Since 1970, the federal Airport and Airway Trust Fund (referred to as the Aviation Trust Fund) has been an important source of finance for airport improvements. But the fund has dwindled thanks to a 2006 law, passed to quell fears of a far-fetched (if not fictional) problem — truckers purchasing jet fuel rather than higher-taxed diesel fuel. According to a new report released Monday from the GAO, the 2006 “fuel fraud law” has cost the Aviation Trust Fund between $1 billion and $2 billion per year, if not much more.
The federal fuel fraud law, in short, requires the same tax rate for jet fuel and diesel fuel used by truckers. More problematically, it requires that taxes from noncommercial aviation fuel funnel into the Highway Trust Fund rather than the Aviation Trust Fund, unless the fuel vendor can prove the fuel was used for aviation.
The fuel fraud law gained support in the early 2000s, when federal officials reported that the ability to substitute car fuel for noncommercial jet fuel, in combination with the $0.025 per gallon difference in federal excise tax between the two fuels, could encourage truckers to divert jet fuel to truck use. Congress responded to the perceived issue in two ways. First, it equalized tax rates for noncommercial jet fuel and diesel fuel purchased by truckers. Second, it allowed aviation jet fuel vendors to maintain the previous lower tax rate as long as the vendor registered with the IRS as an “ultimate vendor” of jet fuel, and then submitted a credit or reimbursement for each sale. The jet fuel vendor would be reimbursed (or credited) for the difference of the pre-fuel fraud law rate and the post-fuel fraud rate.
The law produced predictable results: the bureaucratic process has deterred fuel vendors from applying for the tax refunds. The vendor refund applications are necessary to redirect the funds to the Aviation Trust Fund, the proper recipient. When vendors do not claim reimbursements or credits, the taxes are transferred to the Highway Trust Fund. The GAO report suggests that vendors are unmotivated by the 2.5 cent per gallon refund, which has not been worth the trouble of the complicated refund process. The GAO noted that ultimate vendor registration is “challenging,” requires difficult-to-obtain documentation and entails hours of dedication for refunds, which vendors do not see for many months.
In support of its report, the GAO analyzed data on jet fuel vendors from the Aircraft Owners and Pilots Association for 2015, analyzed IRS data on ultimate vendors, refunds, and credits from 2006–2015, and interviewed industry stakeholders. The GAO also reviewed relevant federal statutes, data on jet fuel prices, data on diesel fuel prices, and interviewed officials from relevant agencies. The results, according to the GAO report released on Monday, have been devastating for airport development previously funded by the Aviation Trust Fund. In 2015, only a quarter of all registered jet fuel vendors filed a credit or refund claim for noncommercial aviation fuel, and over half of all registered ultimate vendors did not file any claim for jet fuel sales.
Not surprisingly, airports benefiting from the Aviation Trust Fund have been hurt by the diversion of billions of dollars each year. While the Secretary of Transportation called the supposed fraud “a serious and growing problem that requires an equally serious [f]ederal response,” the GAO disputes the concerns, stating that “reported instances of jet fuel diversion for non-aviation purposes are rare, and economic and technological disincentives may further discourage such activity.” Regardless, Congress passed the fuel fraud law, aviation fuel vendors have overpaid $230 million in fuel taxes, and funding for airport improvements has been diminished by the law’s adverse impact on the Aviation Trust Fund.