GAO: Fuel Fraud Law Costs Aviation Trust Fund Billions

The aviation trust fund has lost between $1 billion and $2 billion “or more” in tax revenues as a result of the decade-old fuel fraud law, a U.S. government watchdog has found. The Government Accountability Office (GAO) released a report on August 8, finding that less than half of noncommercial jet fuel tax receipts are getting deposited into the aviation trust fund and aviation fuel vendors have overpaid by as much as $230 million in fuel taxes as a result of 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 2.5-cent-per-gallon higher tax levy on highway diesel fuel. The law requires noncommercial 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.

Congress directed the GAO study after industry leaders raised concerns about the losses in aviation revenues, harm to small businesses and cumbersome requirements.

The GAO’s report traced the history of the fuel fraud measure, noting fears that truck drivers were using various means to avoid billions in highway diesel fuel taxes and pointing to activity where six individuals pled guilty to illegally blending jet fuel with diesel fuel.

But GAO questioned the extent of the problem, noting that “reported instances of jet fuel diversion for non-aviation purposes are rare, and economic and technological disincentives may further discourage such activity.”

The IRS has cited some instances of jet fuel tax diversion, but had no documentation of instances that occurred before the enactment of the fuel fraud law. Further, over the past decade, the average price of jet fuel was $2 per gallon more than the cost of highway diesel fuel, the GAO said, providing economic disincentive for such diversion. The watchdog agency also reported that new emission standards have evolved diesel engines to the point that the higher-sulfur-content jet fuel could damage the emission-reducing technologies.

Aside from the underlying justification of the rule, GAO found that many vendors that are authorized to seek the tax refunds aren’t filing for them. While the GAO does not have an exact accounting of the total number of approved fuel vendors (“ultimate” vendors), the agency’s analysis indicates that only about a quarter of those vendors filed a claim for a refund in Fiscal Year 2015. Filing for refunds is voluntary.

Industry stakeholders pointed to numerous reasons for the dearth of refund claims, including the challenging process for vendors to register for authorization. Also, for many vendors the refund on 2.5 cents per gallon is not enough to go through the hassle of seeking a refund. Stakeholders also noted that documentation required to prove fuel was used for aviation purposes may be difficult to obtain. The net result is the funds are remaining in the highway trust fund.

Rep. Mike Pompeo (R-Kan.), who spearheaded the congressional directive for the GAO study, reacted to its results by saying Congress must fix the problem it created by the fuel fraud measure. “This GAO report not only confirms that the fuel fraud provision is deeply flawed and misguided; it demonstrates that the impact on general aviation is far worse than we originally thought,” he said. “This policy serves no practical purpose in the real world and has accomplished nothing short of robbing the aviation industry of billions of dollars over the past decade.”

“The report quantifies the dramatic impact of this revenue diversion that is undermining the viability of the Airport and Airway Trust Fund,” agreed Andrew Priester, chairman of the National Air Transportation Association (NATA), which has long urged Congress to overturn the 2005 fuel fraud law. Priester added that the amounts lost to the trust fund are “simply staggering” and said, “Consider how many new runways, instrument approaches or additional air traffic control towers could have been built had this money been available for its intended purpose."

NATA officials also noted that the report questions the rationale behind the tax law and whether it serves any purpose in the future. "The GAO report lays bare the fact there was never much utility to the provision,” said NATA senior v-p William Deere. “In 2005, the policy change was justified by a belief the 2.5-cent per gallon difference between the highway diesel and jet fuel tax rates somehow incented truckers to use jet fuel. This ignores the fact that in 2005 the average price of highway diesel was $1.30 less than jet fuel. Today, the disparity between those prices is even greater.”

Deere added that the FAA “presciently predicted” that the measure would create a burden and harm the trust fund. The FAA wrote 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.

The report provides industry advocates with the necessary background to seek the overturn of the fuel fraud law. However, they still face an uphill battle in convincing lawmakers to make a change since the law is creating a windfall for the highway trust fund.