GAO To Release Probe on Aviation Fuel Fraud Law

The Government Accountability Office (GAO) is expected to release its study shortly on the amount of tax revenue diverted from the aviation trust fund as a result of a decade-old “fuel fraud” law. Congress directed the study late last year after aviation groups expressed concern that the aviation trust fund is losing tens of millions in non-commercial aviation fuel tax revenue thanks to the fuel fraud law.

Enacted as part of the 2005 highway bill, the fuel fraud law was designed to discourage truck drivers from purchasing aviation jet fuel to avoid paying the higher taxes of the highway diesel fuel. The law requires non-commercial jet fuel to be treated as highway diesel fuel—taxed at the same rate and deposited into the highway trust fund until approved aviation vendors demonstrate that the fuel was used for aviation purposes and seek refunds.

Business aviation advocates have long protested the law, saying that the higher cost of jet fuel more than offsets any tax differential between jet fuel and highway diesel fuel and that the bureaucratic process instead is discouraging aviation vendors from seeking refunds. The net result is much of the non-commercial jet fuel tax is remaining in the highway trust fund.

NATA called the refund process “arduous” and said the 2005 law is “nothing more than a bureaucratic roadblock draining the Airport and Airway Trust Fund of revenues needed for airport improvements and the deployment of a modernized air traffic control system.” NATA in the past has estimated that the aviation trust fund could be losing between $60 million and $90 million a year from the fuel fraud measure, but officials at the association acknowledge that estimate might be conservative.

The FAA also in the past has expressed concern about the requirements, writing the Internal Revenue Service in late 2005 that “the solution to [the highway diesel fuel tax] problem should not harm legitimate aviation users in a fragile industry or create significant administrative burden.” The FAA had asked the IRS to set aside the rule until the affected industries could hammer out a workable rule, but that request was unheeded.

Rep. Mike Pompeo (R-Kan.) spearheaded the congressional directive for the GAO fuel fraud study. “General aviation should not be paying for highway infrastructure—period,” Pompeo said. “The fuel fraud tax is unfair, unnecessary, and must be fixed. This deeply flawed provision is a classic example of what happens when Congress falls asleep on the job; we end up fighting problems that don’t exist.”

The Pompeo directive was included in highway reauthorization legislation (H.R.22) that became law in early December. The directive calls on the GAO to issue a report within 180 days on the effects of the fuel fraud provision and the actual scope of the problem it was intended to address. The report is expected to be released in early August.