Transportation Fuel Taxes Early in the 105th Congress

Bernard A. Gelb
Specialist in Industry Economics
Economics Division
97-326 E
Updated March 17, 1997

Summary

The 105th Congress has reinstated for about half a year the federal excise taxes on fuel used by noncommercial aviation. This follows a similar move by the 104th Congress on aviation fuel taxes, and actions pertaining to the tax on diesel fuel used in recreational motorboats, and to the fuel tax credits given to first purchasers of diesel-powered cars and light trucks. The 104th Congress also debated repeal of the increase of 4.3 cents per gallon in transportation fuel taxes imposed by the Omnibus Budget Reconciliation Act of 1993 (OBRA93) (P.L. 103-66), but no new law resulted.

Context

Transportation fuels have been taxed by the federal government since the early 1930s. In 1932, an excise tax of one cent per gallon was imposed essentially on any liquid used primarily as a fuel to propel motor vehicles, motor boats, or airplanes. There have been many changes in the kinds, levels, and disposition of federal excise taxes on transportation fuels since then.<1>

The issue of how the revenues should be used has played a major role over the years in determining whether and which transportation fuels should be taxed, and by how much. It is interesting to note in the 1990s that the 1932 tax was imposed to help reduce the federal budget deficit during the Depression. And, until the Highway Trust Fund was established in 1956, all revenues from transportation fuel excise taxes went into the General Fund of the Treasury.

The Highway Trust Fund was the first of a few transportation-related trust funds set up to finance primarily capital spending on the infrastructure of specific transportation modes. The Airport and Airway Trust Fund, established in 1970, gets its monies from taxes on passenger airline tickets, air cargo bills, international passenger departures, and fuel used by noncommercial (general) aviation. Established in 1978, the Inland Waterways Trust Fund obtains funds from a tax on fuels used by commercial transportation vessels on specified inland and intracoastal waterways. The Surface Transportation Act of 1982 set up a Mass Transit Account within the Highway Fund to receive the portion of highway fuel tax revenues newly designated for mass transit. The Aquatic Resources Trust Fund gets revenues from excise taxes on several items, including gasoline used by motorboats, to further recreational fishing and boating safety.

The strong federal disposition to earmark transportation fuel tax revenues for spending on the related transportation mode appears to have weakened, however, as evidenced by the following: (1) To pay for the cleanup of past leaks in underground petroleum storage tanks, the law reauthorizing the Superfund program imposed a tax of 0.1 cents per gallon, effective January 1, 1987, on fuels used in highway transportation, commercial transportation on inland waterways, and aviation; revenues went into the Leaking Underground Storage Tank (LUST) Trust Fund. This tax expired January 1, 1996. (2) Half of the 5-cents-per-gallon increase in highway motor fuels taxes provided for in the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) was designated a "deficit reduction rate" and, therefore, placed in the General Fund. (However, the revenues from this increment were redesignated to the Highway Trust Fund effective October 1, 1995.) (3) OBRA93 imposed a permanent tax of 4.3 cents per gallon on top of existing transportation fuel taxes, with the revenues from these increments intended for deficit reduction and deposited into the General Fund. As a result, the total tax for deficit reduction on gasoline and diesel fuel used by highway vehicles, railroad diesel, and noncommercial boat gasoline became 6.8 cents per gallon.

The multifaceted OBRA93 was the culmination of congressional debate on the federal budget for fiscal year 1994. It included changes in the federal excise taxes on fuels used in freight and passenger transportation. The Act extended the life of one of the transportation fuel taxes, changed the disposition of some of the revenues at a specified future date, and changed the collection point of diesel fuel. And the timing and duration of the increases were not uniform.<2>

Thus, as seen in the table, the structure of federal transportation fuel excise taxes is extremely complex, with a variety of amounts, revenue designations, and expiration dates. For example, the taxes on gasoline differ in amount and earmarking depending upon whether the fuel is used by highway vehicles, recreational boats, or general aviation aircraft, as do the dates of expiration.

104th Congress

Deliberations concerning federal excise taxes on transportation fuels largely focused on the 4.3-cent per gallon increase imposed by OBRA93, the taxes on aviation fuels, the tax on diesel fuel used in recreational motorboats, and fuel tax credits for first purchasers of diesel-powered autos, light trucks, and vans.

Summary of Federal Excise Taxes on Major Transportation Fuels

1. Effective October 1, 1995, revenues from 2.5 cents of the combined "deficit reduction rate" of 6.8 cents per gallon, previously earmarked for the General Fund, were redesignated to the Highway Trust Fund.

2. Not authorized beyond September 30, 1999.

3. The tax earmarked for the LUST Trust Fund expired January 1, 1996.

4. Not authorized beyond September 30, 1997.

5. Diesel fuel for recreational boating is exempt from the tax effective August 20, 1996, through December 31, 1997.

6. The Airport and Airway Trust Fund taxes on gasoline and jet fuel for noncommercial aviation were not authorized for January 1 through March 6, 1997. They have been reauthorized by the 105th Congress for March 7, 1997, through September 30, 1997. The totals shown for gasoline and jet fuel are 19.3 cents and 21.8 cents, respectively, only for that period; otherwise, they are 4.3 cents.

Note: See text for descriptions of designation categories.

Sources: U.S. Congress. House of Representatives. Conference Report on H.R. 2264, Omnibus Budget Reconciliation Act of 1993. (H.Rept. 103-213); Conference Report on Small Business Job Protection Act of 1996 (H.Rept. 104-737); Conference Report on Superfund Reauthorization and Amendments Act of 1986 (H.Rept. 104-737); P.L. 105-2, Sec. 2; and Noto and Talley, Excise Tax Financing of Federal Trust Funds.

In response to a sharp rise in the prices of highway motor fuels in the late winter and the spring of 1996, some in Congress and elsewhere called for a cut in the federal excise taxes on those fuels and other transportation fuels as a way of offsetting part of the price increase. A common proposal was to repeal the 4.3-cent per gallon increase in the excise taxes imposed by OBRA93 as a deficit-reduction measure (effective October 1, 1993 in nearly all cases). Eight bills that would have repealed or suspended the 1993 increase were introduced, and an amendment for immediate repeal was attached to another bill. The House passed H.R. 3415, which would have repealed the 4.3 cents through December 31, 1996; there was a unanimous consent agreement to consider it in the Senate, but no further Senate floor action occurred.

The effort to repeal was then replaced by a focus on redirecting revenues to the Highway Trust Fund,<3> but no action resulted. And no other changes were made in the taxes designated for the Highway Trust Fund.

The tax on diesel fuel used in recreational motor boats became an issue because it indirectly resulted in recreational boaters not being able to obtain fuel in many instances. Its imposition, combined with requirements of the Clean Air Act Amendments of 1990 that diesel fuel purchased for highway use be low in sulfur, created complex circumstances that caused some distributors to discontinue supplying the fuel.<4> The Small Business Job Protection Act of 1996 (P.L. 104-188) exempts diesel fuel used in recreational motorboats from August 20, 1996 (the date of enactment), through December 31, 1997. This Act also requires the Treasury Department to study and report (to the House Ways and Means Committee and the Senate Finance Committee) possible alternatives to the current collection regime for motorboat diesel fuel by April 1, 1997.

Another transportation fuel tax issue was the expiration on January 1, 1996, of the several taxes that finance the Airport and Airway Trust Fund. Reauthorization had been included in the FY1996 budget reconciliation legislation, which the President vetoed. Failure to reauthorize these taxes was costing an estimated $500 million in revenues per year, and potentially endangering some federal aviation programs.<5> Congress reauthorized the aviation trust fund as part of the Small Business Job Protection Act of 1996 (P.L. 104-188), for the period August 27, 1996, through December 31, 1996.<6> Fuels for commercial and noncommercial aviation are also subject to a "deficit reduction" tax of 4.3 cents per gallon imposed by OBRA93, which did not expire with the trust fund taxes.

Another diesel fuel tax issue was the refund previously given to first purchasers of diesel-powered automobiles, light trucks, and vans. The Tax Reform Act of 1984 (P.L. 84-627) raised the diesel tax 6 cents per gallon in return for a repeal of a scheduled boost in taxes on heavy trucks, effective August 1, 1984. Prior to that, the highway tax on diesel fuel was the same as that on gasoline. The refund (in the form of a tax credit) was given to avoid penalizing purchasers of diesel-powered automobiles, light trucks, and vans, who were not subject to the truck tax in the first place. The Small Business Job Protection Act repeals the tax credit, effective on the date of enactment.

Reacting to the "patchwork quilt" of transportation taxes, the chairman of the House Committee on Ways and Means, Bill Archer, appointed a bi-partisan committee to examine the tax treatment of all modes of transportation. The goal is to establish a comprehensive framework of taxation for that sector.

105th Congress

Largely because of funding needs, the 105th Congress has reauthorized the several taxes that finance the Airport and Airway Trust Fund, including those on fuels used by noncommercial aviation. However, the Airport and Airway Trust Fund Tax Reinstatement Act of 1997 (P.L. 105-2) reinstates the taxes only for the period March 7, 1997, through September 30, 1997. Therefore, it is very likely that the Congress will be addressing these taxes again this session, with the prospect that replacement by a new system of user fees will be considered along with extension or reauthorization.

In other transportation fuel tax matters, Representative Archer's task force is still active. Also, there still is some interest in redirecting the revenues from the 4.3-cent "deficit-reduction" component of transportation fuel taxes into the transportation trust funds. As noted above, this component has no expiration date.

Endnotes

<1> More information on the origins and structure of transportation fuel excise taxes, and the disposition of revenues, can be found in the following: U.S. Library of Congress. Congressional Research Service. Excise Tax Financing of Federal Trust Funds. CRS Report 93-6 E, by Nonna A. Noto and Louis Alan Talley; and Federal Excise Taxes on Gasoline and the Highway Trust Fund: A Short History. CRS Report 96-394 E, by Louis Alan Talley; and The Tax Treatment of Alternative Transportation Fuels. CRS Report 97-195 E, by Salvatore Lazzari.

<2> For a discussion of the full range of tax provisions in OBRA93, see U.S. Library of Congress. Congressional Research Service. The Omnibus Budget Reconciliation Act of 1993: An Overview of the Tax Provisions. CRS Report 93-810 E, by Gregg A. Esenwein and David L. Brumbaugh.

<3> An obstacle to repeal of the 4.3-cent increase, or any other tax decrease, is the requirement of Title XIII of the 1990 Budget Act that any reduction in revenues be made up in some other way.

<4> The Clean Air Act Amendments of 1990 require (effective October 1, 1993) that diesel fuel purchased for highway use contain no more than 0.05% sulfur. OBRA93 imposed the new tax on diesel fuel for recreational boating, and moved the collection point of federal excise taxes on diesel from points of taxable sales to terminals (effective January 1, 1994).

These changes were superimposed upon a matrix of uses, tax status, and sulfur content regulations. Diesel fuel is a variety of #2 oil. On land, #2 oil is used by highway vehicles, off-road vehicles, and nonvehicular equipment (including home-heating furnaces); watergoing vessels that use it may be commercial or noncommercial. Diesel purchased for highway use must be low-sulfur, but may be taxable or nontaxable depending upon the buyer; diesel purchased for off-road surface uses may be "high" sulfur and is tax exempt; diesel purchased by commercial boats may be high sulfur and is tax exempt. State and local governments, non-profit organizations, and Indian tribes are exempt users.

Because terminal operators (who sell to wholesalers) usually do not know the use characteristic or tax status of ultimate buyers, provision was made to differentiate, by dyeing, tax-exempt from taxable and low sulfur from high sulfur fuel. Tax-exempt high-sulfur fuel is dyed blue; tax-exempt low-sulfur is dyed red; taxable low-sulfur is undyed. Clear fuel may be sold tax-paid to tax-exempt users.

This increased the number of "types" of fuel supplied to the market as a whole; and wholesalers and/or retailers faced with an increase in the number of fuel types are faced with either investing in additional equipment (e.g., pumps and tanks) or not selling all of the fuel "types." As a result, users of diesel fuel, such as recreational boaters, could no longer obtain the appropriate category of fuel for their purpose in some places. Some using fuel for tax-exempt purposes had to buy it tax-paid and file for a refund. (Vendors must apply for refunds on behalf of farmers and state and local governments.)

<5> For background on the issues involved in aviation trust fund reauthorization, see U.S. Library of Congress. Congressional Research Service. Reauthorization of the Airport and Airway Trust Fund. CRS Report 96-629 E, by John W. Fischer.

<6> For details on other tax provisions in P.L. 104-188, see U.S. Library of Congress. Congressional Research Service. Tax Provisions of the Small Business Job Protection Act of 1996 (H.R. 3448, P.L. 104-188). CRS Report 96-718 E, by David L. Brumbaugh.