Bill proposes to detangle fuel-tax collection system

 - October 31, 2007, 11:58 AM

The Senate Finance Committee has approved a bill that would repeal the onerous “fuel fraud” provision enacted into law as part of the 2005 Highway Bill. Although the law dealt with surface transportation, it contained a provision that aviation jet fuel taxes be collected at the highway diesel fuel rate of 24.4 cents per gallon as opposed to the aviation rate of 21.9 cents per gallon.

The provision was designed to guard against alleged fuel fraud from highway truck operators purchasing aviation fuel for highway use to avoid paying the higher tax on highway diesel fuel. It also directed that all taxes on the sale of aviation fuel be deposited initially in the Highway Trust Fund instead of the Airport and Airway Trust Fund.

The bill required the final seller of the fuel (mainly FBOs) to apply for a refund of the 2.5-cents-per-gallon difference in the amount of taxes paid and the amount owed. Only then did the remaining 21.9 cents transfer from the Highway Trust Fund to the Aviation Trust Fund.

The aviation industry disputed the contention that fuel fraud was a widespread problem, citing lack of statistical evidence of highway trucks operating with aviation fuel. The National Air Transportation Association, which represents FBOs, said that repealing the fuel fraud provisions of the 2005 Highway Bill will ensure a direct flow of fuel tax revenues into the Aviation Trust Fund while eliminating the “enormous hassle aviation fuel retailers have endured as a result of this policy.”

The “American Infrastructure Investment and Improvement Act” won Senate Finance Committee approval on September 21. It essentially repeals the requirements of the “fuel fraud” provision of the 2005 Highway Bill as it pertains to FBOs.

The proposal creates a separate category of kerosene used for aviation purposes–aviation-grade kero-sene. All aviation-grade kerosene is initially taxed at the 36-cents-per-gallon rate currently under consideration, and the taxes go directly into the Airport and Airway Trust Fund. The bill includes refund mechanisms for tax-exempt entities that purchase fuel taxed at the 36-cents-per-gallon rate.

The finance committee bill will be paired with S.1300, “The Aviation Investment and Modernization Act of 2007,” which the Senate Commerce Committee passed last May. But there is still debate raging in the Senate about how to pay for the FAA to operate and at the same time fund the NextGen ATC modernization.

There are major disagreements between the Commerce Committee and the Finance Committee leaders on the subject of Aviation Trust Fund financing. Sen. John Rockefeller (D-W.Va.), who sits on both committees, offered an amendment to the finance bill that would have raised general aviation fuel taxes to 52 cents per gallon, instead of the 36 cents per gallon in the measure.

Although it was defeated, Rockefeller, who was a co-author of S.1300, threatened to delay the bill’s progress until a compromise can be reached. At a Finance Committee hearing in July, he warned that he would look for ways to limit general aviation access to congested airspace if corporate aviation doesn’t pay more.

The House of Representatives has approved its version of the FAA reauthorization bill and is awaiting action in the Senate before the two chambers can begin to work on a conference committee to negotiate a final bill.