Member Companies rely heavily on safe and efficient transportation to service customers, expand markets and facilitate the ebb and flow of commerce to thousands of communities in the United States and abroad. They are a critical part of the economic fabric of our nation, generating more than $3 trillion in annual revenues and employing millions.
    Business aviation provides access to economic opportunity with proven results, and our community stands ready to make even greater contributions through an improved FAA and air transportation system. To be successful in that endeavor, we must first address the immediate problem at hand caused by the expiration of the aviation excise taxes. Next, we must recognize and understand the problems at the FAA and act rationally and responsibly to address them in the most appropriate and effective manner. The House made great strides toward that end last year by passing legislation that acknowledged the need to explore innovative financing mechanisms while recognizing the importance of improved FAA management.
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Reinstatement of the Aviation Excise Taxes

    The revenue system the FAA has historically relied on—a combination of excise taxes and general fund contributions—has provided a steady, reliable and abundant source of funds for the agency. The FAA, over the years, has spent billions of dollars on facilities and equipment and even greater amounts on operations and maintenance. The agency, however, has not capitalized on those investments because it lacked the management structure needed to use its dollar and people resources efficiently and effectively. Now, with the enactment of personnel and procurement reforms, the FAA may finally be on the road to ''reinventing'' its operations from within and making better use of the many resources provided through the traditional funding system.
    Unfortunately, the funding system the FAA has traditionally relied on is not in place due to the expiration of the aviation excise taxes on December 31, 1996. Recent analysis concludes that the Aviation Trust Fund surplus could be exhausted as early as March without congressional action to reinstate the taxes. NBAA strongly supports the reinstatement of aviation excise taxes as soon as possible.
    NBAA also believes that the aviation excise taxes should be reinstated for as long as possible. Extending the taxes for a longer period of time will ensure that we avoid the virtual federal giveaway of $500 million a month from the Aviation Trust Fund—a situation we now find ourselves in for the second straight year. A lengthy extension also makes sense because the traditional system works well.
    Simply put, the FAA funding system we have relied on to fund the agency for more than 25 years is a useful, appropriate and efficient system that reflects the benefits that both the general public and direct users receive from its operation. It has enabled our nation's air transportation system to thrive as the world's safest and most efficient; it is the proper system to ensure that our future needs are met.
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    Despite those truths, some have used the expiration of these taxes and the current funding situation to push for the adoption of a user fee system to fund the operations of the FAA. Such a system would create a series of unintended and detrimental consequences.

Benefits to the General Public and the General Fund Contribution

    A relatively small portion of the revenues that fund the FAA come from the general fund of the U.S. Treasury. This system allows the federal government to fulfill its responsibility to participate in the funding of our nation's air transportation system. This is a responsibility NBAA believes is proper and essential for three fundamental reasons:
    1.) Non-users benefit economically and socially from a safe, efficient and effective air transportation system. Property values and employment levels, for example, are higher in regions withaccess to good air transportation, yet it is not possible to charge the non-users who benefit from those economic and quality of life advantages outside of general taxes.
    2.) Our nation's tax revenues are enhanced by the economic impact of a safe, efficient and effective air transportation system, since transportation drives the economy upon which taxes are paid. Imagine what the economy and thus the federal tax revenues of our nation would be ifthere were no air transportation.
    The general fund contribution spurs tremendous economic growth and tax revenues. In its study entitled, The Economic Impact of Civil Aviation on the U.S. Economy Update 1993, Wilbur Smith Associates estimated that the U.S. air transportation system generated $771 billion in economic activity—5.9 percent of our nation's GNP in 1993. Assuming a modest tax rate, civil aviation contributes directly, indirectly or through induced impacts, roughly $30 billion in federal taxes each year, an excellent return on the government's $2 billion annual investment.
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    3.) For safety, efficiency and effectiveness, our nation's ATC system must be a monopoly. European ATC involves about 20 countries and about 40 discrete authorities. A study byIATA concluded that rationalizing Europe's ATC system under one authority (i.e. a monopoly) would double the number of aircraft handled in European airspace daily. Such greater efficiency would only equal the density that routinely operates each day in the Northeast Corridor of the United States. Only government, with congressional oversight, should run monopolies.
    Given these important facts and benefits to the general public, it is clearly appropriate that the FAA and the ATC system be the responsibility of our national government and that some level of public funding be applied to support it.

User Fees—Unintended Consequences

    In contrast, a system funded entirely by direct users will be under capitalized and under utilized, according to most economists and a recent literature search by Arthur Andersen (attached). If users are charged too much, they will be discouraged from using the services to the point of reducing potential economic growth. The result is a trade-off between efficiency and cost-recovery: full cost recovery through charges to users may result in lost productivity, lost economic growth, lost competitiveness and lost tax revenues to the federal government.
    In addition, it seems unwise to give the agency responsible for regulating the aviation community responsibility for imposing fees on that community. As such, a user fee system would reduce, if not eliminate, the incentive for the FAA to operate more efficiently. After all, what incentive is there to change an operation that produces revenue even if a better system exists?
    A user fee system would also create significant administrative costs and headaches that could discourage growth and require new bureaucracies. In an era of making government work better, it makes little sense to switch from a system with low administrative costs and high compliance to one that will undoubtedly require mountains of paperwork and an army of bureaucrats to review.
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    Furthermore, a system in which a price is placed on system use could have detrimental safety effects. Pilots could be discouraged from filing flight plans, checking the weather or contacting the tower if they are charged for doing so. The current system avoids such risks.
    NBAA is especially concerned with the unintended consequences of proposals for new user fees on ''business jets'' or ''corporate jets'' or ''non-commercial turbine-powered aircraft'' for the following reasons:
    1.) Utilization of ''business aircraft'' would be reduced significantly (in the order of one-third according to recent studies, attached) which would harm many companies—small, medium, and large—and be detrimental to the nation, including thousands of rural cities and towns that now benefit from the ebb and flow of commerce facilitated by business aviation.
    2.) Existing aviation policy would be affected, possibly in a way that would discourage new entrants to air transportation.
    3.) ''Business jets'' could be subject to discrimination.
    4.) There would be reduced aviation tax revenues from all sources, including lost fuel taxes and lost taxes due to reduced sales of aviation-related products and services.
    NBAA has been and remains especially troubled by a proposal by President Clinton that would target our community for new and potentially damaging taxes or fees. The proposal exhibits a fundamental misunderstanding of ''business aviation'' and the vital role it plays in corporate productivity and taxable revenues of American corporations. And,it seems inappropriate to consider a proposal that would divert aviation revenues to other programs. It is particularly puzzling that President Clinton would move in this direction given his previous comments about the business aviation community in a September 18, 1992 letter addressed to NBAA, which states:
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    ''As Governor of Arkansas and as a presidential candidate, I have been grateful for and dependent on every aspect of this important industry, including airplanes, helicopters, FBO's, fuelers, and others. General aviation has provided me with a flying office and conference room, a sleeping coach, and a means of covering many, many thousands of miles to carry my message of change to America.''
    ''General aviation is critical to the health and growth of our economy. From aircraft manufacturing to business flight departments to FBOs and fuelers, general aviation contributes greatly to our economy. It provides jobs, creates high technology export products contributing to the balance of trade, and improves the efficiency and productivity of businesses through safe and efficient transportation of people and materials by air to all regions of the country and the globe. Success in rebuilding our economy depends on giving workers and businesses the tools, such as those associated with general aviation, to compete in the fast-paced world economy.''

Excise Taxes—An Appropriate Use-Based System

    Rather than take chances with a risky and unproven system, NBAA strongly supports the excise tax system, under which business aviation, and all general aviation, pays for its use of the air transportation system through a per-gallon tax of 19.4 cents per-gallon on aviation gasoline and 21.9 cents on jet fuel—(Note, these amounts include 4.3 cents per-gallon for deficit reduction). The NBAA believes that the fuel tax is an appropriate reflection of the use of the system. Aircraft that fly further distances burn more fuel and pay higher taxes. In addition, the jet fuel that sophisticated aircraft burn is taxed at a higher rate than the aviation gasoline that less sophisticated aircraft use.
    Some have criticized the fuel tax, claiming that it does not reflect general aviation's use of the system. While some cost allocation studies that have been performed and relied upon in the past claim that business aviation is not paying its ''fair share,'' it is important to note that those studies focus on the fully allocated costs rather than the avoidable costs of business aviation. That important distinction is critical when determining what costs of the aviation system should be borne by different segments of the aviation community.
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    NBAA believes that the right question to ask is: ''How much more does it cost the FAA to operate because of the various elements of general aviation, including business aviation?'' We observe that incremental costs are a more appropriate means for determining the business aviation communities' ''fair share.''
    Turbine-powered business aircraft are incremental users of an air traffic control system that is designed, built and maintained for the commercial air carriers and their passengers. If a business jet or turboprop never flew again, capital and maintenance costs of our nation's ATC system would be virtually unchanged. Most of the dollars earmarked for airport improvement also would remain within the FAA budget. Only incremental costs associated with a limited percentage of controllers would be affected, and those dollars are significantly less than the fully allocated costs often attributed to business aviation.
    If turbine-powered business aircraft never flew again, the real losers would be American businesses, communities, and the federal government. Loss of productivity would reduce corporate profits and federal revenues, making less money available for other worthwhile government programs. It is our hope that these facts will be borne out by the independent cost allocation analysis being performed by Coopers & Lybrand.

The Alliance for Safe and Efficient Air Transportation

    NBAA is a member of and strongly supports the Alliance for Safe and Efficient Air Transportation, the largest and most diverse group of aviation interests ever formed to address aviation policy issues. The Alliance and NBAA strongly support the reinstatement of the aviation excise taxes as soon as possible for as long as possible. Further, the Alliance encourages more innovative use of traditional excise tax revenues and maintenance of a general fund contribution.
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    Immediate reinstatement of the expired aviation excise taxes and reform of the FAA and the ATC system are critical to the long-term economic stability of the business aviation community and the nation. NBAA Members Companies stand ready to work with the Committee, Congress and the Administration to ensure that our nation's air transportation system remains the safest and most efficient in the world. This is a unique opportunity to elevate the debate on this issue and to truly make significant progress. We should not and cannot, however, waste our energies focusing on switching to an unproven and risky user fee system. Instead, we should recognize the many strengths of the traditional system, and aggressively pursue changes that will enable the FAA and the entire aviation community to be more effective.
    [The official Committee record contains additional material here.]


(Footnote 1 return)
Initial information regarding excise tax collections is available only in aggregate form. No information is available with respect to liability or collections for a particular excise tax source until quarterly returns are filed and completely processed by IRS, usually 6 to 9 months after a taxable quarter has closed. During October-November 1996, total excise tax collections, which were in excess of $13 billion, were below forecast level by an amount that was well within the range of normal and acceptable forecasting error. It would appear that, in aggregate, deposits of all other excise taxes exceeded Treasury estimates, thus offsetting and masking the $1.2 billion shortfall in Airport and Airway Trust Fund taxes.

(Footnote 2 return)
The Treasury Department intends to modify, effective immediately, the regulatory safe-harbor provision on which the airlines relied to provide that when a new tax is imposed, or an expired tax is reinstated, taxpayers must deposit liabilities attributable to the new or reinstated tax on a current basis.

(Footnote 3 return)
The Omnibus Budget Reconciliation Act of 1993 imposed an additional tax of 4.3 cents per gallon on both commercial and noncommercial aviation fuel. Revenues from this tax, which remains in effect and is not scheduled to expire, are retained in the General Fund.

(Footnote 4 return)
Liabilities incurred for a given year may differ from net receipts to the Trust Fund, due to adjustments made during that year which relate to prior periods.

(Footnote 5 return)
Net receipts from the additional 4.3-cents-per-gallon tax on commercial and noncommercial aviation fuels were $28 million in FY 1993, $38 million in FY 1994, $41 million in FY 1995, and $568 million in FY 1996. Deposits received relating to these taxes remain in the General Fund. The application of the 4.3-cents-per-gallon rate to fuel used in commercial aviation began in FY 1996.

(Footnote 6 return)
The Bureau of Alcohol, Tobacco, and Firearms (ATF) also collects excise taxes on behalf of the Federal Government. These taxes (on alcohol, tobacco, and firearms) are all retained in the general revenue fund and are not transferred to any of the trust funds. Accordingly, the discussion in this letter relates only to excise taxes collected by the IRS.

(Footnote 7 return)
The funds are the Black Lung Disability Trust Fund, the Airport and Airway Trust Fund, the Highway Trust Fund, the Aquatic Resources Trust Fund, the Harbor Maintenance Trust Fund, the Inland Waterways Trust Fund, the Hazardous Substance Superfund, the Leaking Underground Storage Tank Trust Fund, the Oil Spill Liability Trust Fund, the Vaccine Injury Compensation Trust Fund, and the National Recreational Trails Trust Fund. In addition, the Highway Trust Fund includes a Mass Transit Account and the Aquatic Resources Trust Fund includes a Sport Fish Restoration Account and a Boat Safety Account.

(Footnote 8 return)
The other categories relate to payments with respect to the following tax forms: (1) Form 940, Employer's Annual Federal Unemployment Tax Return; (2) Form 941, Employer's Quarterly Federal Tax Return; (3) Form 943, Employer's Annual Tax Return for Agricultural Employees; (4) Form 945, Annual Return of Withheld Federal Income Tax; (5) Form 990–C Farmer's Cooperative Association Income Tax Return; (6) Form 990–PF, Return of Private Foundation or Section 4947(a)(1) Charitable Trusts Treated as a Private Foundation; (7) Form 990–T, Exempt Organization Business Income Tax Return; (8) Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons; (9) Form 1120, U.S. Corporation Income Tax Return; and (10) Form CT–1, Employer's Annual Railroad Retirement and Unemployment Repayment Tax Return.

(Footnote 9 return)
According to an IRS survey conducted over a four-year period (calendar years 1991 through 1994), the difference between liabilities and actual collections was only 0.2 percent.

(Footnote 10 return)
The Airport and Airway Trust Fund error was corrected by withdrawing the excess transfers from the trust fund. In early 1997, however, Congress enacted legislation requiring Treasury to transfer aviation taxes to the Airport and Airway Trust Fund regardless of when the taxes are received. Under this authority, aviation taxes imposed in 1996 and received in 1997 have been restored to the Airport and Airway Trust Fund.