Before the Subcommittee on Transportation, Infrastructure, and Nuclear Safety Committee on Environment and Public Works, U.S. Senate
United States General Accounting Office
We appreciate the opportunity to provide testimony on the Highway Trust Fund. Our statement today is based on our June 2000 report on problems with Highway Trust Fund information, work we performed as the principal auditor of the annual financial statements of the Department of Treasury’s Internal Revenue Service (IRS), and other work we do to assist the Department of Transportation Office of Inspector General in its annual audits of the Highway Trust Fund and Department of Transportation financial statements. The Highway Trust Fund is the principle mechanism for funding federal highway programs authorized by the Transportation Equity Act for the 21st Century (TEA-21). Under TEA-21, the funding levels for federal highway programs are adjusted annually upward or downward based on actual and projected receipts of the Highway Trust Fund. These adjustments are referred to as the Revenue Aligned Budget Authority (RABA). We are currently reviewing the fiscal year 2003 RABA adjustment. We can provide you the results of that work at a later time.
This statement will provide a description of (1) how the Transportation Equity Act for the 21st Century (TEA-21) changed the budgetary treatment of programs financed by the Highway Trust Fund, (2) the Revenue Aligned Budget Authority (RABA) calculation process, and (3) the results of our review of the Department of the Treasury’s excise tax distributions to the Highway Trust Fund for fiscal year 2001.
TEA-21 made significant changes to the budgetary treatment of federal highway and transit programs financed by the Highway Trust Fund. In particular, TEA-21 guaranteed annual funding levels for most highway and transit programs and more closely linked highway user tax receipts, such as those from motor fuel and truck tire taxes, to the annual guaranteed funding levels for highway programs.
RABA adjustments ensure that highway program funding levels will change as Highway Account receipt levels change. For the first time, the RABA adjustment for fiscal year 2003 is negative—decreasing highway funding by $4.37 billion.
Our work shows that the amounts distributed to the Highway Trust Fund for the first nine months of fiscal year 2001, as adjusted based on IRS’ certifications, were reasonable and adequately supported based on available information.
TEA-21 authorized $217.9 billion for highway, mass transit, and other surface transportation programs for fiscal years 1998 through 2003. TEA-21 continued the use of the Highway Trust Fund—which is divided into a Highway Account and a Mass Transit Account—as the mechanism to account for federal highway user tax receipts that fund various surface transportation programs. Prior to TEA-21, these programs competed for budgetary resources through the annual appropriations process with other domestic discretionary programs. In a major change to federal budget rules, TEA-21 guaranteed a minimum level of spending for these programs. New budget categories were established for highway and transit spending, effectively establishing a budgetary “firewall” between those programs and other domestic discretionary spending programs. Of the $217.9 billion authorized for surface transportation programs over the 6-year life of TEA-21, about $198 billion is protected by the budgetary firewall—about $162 billion for highway programs and $36 billion for transit programs. TEA-21 also enhanced the linkage between highway user tax receipts in the Fund’s Highway Account and federal highway program funding levels in several ways, including (1) guaranteeing specific annual funding levels for most highway programs over a 6-year period on the basis of the projected receipts in the Highway Account, and (2) adjusting the guaranteed spending level for each fiscal year upward or downward if the receipt levels in the Highway Account increased or decreased from those projected in TEA-21.
Federal highway user taxes directed to the Highway Trust Fund include excise taxes on motor fuels (gasoline, gasohol, diesel, and special fuels); and truck-related taxes on truck tires, sales of trucks and trailers, and the use of heavy vehicles (see fig. 1). Someone other than the consumer generally pays the motor fuel taxes into the Highway Trust Fund. Oil companies typically pay a per-gallon tax on the motor fuels at the point where their fuel is loaded into tanker trucks or rail cars at a terminal. Tire manufacturers pay taxes on truck tires, by weight; and retailers pay taxes on the sales price of new trucks and trailers. Owners of heavy highway vehicles pay taxes on the use of these vehicles, making this the only highway tax directly paid by the highway user.
Note: Tax rates as of July 1, 2001.
Source: Federal Highway Administration
(FHWA) and the Office of Tax Analysis, Department of the Treasury.
Twice a month, business taxpayers make deposits of excise taxes—including highway user taxes—generally through Treasury’s Electronic Federal Tax Payment System. Excise taxes are deposited into Treasury’s General Fund as received. Treasury uses a complex and lengthy process—involving four organizations within the department—for distributing excise tax receipts to the various trust funds, including the Highway Trust Fund. The department uses this process, in part, because it does not obtain data from business taxpayers (when they make semimonthly deposits) on the types of excise taxes that these deposits are intended to cover.
Because businesses, rather than consumers generally pay highway user taxes, most of the federal motor fuel and truck taxes come from only the handful of states where those businesses have their corporate headquarters and pay their taxes. As a result, the Treasury Department does not provide the Federal Highway Administration (FHWA) with state-level data on highway tax receipts, and FHWA must therefore estimate these data in order to distribute Highway Account funds to the states under various highway programs. FHWA estimates state-level contributions through what it refers to as its “attribution process.” Through this process, it determines each state’s share of highway motor fuel usage on the basis of data provided by the states, and it uses that information to estimate the amount of contributions to the Highway Account attributable to each state’s highway users. The information developed by Treasury and FHWA is used to determine the amounts of funds distributed to each state under several major highway programs.
TEA-21 used projections of Highway Account receipts to develop guaranteed highway funding levels for fiscal years 1999 through 2003. Beginning in fiscal year 2000, these guaranteed levels were to be adjusted upward or downward each year on the basis of actual Highway Account receipts and new projections of these receipts. If this RABA adjustment lowers the guaranteed funding level for a given fiscal year, TEA-21 requires that the Department of Transportation reduce the amount of funding authorized on October 1 of the next fiscal year. RABA adjustments ensure, for the first time, that highway program funding levels will change as Highway Account receipt levels change.
The RABA adjustment to the funding levels authorized in TEA-21 is based on actual receipts from 2 years prior to the fiscal year, as reported by Treasury, plus revised Treasury receipt projections for the fiscal year in question. For example, for fiscal year 2000, TEA-21 requires that this adjustment be calculated by comparing (1) actual Highway Account receipts for fiscal year 1998 with the TEA-21 projection of these receipts (the “look back “ portion of the calculation) and (2) revised projections of Highway Account receipts for fiscal year 2000 with the TEA-21 projection of these receipts (the “look forward” portion of the calculation). The sum of these differences becomes the RABA adjustment. To determine the amount of the RABA adjustment, the Office of Management and Budget relies on information on Highway Account receipts supplied by Treasury. Specifically, the Bureau of Public Debt provides the actual Highway Account receipts for the prior fiscal year, and the Office of Tax Analysis (OTA) provides a projection of Highway Account receipts for the next fiscal year.
Figure 2 shows the RABA calculations and resulting adjustments for fiscal years 2000 through 2003. As shown, the RABA adjustments for fiscal years 2000 through fiscal year 2002 were positive—increasing highway funding levels by a total of over $9 billion. However, in fiscal year 2003, actual Highway Account receipts for fiscal year 2001 were less than the TEA-21 estimate for fiscal year 2001, and Treasury’s projection of Highway Account receipts for fiscal year 2003 was less than the TEA-21 estimate for that year. As a result, the RABA adjustment for fiscal year 2003 is negative $4.37 billion.
Note: Actual receipts are net tax receipts (excluding fines and penalties) after deduction of transfers and refunds. OTA prepares forecasts of tax receipts to the Highway Account of the Highway Trust Fund for the President’s Budget and other analyses. References to TEA-21 estimates are to the estimates of Highway Account receipts in TEA-21. The Congressional Budget Office prepared these estimates.
Source: Department of Transportation
We are currently reviewing the fiscal year 2003 RABA calculation and will report our results at a later date. We have, however, completed our annual review of the Treasury’s distribution of excise taxes to the Highway Trust Fund for fiscal year 2001—which accounts for about 80 percent of the total negative RABA of $4.37 billion.
The federal government levies excise taxes on entities and individuals to finance general federal activities and specific government programs. Several different bureaus and offices within Treasury collected about $69 billion of net excise taxes in fiscal year 2000. However, IRS accounted for the majority of excise taxes in fiscal year 2000, with about $54 billion in net excise tax collections on the purchase, use, or inventory of various types of goods or services, such as gasoline and tobacco. The various excise tax receipts accounted for by IRS are initially deposited into the General Fund of the Treasury as they are paid by the business taxpayer; subsequently, a portion of these deposits are distributed to nine excise tax-related trust funds, which are administered by six Federal agencies. More than 63 percent of these funds are ultimately distributed to the Highway Trust Fund.
Under section 9601 of the Internal Revenue Code, the Secretary of Treasury is required to transfer applicable excise tax receipts from the General Fund to trust funds on a monthly basis. These transfers are based on estimates because data is not available to attribute excise taxes to the appropriate trust funds when the deposits are initially made. Treasury’s OTA prepares these semi-monthly estimates based on historical IRS certification data and actual current excise tax revenue collections. The estimates are used to prepare accounting entries for the initial distributions to the trust funds. Subsequently, IRS certifies the actual excise tax revenue collections that should have been distributed to the trust funds based on the payments and tax returns IRS receives from taxpayers.  Using the IRS certifications, Treasury then adjusts the initial trust fund distributions. For example, in March 2001, Treasury made an adjustment to decrease the Highway Trust Fund’s fiscal year 2001 excise tax distributions by about $1.2 billion. This adjustment was to correct for actual collections for the fourth quarter of fiscal year 2000 being less than what was initially distributed based on OTA’s estimates for the quarter ended September 30, 2000. According to an official from OTA, the original estimated transfer amounts for the quarter had been calculated using an economic model that assumed a higher rate of economic growth through calendar year 2000 than was actually the case. As a result, the downward adjustment was made, effectively reducing fiscal year 2001 distributions to the Highway Trust Fund by the $1.2 billion.
We are issuing today results of a report on the procedures we performed related to the distributions of excise taxes to the Highway Trust Fund in fiscal year 2001. Based on this work, we believe the amounts distributed to the Highway Trust Fund for the first nine months of fiscal year 2001, which were subject to the IRS’ quarterly excise tax certification process and which were adjusted based on this process, were reasonable and were adequately supported based on available information. Additionally, we believe the March 2001 adjustment made by Treasury to reduce fiscal year 2001 Highway Trust Fund excise tax distributions by $1.26 billion was reasonable and appropriately supported. The certifications for distributions of excise tax revenue collected during the period July 1, 2001, through September 30, 2001, will not be completed by IRS until March 2002. Consequently, the distributions of fourth quarter fiscal year 2001 excise tax revenue were based solely on estimates prepared by OTA. While we reviewed certain procedures associated with OTA’s estimates, we did not audit the estimation process nor did we audit the estimates themselves. Therefore, we cannot conclude on the reasonableness of the distributions made to the Highway Trust Fund for the fourth quarter of fiscal year 2001.
For further contacts regarding this testimony please contact JayEtta Z. Hecker at (202) 512-2834 or on email@example.com. Individuals making key contributions to this testimony included Nikki Clowers, Ted Hu, Steven Sebastian, Ronald Stouffer.
FHWA apportions any additional RABA funds to the states on October 15 of each fiscal year—about 2 weeks after apportioning the amount of highway program funds for the fiscal year that was authorized in TEA-21.
Typically IRS certifies quarterly excise tax distributions six months after the end of the quarter. This is to allow sufficient time for receipt and processing of the tax returns, including returns filed late. Even though IRS certifies collections six months after the end of a quarter, certifications for any given quarter routinely contain some amounts related to prior quarters.
Prior to December of 2000, this process used economic models and was linked to OTA’s receipt estimates for inclusion in the President’s Budget.