This is the accessible text file for GAO report number GAO-03-979 
entitled 'Airport and Airway Trust Fund: Financial Outlook Is Positive, 
but the Trust Fund's Balance Would Be Affected If Taxes Were Suspended' 
which was released on September 15, 2003.

This text file was formatted by the U.S. General Accounting Office 
(GAO) to be accessible to users with visual impairments, as part of a 
longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov.

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

Report to Congressional Requesters:

September 2003:

Airport and Airway Trust Fund:

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

GAO-03-979:

GAO Highlights:

Highlights of GAO-03-979, a report to the Senate Committee on 
Commerce, Science, and Transportation and its Subcommittee on 
Aviation

Why GAO Did This Study:

The multibillion dollar Airport and Airway Trust Fund (Trust Fund) 
provides most of the funding for the Federal Aviation Administration 
(FAA). The Trust Fund relies on revenue from 10 taxes, including 
passenger ticket, fuel, and cargo taxes. Concerns about the financial 
outlook of the Trust Fund have emerged recently given the downturn in 
passenger air travel, requests from the airlines to suspend some of 
the Trust Fund taxes, and the need to reauthorize FAAís major programs 
in 2003. GAO was asked to determine (1) the projected financial 
outlook of the Trust Fund and (2) how a 1-year suspension of various 
taxes accruing to the Trust Fund (i.e., a tax holiday), would affect 
its financial status. We were asked to assess five potential tax 
holidays that would have begun on April 1, 2003, and ended on April 1, 
2004.

GAO used a model developed by FAA that made financial projections for 
the Trust Fund using expenditure assumptions that were based on (1) 
the Senate Committee on Commerce, Science, and Transportationís May 2, 
2003, and the House Subcommittee on Aviationís May 15, 2003, 
reauthorization proposals authorizing over $34 billion and (2) the 
Presidentís proposal authorizing almost $38 billion from the Trust 
Fund. For each of these proposals, GAO asked FAA to model the effects 
of five different tax holidays.

What GAO Found:

Over the next 3 years, with no change in tax rates and assuming that 
FAAís passenger traffic and airfare projections are valid, the Trust 
Fund is expected to continue to have sufficient revenue to cover 
authorized spending and end each year with a surplus, or an 
ďuncommitted balanceĒ as it is usually called, under each of the three 
expenditure scenarios we analyzed. For fiscal years 2004 through 2006, 
the potential uncommitted balances would range from over $4.4 billion 
(if Congress adopted either the House or the Senate proposal) to $1 
billion, if the Presidentís proposal were adopted.

Suspending some or all of the taxes that accrue to the Trust Fund for
1 year would reduce or eliminate the Trust Fundís uncommitted balance. 
As depicted below, if all taxes accruing to the Trust Fund were 
suspended, effective April 1, 2003, almost $10 billion in tax revenue 
would be forgone and the uncommitted balance would be eliminated by 
October 2003. The status of the Trust Fund would also differ according 
to the reauthorization proposal adopted and the taxes suspended. For 
example, suspending the passenger ticket tax and adopting either the 
House or Senate proposal would reduce the uncommitted balance to $1.8 
billion and $2 billion, respectively, in 2006. However, suspending the 
same tax and adopting the Presidentís proposal would eliminate the 
uncommitted balance by October 2003. The budgetary consequences of the 
remaining potential tax holidays would vary substantially. FAA 
officials stated that under the Presidentís proposal, a passenger 
ticket tax holiday might require spending cuts to its capital 
programs, while a cargo tax holiday would require few if any spending 
cuts to its programs. In its comments on a draft of this report, FAA 
agreed with the reportís findings and provided some clarifying 
comments that we incorporated where appropriate.

www.gao.gov/cgi-bin/getrpt?GAO-03-979.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Gerald Dillingham at 
(202) 512-2834 or dillinghamg@gao.gov.

[End of section]

Contents:

Letter: 

Results in Brief: 

Background: 

Projected Financial Outlook for the Trust Fund Is Positive but Depends 
on Realization of Forecasted Passenger Traffic Levels and Airfares: 

Suspending Some or All Taxes Accruing to the Trust Fund Would Reduce or 
Eliminate the Trust Fund's Uncommitted Balance: 

Agency Comments: 

Appendix:

Appendix I: Scope and Methodology: 

Tables Tables :

Table 1: Projected Trust Fund Uncommitted Balances at the End of 
Fiscal Year 2006, by Tax Holiday and Reauthorization Proposal: 

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

Table 3: Sensitivity Analysis of the Trust Fund's Uncommitted Balance 
to Revenue Shortfalls: 

Figures:

Figure 1: Trust Fund Revenues Totaled $10 Billion in Fiscal Year 2002: 

Figure 2: Trust Fund Expenditures Totaled $12 Billion in Fiscal Year 
2002: 

Figure 3: Projected Uncommitted Balances of the Trust Fund, Fiscal 
Years 2003 through 2006: 

Figure 4: The Amount of Forgone Tax Revenues under the Five Potential 
Tax Holiday Scenarios, April 1, 2003, through April 1, 2004: 

Figure 5: Trust Fund's Projected Uncommitted Balances Based on Tax 
Holidays, under the Senate Committee on Commerce, Science, and 
Transportation's Proposal: 

Figure 6: Trust Fund's Projected Uncommitted Balances Based on Tax 
Holidays, under the House Committee on Transportation and 
Infrastructure, Subcommittee on Aviation's Proposal: 

Figure 7: Trust Fund's Projected Uncommitted Balances Based on Tax 
Holidays, under the President's Proposal: 

Abbreviations: 

AIP: Airport Improvement Program:

AIR-21: Wendell H. Ford Aviation Investment and Reform Act for the 21ST 
Century:

FAA: Federal Aviation Administration:

F&E: Facilities and Equipment:

RED: Research, Engineering, and Development:

Letter September 15, 2003:

The Honorable John McCain 
Chairman 
The Honorable Ernest F. Hollings 
Ranking Minority Member 
Committee on Commerce, Science, and Transportation 
United States Senate:

The Honorable Trent Lott 
Chairman 
The Honorable John D. Rockefeller, IV 
Ranking Minority Member 
Subcommittee on Aviation 
Committee on Commerce, Science, and Transportation 
United States Senate:

The multibillion dollar Airport and Airway Trust Fund (hereafter called 
the Trust Fund) provides all of the funding for three out of four of 
the Federal Aviation Administration's (FAA) major accounts--Airport 
Improvement Program; Facilities and Equipment; and Research, 
Engineering, and Development--and a majority of support for the fourth 
account, Operations. The Trust Fund relies on a number of taxes for its 
revenue, including passenger ticket, fuel, and cargo taxes that are 
paid by passengers and airlines.

In fiscal year 2002, the Trust Fund received about $10 billion in 
revenue and had expenditures of about $12 billion. Although 
expenditures exceeded revenues in fiscal year 2002, since its creation 
in 1970, Trust Fund revenues have generally exceeded expenditures--
resulting in a surplus (or an "uncommitted balance" as it is usually 
called). For example, at the end of fiscal year 2002, the Trust Fund's 
uncommitted balance was nearly $5 billion. The Trust Fund's uncommitted 
balance represents money against which there is no outstanding budget 
commitment or authority to spend and, subject to congressional 
approval, is the amount available to finance FAA accounts in the 
future. It was also used to offset forgone revenue when Trust Fund 
taxes lapsed in 1996 and to fund new airport security requirements 
resulting from the September 11, 2001, terrorist attacks.

Although the Trust Fund's uncommitted balance totaled almost $5 billion 
at the end of fiscal year 2002, a number of recent developments have 
raised congressional concerns about its financial outlook. First, 
domestic passenger traffic has declined over 12 percent over the last 3 
years, in part because of a sluggish economy and the public's 
reluctance to travel. Second, the airline industry is experiencing 
significant financial problems, and the airlines have asked Congress 
for tax relief, such as suspending the taxes that support the Trust 
Fund, which is known as a "tax holiday." According to Air Transport 
Association officials, such relief could lower airline operational 
costs, generate additional passenger traffic through lower fares, or 
improve yields realized on existing traffic. Third, given that the 
current authority--the Wendell H. Ford Aviation Investment and Reform 
Act for the 21ST Century--for funding FAA's major programs and 
activities expires at the end of fiscal year 2003, Congress will have 
to decide what level of expenditures from the Trust Fund is appropriate 
to authorize for fiscal year 2004 and beyond. Recently, the Senate 
Committee on Commerce, Science, and Transportation; the House Committee 
on Transportation and Infrastructure's Subcommittee on Aviation; and 
the President presented reauthorization proposals for FAA. The three 
proposals differ regarding the amounts authorized from the Trust Fund, 
the number of years authorized, and how much would be used to support 
FAA programs. In light of these developments, we were asked to address 
the following questions:

1. What is the projected financial outlook of the Trust Fund?

2. How would the suspension (i.e., a tax holiday) of various taxes 
accruing to the Trust Fund affect its financial status?

To answer these questions, we requested Trust Fund financial 
projections from FAA using the expenditure scenarios included in the 
following three proposals: (1) the Senate Commerce, Science, and 
Transportation Committee's reauthorization proposal, known as the 
Aviation Investment and Revitalization Vision Act (S. 824, May 2, 2003, 
version, hereafter called the Senate); (2) the House Transportation and 
Infrastructure Committee, the Aviation Subcommittee's reauthorization 
proposal, known as Flight 100--Century of Aviation Reauthorization Act 
(H.R. 2115, May 15, 2003, version, hereafter called the House); and (3) 
the President's reauthorization proposal, known as the Aviation 
Authorization Act of 2003. Because there is a difference in the number 
of years that the three expenditure scenarios would authorize funding 
for FAA's accounts, our analysis compares proposed authorizations for 
fiscal years 2004 through 2006, which were included in each scenario. 
For each of these three proposals, we asked FAA to model the effects of 
the following five different tax holidays: a cargo tax holiday, a fuel 
tax holiday, a flight segment tax holiday, a passenger ticket tax 
holiday,[Footnote 1] and an "all" tax holiday that would include the 
four taxes previously mentioned and the international departure/arrival 
taxes. We selected these five holidays because they represent a range 
of different tax holiday scenarios. At your request, our analysis was 
based on a tax holiday hypothetically beginning on April 1, 2003, and 
lasting 1 year until April 1, 2004. Although our analysis is based on 
hypothetical tax holidays during this period, the results of our 
analysis would remain valid if Congress were to decide to implement the 
tax holidays retroactive to April 1, 2003, or would be similar if 
Congress were to grant a tax holiday at a later time. The information 
and analysis presented in this report are based on FAA's most recently 
published aviation forecasts, which were made in November 2002. 
Appendix I provides additional details on our scope and methodology.

We performed our work from February through August 2003 in accordance 
with generally accepted government auditing standards.

Results in Brief:

With no change in tax rates and assuming FAA's passenger traffic and 
airfare projections are valid, the Trust Fund is expected to continue 
to have sufficient revenue to cover authorized spending and end each 
year through fiscal year 2006, with a surplus (or an "uncommitted 
balance") under each of the three expenditure proposals we analyzed. 
For example, if Congress were to adopt the Senate's or House's 
reauthorization proposal, which would authorize over $34 billion from 
the Trust Fund, the Fund's uncommitted balances are projected to be 
over $4.4 billion each year from 2004 through 2006. In comparison, if 
the President's reauthorization proposal to authorize $38 billion from 
the Trust Fund were to be adopted, the Fund's uncommitted balance is 
projected to decline from $4.8 billion in 2002 to $1 billion in 2006 
because it authorizes a higher amount of Fund revenue for FAA's 
Operations. However, if passenger traffic and airfares[Footnote 2] 
through 2006 are below the levels projected in FAA's November 2002 
forecast, Trust Fund revenues may not be sufficient to cover planned 
expenditures beginning in 2005. According to FAA officials, as of May 
2003, passenger traffic levels and airfares are lower than the 
projections made in November 2002.

The suspension of some or all of the taxes that accrue to the Trust 
Fund for 1 year would reduce or eliminate the uncommitted balance of 
the Trust Fund. As shown in table 1, for example, suspending all taxes 
accruing to the Trust Fund for 1 year, starting on April 1, 2003, would 
cause the Trust Fund's uncommitted balance to reach zero by October 
2003, no matter which legislative proposal were adopted.

Table 1: Projected Trust Fund Uncommitted Balances at the End of Fiscal 
Year 2006, by Tax Holiday and Reauthorization Proposal:

Dollars in millions.

All taxes; Senate's proposal: Eliminated as of October 2003; House's 
proposal: Eliminated as of October 2003; President's proposal: 
Eliminated as of October 2003.

Passenger ticket taxes; Senate's proposal: $1,957; House's proposal: 
$1,772; President's proposal: Eliminated as of October 2003.

Flight segment tax; Senate's proposal: 3,608; House's proposal: 3,424; 
President's proposal: Eliminated as of April 2004.

Fuel tax; Senate's proposal: 4,237; House's proposal: 4,053; 
President's proposal: $135.

Cargo tax; Senate's proposal: 4,412; House's proposal: 4,228; 
President's proposal: 495.

Source: FAA.

Notes:

At the end of fiscal year 2002, the Trust Fund's uncommitted balance 
was $4.8 billion.

The Senate's reauthorization proposal is the version of S. 824 passed 
by the Senate Commerce, Science, and Transportation Committee on May 2, 
2003, and the House's reauthorization proposal is the version of H.R. 
2115 passed by the House Transportation and Infrastructure Committee's 
Aviation Subcommittee on May 15, 2003.

Under an all tax holiday, all taxes accruing to the Trust Fund are 
suspended. A passenger ticket tax holiday would suspend the passenger 
ticket tax, the rural airport tax, and the frequent flyer tax. A flight 
segment tax holiday would suspend the segment tax. A fuel tax holiday 
would suspend the commercial aviation, general aviation gasoline, and 
general aviation jet fuel taxes. A cargo tax holiday would suspend the 
cargo waybill taxes.

[End of table]

In addition, according to FAA officials, an all tax holiday would 
require significant spending cuts to FAA's capital programs and could 
result in contract termination costs in excess of $1 billion under all 
three expenditure scenarios, unless Congress authorized funding from 
the General Fund. However, FAA officials stated that air traffic 
control services would be maintained if taxes were suspended and the 
Trust Fund's uncommitted balance reached zero because such services are 
considered an emergency function that involves the safety of human 
life. According to FAA officials, to ensure the continued safe 
operations of the national airspace system, the agency would use 
available Trust Fund revenue to first fund Operations costs, which 
primarily support air traffic control activities.

In commenting on a draft of this report, FAA agreed with information 
contained in this report and provided some clarifying and technical 
comments that we incorporated where appropriate.

Background:

The Trust Fund was established by the Airport and Airway Revenue Act of 
1970 (P.L. 91-258) to help fund the development of a nationwide airport 
and airway system and to fund FAA investments in air traffic control 
facilities. It provides all of the funding for the Airport Improvement 
Program (AIP), which provides grants for construction and safety 
projects at airports; the Facilities and Equipment (F&E) account that 
funds technological improvements to the air traffic control system; and 
a Research, Engineering, and Development (RED) account. In fiscal year 
2002, the Trust Fund provided 79 percent of the funding for FAA 
Operations, which represented almost 50 percent of Trust Fund 
expenditures.

The Trust Fund is supported by 10 dedicated excise taxes. One of the 
major taxes is referred to as the passenger ticket tax, which include 
the following 3 taxes:

* 7.5 percent tax on the price of domestic airline tickets,

* 7.5 percent tax on the value of awards of free or reduced-rate air 
fares (frequent flyer awards tax), and:

* 7.5 percent tax on the price of domestic airline tickets to 
"qualified rural airports" (flight segment fees do not apply if this 
tax is levied).

The remaining 7 excise taxes that finance the Trust Fund include the 
following:

* $3 on each flight segment, indexed to inflation starting in 2002;

* 6.25 percent tax on the price charged for transporting cargo by air;

* $0.043 per gallon tax on commercial aviation jet fuel;

* $0.193 per gallon tax on general aviation gasoline;

* $0.218 per gallon tax on general aviation jet fuel;

* $13.40 tax on international arrivals, indexed to inflation; and:

* $13.40 tax on international departures, indexed to inflation.

In fiscal year 2002, the Trust Fund received about $10 billion in 
revenue from these taxes and interest.[Footnote 3] As shown in figure 
1, the passenger ticket tax was the largest single source of Trust Fund 
revenue, totaling about 47 percent of all receipts, followed by the 
flight segment tax at 15 percent of total receipts, and the 
international departure/arrival tax at about 13 percent of total 
receipts.

Figure 1: Trust Fund Revenues Totaled $10 Billion in Fiscal Year 2002:

[See PDF for image]

[End of figure]

Note: Other revenues to the Trust Fund include the rural airport tax, 
the frequent flyer tax, and the collection of fees from other 
activities.

Trust Fund expenditures totaled almost $12 billion in fiscal year 2002. 
As shown in figure 2, FAA Operations accounted for nearly half of Trust 
Fund expenditures, followed by AIP grant funding at 24 percent, F&E at 
23 percent, and RED at almost 2 percent.

Figure 2: Trust Fund Expenditures Totaled $12 Billion in Fiscal Year 
2002:

[See PDF for image]

Note: Other expenditures include offsetting collections from the 
program accounts to the Trust Fund and appropriations to the Payments 
to Air Carriers Program managed by the Department of Transportation.

[End of figure]

FAA's current authorization expires on September 30, 2003, and Congress 
is considering three proposals that would reauthorize funding for FAA. 
In the May 2, 2003, version of S. 824, the Senate proposes to authorize 
$43.4 billion from 2004 through 2006 for FAA programs, of which $34.4 
billion would be funded from the Trust Fund, with the balance of $9.1 
billion covered by the General Fund. In the May 15, 2003, version of 
H.R. 2115, the House Subcommittee on Aviation proposes to authorize $60 
billion from 2004 through 2007 for FAA programs, of which $47.2 billion 
would be funded from the Trust Fund, with the balance of $12.8 billion 
covered by the General Fund. The President's proposal authorizes $57.3 
billion from 2004 through 2007 for FAA programs, of which $50.8 billion 
would be funded from the Trust Fund and the remaining $6.6 billion 
would be funded from the General Fund.

Table 2 breaks down the distribution of the funding among FAA programs 
for each of the three expenditure scenarios through 2006.[Footnote 4] 
Under each proposal, the Trust Fund provides all of the funding for the 
AIP, F&E, and RED programs and funds between 58 and 79 percent of FAA 
Operations. The balance of FAA Operations is funded through the General 
Fund and not reflected in table 2.

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

Dollars in millions.


Airport Improvement Program: 

Senate's proposal; Fiscal year: 2004: $3,400; Fiscal year: 2005: 
$3,500; Fiscal year: 2006: $3,600; Total: $10,500.

House's proposal; Fiscal year: 2004: 3,400; Fiscal year: 2005: 3,600; 
Fiscal year: 2006: 3,800; Total: 10,800.

President's proposal; Fiscal year: 2004: 3,400; Fiscal year: 2005: 
3,400; Fiscal year: 2006: 3,400; Total: 10,200.

Facilities and Equipment: 

Senate's proposal; Fiscal year: 2004: 2,916; Fiscal year: 2005: 2,971; 
Fiscal year: 2006: 3,030; Total: 8,917.

House's proposal; Fiscal year: 2004: 2,938; Fiscal year: 2005: 2,993; 
Fiscal year: 2006: 3,053; Total: 8,984.

President's proposal; Fiscal year: 2004: 2,916; Fiscal year: 2005: 
2,971; Fiscal year: 2006: 3,031; Total: 8,918.

Research, Engineering, and Development: 

Senate's proposal; Fiscal year: 2004: 289; Fiscal year: 2005: 204; 
Fiscal year: 2006: 317; Total: 810.

House's proposal; Fiscal year: 2004: 366; Fiscal year: 2005: 410; 
Fiscal year: 2006: 462; Total: 1,238.

President's proposal; Fiscal year: 2004: 100; Fiscal year: 2005: 102; 
Fiscal year: 2006: 104; Total: 306.

Operations: 

Senate's proposal; Fiscal year: 2004: 4,124; Fiscal year: 2005: 4,808; 
Fiscal year: 2006: 5,210; Total: 14,142.

House's proposal; Fiscal year: 2004: 4,025; Fiscal year: 2005: 4,480; 
Fiscal year: 2006: 4,842; Total: 13,347.

President's proposal; Fiscal year: 2004: 6,000; Fiscal year: 2005: 
6,112; Fiscal year: 2006: 6,236; Total: 18,348.

Other: 

Senate's proposal; Fiscal year: 2004: 0; Fiscal year: 2005: 0; Fiscal 
year: 2006: 0; Total: 0.

House's proposal; Fiscal year: 2004: 5; Fiscal year: 2005: 7; Fiscal 
year: 2006: 5; Total: 16.

President's proposal; Fiscal year: 2004: 4; Fiscal year: 2005: 5; 
Fiscal year: 2006: 5; Total: 13.

Total authorizations: 

Senate's proposal; Fiscal year: 2004: $10,729; Fiscal year: 2005: 
$11,483; Fiscal year: 2006: $12,157; Total: $34,369.

House's proposal; Fiscal year: 2004: 10,734; Fiscal year: 2005: 11,490; 
Fiscal year: 2006: 12,162; Total: 34,385.

President's proposal; Fiscal year: 2004: 12,420; Fiscal year: 2005: 
12,590; Fiscal year: 2006: 12,776; Total: 37,785.

Source: S. 824 (May 2, 2003, version), H.R. 2115 (May 15, 2003, 
version), H.R. 586, and the President's reauthorization proposal.

Note: "Other" includes funding for an airline data and analysis 
program, and a climate change program, but does not include payments to 
air carriers funding. In some cases, the numbers do not add to reported 
totals due to rounding.

[End of table]

Projected Financial Outlook for the Trust Fund Is Positive but Depends 
on Realization of Forecasted Passenger Traffic Levels and Airfares:

Over the next 3 years, the Trust Fund is projected to have sufficient 
revenue to fund authorized spending and end each year with an 
uncommitted balance under each of the three expenditure proposals. This 
positive financial outlook depends on the realization of FAA's 
forecasted passenger traffic levels and airfares. As shown in figure 3, 
under the Senate's and House's proposals, the Trust Fund's year-end 
uncommitted balance is projected to be over $4.4 billion over the next 
3 years. Under the President's proposal, the Trust Fund's year-end 
uncommitted balance is projected to range between $2.9 billion in 2004 
and $1 billion in 2006.

Figure 3: Projected Uncommitted Balances of the Trust Fund, Fiscal 
Years 2003 through 2006:

[See PDF for image]

[End of figure]

The primary reason that the Trust Fund's uncommitted balance would be 
higher under the Senate's and House's proposals is that they use the 
formula created in the Wendell H. Ford Aviation Investment and Reform 
Act for the 21ST Century (AIR-21) to determine how much funding for FAA 
Operations should come from the Trust Fund, and the President's 
proposal does not. Under AIR-21, the formula sets the amount of Trust 
Fund revenue that will be authorized for FAA Operations and RED in a 
given year equal to projected Trust Fund revenues (as specified in the 
President's budget) minus the authorizations for the capital accounts 
(AIP and F&E) in that year. Thus, under the Senate's proposal, the 
Trust Fund is projected to support $14.1 billion, or 61 percent of FAA 
Operations from 2004 through 2006. Under the House's proposal, the 
Trust Fund is projected to support $13.3 billion, or 58 percent of FAA 
Operations from 2004 through 2006.[Footnote 5] In contrast, the 
President's proposal specifies a set amount of Trust Fund revenue to be 
used for FAA Operations. Therefore, if Congress enacts the President's 
proposal, the Trust Fund would provide $18.3 billion for FAA Operations 
from 2004 through 2006, or about 79 percent of its total estimated 
costs for Operations.

Although the Trust Fund is projected to have a surplus over the next 
several years under each of the expenditure proposals, this projection 
depends to a significant extent on the realization of forecasted 
commercial passenger traffic levels and airfares. If passenger traffic 
or yields fall below the levels that FAA projected in November 2002, 
the Trust Fund may not have sufficient revenues to fund projected 
expenditures. For example, table 3 presents the projected Trust Fund 
balances under each expenditure proposal and shows the impact if 
revenues were 5 percent or 10 percent less than currently projected. 
The Trust Fund could absorb these revenue shortfalls while retaining a 
positive balance under the Senate's and House's proposals because the 
AIR-21 formula would limit appropriations from the Trust Fund for FAA 
Operations. In contrast, if revenues were 5 percent lower than 
projected, the uncommitted balance of the Trust Fund would reach zero 
during 2006 under the President's proposal; if the revenues were 10 
percent lower than projected the uncommitted balance would reach zero 
in 2005.

Table 3: Sensitivity Analysis of the Trust Fund's Uncommitted Balance 
to Revenue Shortfalls:

[See PDF for image]

Source: FAA.

[End of table]

Suspending Some or All Taxes Accruing to the Trust Fund Would Reduce or 
Eliminate the Trust Fund's Uncommitted Balance:

Billions of Trust Fund revenue would be forgone if all taxes accruing 
to the Trust Fund were suspended for 1 year. As shown in figure 4, 
suspending all taxes would result in almost $10 billion in forgone 
Trust Fund revenues. The amount of Trust Fund revenues forgone under 
the other tax holiday scenarios would range from approximately $447 
million if the cargo tax were suspended to nearly $5.2 billion if the 
passenger ticket taxes were suspended.

Figure 4: The Amount of Forgone Tax Revenues under the Five Potential 
Tax Holiday Scenarios, April 1, 2003, through April 1, 2004:

[See PDF for image]

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

[End of figure]

Under an all tax holiday, the Trust Fund's uncommitted balance would 
reach zero by October 2003, no matter which expenditure proposal were 
adopted, as shown in figures 5 through 7. However, the other four tax 
holiday scenarios would affect the Trust Fund's uncommitted balance in 
different ways under each of the three expenditure proposals. Figure 5 
shows the effects of several tax holidays under the Senate's proposal. 
Although the Trust Fund's uncommitted balance would decrease under the 
other four tax holiday scenarios, it would not reach zero. For example, 
a passenger ticket tax holiday would decrease the Trust Fund's 
uncommitted balance from $4.8 billion in 2002 to $2 billion in 2003 and 
to $2.1 billion in 2004, while a fuel tax holiday would reduce it to 
$4.1 billion in 2003 and to $4.2 billion in 2004.

Figure 5: Trust Fund's Projected Uncommitted Balances Based on Tax 
Holidays, under the Senate Committee on Commerce, Science, and 
Transportation's Proposal:

[See PDF for image]

Notes:

This figure includes fiscal years 2002 and 2003 and reflects 
expenditures according to AIR-21, which expires on September 30, 2003. 
It also includes fiscal years 2004 through 2006, which reflects the 
Senate's reauthorization proposal.

The baseline represents FAA's projections of the Trust Fund's 
uncommitted balance under the Senate's proposal with no tax holiday. 
Under an all tax holiday, all taxes accruing to the Trust Fund are 
suspended. A passenger ticket tax holiday would suspend the passenger 
ticket tax, the rural airport tax, and the frequent flyer tax. A flight 
segment tax holiday would suspend the segment fee. A fuel tax holiday 
would suspend the commercial aviation, general aviation gasoline, and 
general aviation jet fuel taxes. A cargo tax holiday would suspend the 
cargo waybill taxes.

[End of figure]

Similarly, as shown in figure 6, under the House's proposal, the Trust 
Fund's uncommitted balance would also decrease under the other four tax 
holiday scenarios, but it would not reach zero. For example, a flight 
segment fee tax holiday would decrease the Trust Fund's uncommitted 
balance from $4.8 billion in 2002 to $3.5 billion in 2003 and to $3.6 
billion in 2004, while a cargo tax holiday would reduce it to $4.3 
billion in 2003 and to $4.3 billion in 2004.

Figure 6: Trust Fund's Projected Uncommitted Balances Based on Tax 
Holidays, under the House Committee on Transportation and 
Infrastructure, Subcommittee on Aviation's Proposal:

[See PDF for image]

Notes:

This figure includes fiscal years 2002 and 2003 and reflects AIR-21, 
which expires on September 30, 2003. It also includes fiscal years 2004 
through 2006, which reflects the House's reauthorization proposal.

The baseline represents FAA's projections of the Trust Fund's 
uncommitted balance under the House's proposal with no tax holiday. 
Under an all tax holiday, all taxes accruing to the Trust Fund are 
suspended. A passenger ticket tax holiday would suspend the passenger 
ticket tax, the rural airport tax, and the frequent flyer tax. A flight 
segment tax holiday would suspend the segment fee. A fuel tax holiday 
would suspend the commercial aviation, general aviation gasoline, and 
general aviation jet fuel taxes. A cargo tax holiday would suspend the 
cargo waybill taxes.

[End of figure]

In contrast, as shown in figure 7, under the President's proposal, the 
Trust Fund's uncommitted balance would reach zero under three of the 
five tax holiday scenarios by the end of 2006. For example, a passenger 
ticket tax holiday would cause the uncommitted balance to reach zero by 
October 2003. A fuel tax holiday and cargo tax holiday would be the 
only tax holiday scenarios in which the Trust Fund's uncommitted 
balance would not reach zero by 2006 under the President's proposal. 
Under a fuel tax holiday, the Trust Fund's uncommitted balance would 
decrease from $4.8 billion in 2002 to $135 million in 2006, a decrease 
of about $4.7 billion. Similarly, a cargo tax holiday would decrease to 
$495 million in 2006, a decrease of about $4.3 billion.

A tax holiday under the President's proposal would have a greater 
effect because that proposal would require the Trust Fund to support a 
larger percentage of FAA Operations compared with the Senate's and 
House's proposals. For example, if there were an all tax holiday and 
the President's proposal was adopted, the Trust Fund would support 79 
percent of FAA Operations. Under the Senate's and House's proposals, 
the amount of funding spent on FAA Operations would be reduced in 
response to the amount of revenues lost from a tax holiday due to the 
adoption of the AIR-21 funding formula for Operations.

Figure 7: Trust Fund's Projected Uncommitted Balances Based on Tax 
Holidays, under the President's Proposal:

[See PDF for image]

Notes:

This figure includes fiscal years 2002 and 2003 and reflects AIR-21, 
which expires on September 30, 2003. It also includes fiscal years 2004 
through 2006, which reflects the President's reauthorization proposal.

The baseline represents FAA's projections of the Trust Fund's 
uncommitted balance under the President's proposal with no tax holiday. 
Under an all tax holiday, all taxes accruing to the Trust Fund are 
suspended. A passenger ticket tax holiday would suspend the passenger 
ticket tax, the rural airport tax, and the frequent flyer tax. A flight 
segment tax holiday would suspend the segment fee. A fuel tax holiday 
would suspend the commercial aviation, general aviation gasoline, and 
general aviation jet fuel taxes. A cargo tax holiday would suspend the 
cargo waybill taxes.

[End of figure]

In addition to forgone revenue and the elimination or reduction of the 
Trust Fund's uncommitted balance, granting any kind of tax holiday 
could pose budgetary challenges for FAA. For example, as previously 
noted, a 1-year all tax holiday starting in April 2003 would cause the 
uncommitted balance of the Trust Fund to reach zero by October 2003 and 
might require FAA to make significant spending cuts to the aviation 
programs supported by the Trust Fund unless additional funding were 
authorized from the General Fund. If there were a 1-year all tax 
holiday, FAA officials said they would continue to maintain some FAA 
Operations, particularly air traffic control services because it is 
considered an emergency function that involves the safety of human 
life. However, according to FAA officials, the agency would have to 
suspend activities for the AIP, F&E, and RED programs until April 2004 
and use the funds appropriated for these suspended capital programs to 
continue to first fund FAA Operations. According to FAA officials, 
additional support from the General Fund would also be needed to 
continue funding Operations during the first 6 months of fiscal year 
2004.

FAA officials also stated that if a 1-year all tax holiday under all 
three expenditure scenarios were granted, FAA might have to delay or 
terminate some multimillion dollar F&E contracts, unless Congress 
authorized funding from the General Fund. FAA officials stated that 
while their contracts have clauses that limit liability, it is their 
experience that any remaining obligated funds for contracts in a given 
fiscal year that have not actually been expended would be used to 
offset contract termination costs. If there were a 1-year all tax 
holiday, FAA estimates it could incur in excess of $1 billion in 
contract termination costs. For example, according to FAA officials, 
terminating the National Aerospace System Implementation Services 
contract, which provides engineering support for the implementation of 
programs such as the Standard Terminal Automation Replacement System, 
would result in termination costs of $20 million. We reviewed FAA's 
data on the unobligated balances of outstanding F&E contracts and 
verified that the amount totaled $1.5 billion. However, we did not 
review individual FAA outstanding F&E contracts to confirm FAA's 
statement that on the basis of its experience, any remaining obligated 
funds for contracts in a given fiscal year that have not actually been 
expended would be used to offset contract termination costs.

Although FAA would not have to terminate contracts under the House's 
and Senate's proposals if there were a passenger ticket tax, flight 
segment tax, or fuel tax holiday, FAA' s ability to continue to fund 
its programs with Trust Fund revenue would be affected under the 
President's proposal if one of these holidays were granted. For 
example, if passenger ticket taxes were suspended for 1 year, beginning 
in April 2003, the uncommitted balance would reach zero by October 
2003. Consequently, FAA officials stated that its AIP and F&E programs 
would have to be suspended from October 2003 through May 2004, if 
additional funds were not provided from the General Fund. However, to 
fully fund FAA Operations, particularly air traffic control services, 
Congress would have to authorize additional funding from the General 
Fund to offset revenue shortfalls created by these tax holidays.

Agency Comments:

We provided the Department of Transportation with a draft of this 
report for its review and comment. FAA officials agreed with 
information contained in this report and provided some clarifying and 
technical comments that we incorporated where appropriate.

We are sending copies of this report to the appropriate congressional 
committees; the Secretary of Transportation; and the Administrator, 
FAA. We will also make copies available to others upon request. In 
addition, this report is also available at no charge on GAO's Web site 
at [Hyperlink, http://www.gao.gov.] http://www.gao.gov.

Please contact me or Tammy Conquest at (202) 512-2834 if you have any 
questions. In addition, Jay Cherlow, Colin Fallon, Dave Hooper, and 
Richard Swayze made key contributions to this report.

Gerald Dillingham 

Director, Physical Infrastructure Issues:

Signed by Gerald Dillingham:

[End of section]

Appendixes:

Appendix I: Scope and Methodology:

To determine the projected financial status of the multibillion dollar 
Airport and Airway Trust Fund (hereafter called the Trust Fund), we 
obtained from the Federal Aviation Administration (FAA) the financial 
projections for the Trust Fund that it had developed under the 
expenditure proposals included in the President's reauthorization 
proposal.[Footnote 6] We subsequently asked FAA to develop similar 
projections using the expenditure scenarios in the proposals from the 
Senate Committee on Commerce, Science, and Transportation and the House 
Committee on Transportation and Infrastructure, Subcommittee on 
Aviation. In addition, since the realization of FAA's projections 
depends on passenger traffic levels and airfares, we asked FAA to 
develop two additional projections under each of the three expenditure 
proposals. Specifically, we asked FAA to project what would happen if 
tax revenues accruing to the Trust Fund from fiscal years 2003 through 
2007 were 5 percent and 10 percent below the levels projected in FAA's 
November 2002 forecasts. Accordingly, our findings on the financial 
outlook of the Trust Fund are based on FAA's projections, rather than 
on any projections of our own. We reviewed the process, methodology, 
and sources of information used by FAA to make these projections and 
found them reasonable.[Footnote 7] We discussed the approach and 
results of our analysis with FAA officials who are responsible for 
making the projections, representatives from the Airports Council 
International and the Air Transport Association, and two academic 
experts.

To assess the effect of various tax holidays on the financial status of 
the Trust Fund, we asked FAA to develop additional financial 
projections under various tax holiday scenarios. FAA developed these 
additional projections under each of the three expenditure proposals 
that we used in determining the financial condition of the Trust Fund. 
We then assessed the effect of each tax holiday scenario under each 
expenditure proposal by comparing the financial projection for the 
Trust Fund under that tax holiday scenario and expenditure proposal 
with FAA's baseline projection.

We used the following five tax holiday scenarios:

* An all taxes holiday, in which all taxes that accrue to the Trust 
Fund are suspended.

* A passenger ticket tax holiday, in which the passenger ticket tax, 
the rural airport tax, and the frequent flyer tax are suspended.

* A flight segment tax holiday, in which the passenger segment tax 
holiday is suspended.

* A fuel tax holiday in which the commercial aviation, general aviation 
gasoline, and general aviation jet fuel taxes are suspended.

* A cargo tax holiday in which the cargo waybill taxes are suspended.

The following assumptions were also included in the analyses:

* As requested in March 2003, we based our analysis on hypothetical tax 
holidays that would have begun on April 1, 2003, and ended on April 1, 
2004.

* The FAA projections presented do not account for budgetary responses 
by FAA to the drop in revenues resulting from a tax holiday. Unless 
each dollar of lost revenue resulting from a tax holiday was replaced 
by General Fund revenues, FAA would adjust its spending plans, which in 
turn would have a direct effect on FAA's projections.

In addition, in projecting the effect of any particular tax holiday on 
the Trust Fund's revenues, FAA set the tax rate to zero for the tax or 
taxes that were being suspended while keeping all other factors in its 
forecast model unchanged. That is, FAA's projections do not take into 
account changes that might cause the Trust Fund's revenues from one tax 
to increase when another tax was suspended (i.e., feedback effects). 
For example, a suspension of the passenger ticket taxes might lead to 
lower fares for air travelers, which in turn might cause more trips to 
be made, thereby increasing the Trust Fund's revenues from the flight 
segment tax. We discussed with FAA officials the possibility of 
preparing additional projections that incorporated feedback effects to 
more thoroughly analyze the impact of tax holidays. However, we chose 
not to make such a request because preliminary analysis that we and FAA 
officials conducted indicated that these feedback effects would likely 
not be large enough to change our findings. Finally, to assess the 
effect that tax holidays would have on FAA's ability to continue to use 
Trust Fund revenue to support its programs, we interviewed FAA 
officials. We reviewed FAA data on the outstanding Facilities and 
Equipment (F&E) contracts that had unobligated balances and verified 
that they totaled $1.5 billion. However, we did not review individual 
FAA outstanding F&E contracts to confirm FAA's statement that on the 
basis of its experience, any remaining obligated funds for contracts in 
a given fiscal year that have not actually been expended would be used 
to offset contract termination costs.

(540065):

FOOTNOTES

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

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

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

[4] Although the House's and President's reauthorization proposals 
authorize funding through 2007, for comparative purposes, our analysis 
includes authorizations for fiscal years 2004 through 2006, which were 
included in all three proposals.

[5] Although the House and Senate use the same formulas to determine 
how much funding of FAA Operations should come from the Trust Fund, the 
total amount of funding in the two proposals differ.

[6] FAA develops financial projections for the Trust Fund in 
conjunction with its forecasts of aviation activity.

[7] FAA uses both econometric and spreadsheet models to develop its 
financial projections for the Trust Fund. Although we did not do a 
comprehensive evaluation of FAA's models, we reviewed them to determine 
their appropriateness for this purpose.

GAO's Mission:

The General Accounting Office, the investigative arm of Congress, 
exists to support Congress in meeting its constitutional 
responsibilities and to help improve the performance and accountability 
of the federal government for the American people. GAO examines the use 
of public funds; evaluates federal programs and policies; and provides 
analyses, recommendations, and other assistance to help Congress make 
informed oversight, policy, and funding decisions. GAO's commitment to 
good government is reflected in its core values of accountability, 
integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony:

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains 
abstracts and full-text files of current reports and testimony and an 
expanding archive of older products. The Web site features a search 
engine to help you locate documents using key words and phrases. You 
can print these documents in their entirety, including charts and other 
graphics.

Each day, GAO issues a list of newly released reports, testimony, and 
correspondence. GAO posts this list, known as "Today's Reports," on its 
Web site daily. The list contains links to the full-text document 
files. To have GAO e-mail this list to you every afternoon, go to 
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order 
GAO Products" heading.

Order by Mail or Phone:

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to:

U.S. General Accounting Office

441 G Street NW,

Room LM Washington,

D.C. 20548:

To order by Phone: 

	Voice: (202) 512-6000:

	TDD: (202) 512-2537:

	Fax: (202) 512-6061:

To Report Fraud, Waste, and Abuse in Federal Programs:

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470:

Public Affairs:

Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800 U.S.

General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C.

20548: