Prior to the 1997 agreement to balance the federal budget, aviation taxes deposited into the Airport and Airway Trust Fund were limited to a 10% ticket tax, a 6.25% cargo waybill tax, a $6 international departure tax, a 17.5 cents per gallon general aviation jet fuel tax, and a 15 cents per gallon general aviation gasoline tax. These taxes and fees levied on the aviation community (including passengers and shippers) have been increased to help reduce the federal budget deficit or to pay for cuts in other areas. As such, once these additional revenues are collected, they will likely remain unavailable for FAA funding unless the FAA receives the budget treatment sought by the Commission.

3 Preliminary estimates. Ongoing refinements needed for ticket tax in rural areas, impact of Alaska and Hawaii on international departure taxes, and frequent flier taxes.

4 Interest calculation assumes Trust Fund continues to fund the FAA at current rates.

C. Why Change Is Needed

The Commission believes that there are compelling reasons to move to a cost-based system of charges for ATC-related services which include the FAA's operational and capital investment programs in airport grants, facilities and equipment, and research, engineering and development.

As manager of the aviation system, the FAA provides its customers with a variety of facilities and services. The customers pay for the system, but current payments bear little relationship to the particular facilities and services they actually use and whether they use them at busy or slack times.

By contrast, a private sector firm can look at the revenues and costs of its services and product lines and learn a lot about how customers, including passengers, value products relative to their costs, where the firm should try to reduce costs, what product lines to improve or develop, the most attractive opportunities to invest new capital, and so forth. The FAA does not get that kind of detailed information from its customers, nor do its customers receive detailed information on the costs of providing the services they use.

Changing to a cost-based system is essential to develop a more independent, more commercial and more efficient air traffic system. If charges for services have little or no relationship to real costs, there is neither the means nor the opportunity for service providers to enter into realistic consultations with customers as to what services are providers to enter into realistic consultations with customers as to what services are needed, how they should be provided and what the charges should be.

In order to provide more efficient services, the FAA must distinguish between the buyers of air transport services, the users of the system, and the beneficiaries of the air transportation industry. The buyers -- largely travelers and shippers -- pay market prices for the services they receive. On the other hand, none of the direct users of the public infrastructure -- including airlines and owners of general aircraft -- pay market prices for air traffic control services. Rather, they collect ticket or waybill taxes from buyers, or they pay fuel taxes. These taxes, however, are not directly related to the FAA's costs in providing the specific services used. Moreover, beneficiaries of the air transport sport system, including the general public and all businesses, have little insight concerning the infrastructure that makes up the public component of the aviation system, and little or no idea about how the public component of the system is financed.

The Commission's approach has been to develop alternatives to provide system managers with useful information as well as the power and resources to act on that information. This approach mimics the information and resources that the market system provides to the private portions of the aviation system and will provide valuable tools to decision makers in the aviation system. Revenue streams will serve as signals to providers within the system -- including the FAA, airports, airlines -- as to where improvement is needed or demand is not being met. This approach also ensures that these revenue streams provide the financial resources needed to act on those signals and provide the means to increase capacity (or decrease it, if less capacity is needed).

The Commission believes that better spending decisions will come from better information. It is not hard to make a strong general case for the gains from imposing user charges that reflect the costs of providing air traffic control services. This is a basic tenet of a free-market economy. The FAA, the aviation system in general, and the individuals and businesses who depend on air travel would all benefit from a move to charges that reflect FAA's actual costs to provide specific services. Similarly, the FAA needs more information from its customers on their costs of specific operations, including operations of particular aircraft types, time of day differentials, etc., in order to evaluate its operations, investments, and pricing. Better information on revenues and costs would have several important impacts:

• First, the FAA, and its customers, would be able to plan more effectively. Better information allows better analysis and better decisions. The FAA would be able to see more clearly where more spending, faster development or deployment of new technologies, and new investment are required. Such analysis could point to greater emphasis on particular improvements or technologies applicable to many elements of the system or to solutions of problems at particular locations, as appropriate.
• Similarly, the FAA would have access to realistic information about its performance. Public availability of data on revenues and costs of system elements will encourage FAA managers to focus their efforts. Such data would also be helpful in the development of a system of performance measures which customers, the Congress, and the general public could use to judge how well FAA does its Job.
• Further, there will be revenue and pricing effects to the extent that customers and the FAA adjust their behavior. Some carriers may decide to avoid times and places with higher prices. Other carriers may decide that the cost of air traffic services is not a critical component of their operations decisions, and will be undeterred by such prices. Behavioral changes of this kind could reduce system costs while helping to expand system capacity. At the same time, the FAA will be able to focus its revenues on particular costs sectors or locations, speeding needed deployment of new air traffic technologies, personnel, or even helping to finance needed system runway expansion.

In addition to these economic performance based reasons for moving to a cost-based user charge, there are other, institutional benefits from such a system. Revenue raised through a cost-based system normally receives more favorable treatment in the budget process. A cost-based system is more likely to receive the budget treatment recommended by the Commission, allowing all of the revenues from the system to fund relevant programs. In addition, the current excise taxes have been challenged as not being appropriately tied to the ATC services provided to a particular flight and therefore does not fairly distribute costs among users. A cost-based system -- based upon a cost accounting system -- would finally clarify whether this perceived lack of connection is real. Finally, a cost-based system could be more readily adjusted in order to take into account new aviation system priorities, new programs, and/or FAA cost reductions.

D. Future Method of Funding the FAA

1. Future User Charge System

The Commission recommends that the future cost-based funding system for the FAA should have the following features:

• Have accurate costs as its foundation,
• Be easy to administer;
• Be readily adjustable;
• Ensure that the FAA has a stable and adequate funding source;
• Ensure that the nation's airports and airways are safe and are used as efficiently as possible;
• Encourage a strong, competitive aviation industry; and
• Make the FAA more accountable to its customers.

2. Air Carriers Should Pay Cost-Based User Charges

The Commission recommends that the cost-based user charges required of air carriers fully recover the FAA's operating costs and capital needs (other than those recovered by general aviation fuel taxes and the proposed general fund contribution for public use of the system). When developing a cost-based system, the FAA should first rely on the new cost accounting system to best determine where and how system costs are generated. The FAA may also consider guidelines such as those established by the International Civil Aviation Organization (ICAO). ICAO approved formulas are typically based on separate en-route/in-flight and terminal/approach charges, taking into account aircraft weight and distance flown. However, there are many other factors which are not part of the ICAO formula that would be critical to the development of a true cost-based system, and therefore should also be taken into consideration when developing user charges (i.e., time of day when the flight occurs and the level of congestion in the airports and airspace utilized). In addition, when establishing this new system, the competitive balance among industry segments must be taken into consideration.

3. General Aviation Should Continue to Pay a Fuel Tax

The Commission recommends a continuation of the fuel tax for general aviation. A fuel tax is an efficient, easy to administer revenue collection mechanism. Any fuel excise tax must receive the same special budget treatment as the Commission seeks for all aviation user charges, and these taxes should be used to support the air traffic and airport development activities of the FAA. In addition, the Commission believes the Congress should allow air taxis (air carriers operating non-scheduled air transportation under 14 CFR Part 135) to pay general aviation fuel tax instead of the air transportation taxes that their customers currently pay.

Notwithstanding this recommendation it is clear from existing aviation cost allocation studies that the current level of tax payments does not cover the costs general aviation imposes on the FAA. The Commission believes that fuel taxes imposed on general aviation should be re-evaluated based on an accurate analysis of the costs of providing ATC and related services to them. It must also be recognized that general aviation is a unique user of our nation's aviation system and consideration should be given to its unique status and the benefits it provides.

The Commission anticipates that general aviation users and the FAA will work together to allow the FAA to provide more cost-effective services to general aviation in order to reduce the costs they impose on the aviation system. For example, a cost effective DUATS (Direct User Access Terminal. which provides automated flight service information via computer link) could be used more often in place of automated on-site flight service facilities.

4. There Should Continue To Be a General Fund Contribution

The Commission recommends that the FAA should continue to receive a portion of its funding, from the U.S. Treasury general fund. This contribution should be made to cover the FAA programs which are clearly of public benefit, such as the costs of the military/government use of the ATC system and the costs of the safety and security lines of business at the FAA which benefits the nation as a whole.

Some people argue that the general fund contribution is not needed and that the FAA should be 100 percent supported by the aviation system users. However, the Commission believes that the FAA should be partially funded by general tax revenues, in part because aviation system benefits all of society, not just system users. Non-aviation users benefit economically and socially from a safe, efficient, and effective air transportation system.

Examples of this public benefit include: increased property values and employment levels in areas which have good access to air transportation; people who benefit directly from the air transportation system without getting on a plane include cab drivers, hotel employees, and shop workers who manufacture goods destined for the global economy; and all members of our society benefit from a safe aviation system that prevents fatal aircraft accidents involving family, friends, and coworkers.

This public benefit is not readily susceptible to quantification in terms of the FAA's annual budget. So the Commission's recommendation on the portion of the FAA budget to be supported by the general fund is based on a quantification of those portions of the budget which are most directly of general benefit. The cost of safety regulation and certification should be borne by a general fund contribution as these activities are consistent with the government's traditional role of providing for the general welfare of the citizens and are clearly in the broad public.interest. Safety is fundamental to public confidence in the transportation system. That confidence is necessary for transportation to serve the country and the economy as a whole.

The Commissioners concur with the conclusion of the White House Commission on Aviation Safety and Security that ". . . terrorist attacks on civil aviation are directed at the United States, and that there should be an ongoing federal commitment to reducing the threats that they pose." Therefore, the Commission recommends that the security functions of the FAA be paid for through a general fund contribution.

Using FY 1995 as an illustrative example, the total cost to the general fund of public use, regulation and certification (including administrative and research, engineering and development costs), and security (including administrative and research, engineering and development costs) would have been:

It must be noted that events that have occurred since FY 1995 have placed pressure on the need for the FAA to make additional investments in the safety and security areas. Therefore, the general fund contribution for these functions is expected to increase accordingly above the FY 1995 levels. This dollar amount is intended to be illustrative of the scope of a general fund contribution, not an exact recommended amount.

The Commissioners recognize that this subjects these programs to the pressures of the federal budget process. However, by limiting the general fund contribution to public use, safety, and security, the Commissioners believe this is a fair and appropriate decision. The Congress and the Administration should strongly support and -- as they have in the past -- provide adequate funding for these critical safety and security programs.

With regard to the FAA's functions funded by the general fund, the Commission recommends a multiyear appropriation which would greatly improve the planning and management of these programs. Presently, the FAA Safety and Security Office finds itself concerned with three budget cycles at one time -- the current budget, next years budget being considered by the Congress, and the budget two years out being developed by the agency. This type of budget planning is distracting, not productive. A multiyear appropriation will allow the FAA to focus on its job, not its budgetary plans and strategies.

5. Process for Getting to Cost-Based User Charges

Listed below is the process recommended by the Commission to develop and implement cost-based user charges:

• The FAA Administrator should be empowered and directed to develop and implement, after approval of the new Performance Based Organization Board, a schedule of charges for all users of the ATC system. The charges for ATC services should differentiate between the provision of services (including capital investment) related to the landing and takeoff of aircraft and the provision of services related to handling aircraft in flight, and must reflect a reasonable allocation of the costs of providing those services using the best available cost accounting data.
• The Administrator and the Board would consider, when establishing the charges for ATC services, the cost of services provided at different size terminals to different size aircraft and at different times of day. Ease of administration and the competitive balance among industry segments must be taken into consideration as well as the unique circumstances associated with inter-island air carrier service in Hawaii and rural air service in Alaska.
• The Administrator and the Board could formulate charges for some users that would not be solely cost-based if s/he determined that the public interest would be better served to do so (such as small regional air carriers, if it was determined that certain changes would result in a significant loss of air service) or safety concerns.
• The initial schedule of charges would be developed in consultation with the FAA's Management Advisory Council and the Congress.
• The FAA Administrator would publish the schedule of charges as a Notice of Proposed Rulemaking by July 1, 1999. The schedule published by the Administrator must be accompanied by the cost allocation data forming the basis of the charges.
• A Final Rule on charges for ATC would be issued after public comment and hearing by March 1, 2000 and would take effect on July 1, 2000. During this four-month period, the Congress can review the Final Rule to determine if the charges promulgated by the Administrator sufficiently relate user charges to allocated costs. Existing user charges, except on general aviation fuel, would be repealed at that time, when duplicative.
• The Administrator would have the authority to adjust charges based on improved cost accounting data and the need to fund new or accelerated programs after approval by the Performance Based Organization Board and public hearings and comment through the Notice of Proposed Rulemaking process.

The Commissioners believe this process will help gain credibility and support for a new financing system, provided that the cost information used as the foundation for pricing is highly specific and sophisticated. Commissioners and the aviation industry have expressed concern over the high percentage of fixed costs in past cost allocation studies. Only through more reliable cost allocation data can a system based on costs help improve the FAA's performance and cause the aviation industry users to become more sensitive to the costs of services provided by the agency. The Commissioners hope that the positive example set by the Food and Drug Administration of improvement in performance linked to cost-based charges will also be true of the FAA. Finally, the combination of more accurate costs and the performance improvements suggested in this report should serve as a solid funding foundation for the FAA and the industry to meet the aviation challenges of the 21st century.

The law establishing the Commission directed it to analyze and determine the effect of a new financing system on a variety of aspects of the nation's air transportation system, such as the effect on Alaska, Hawaii, rural areas and small communities. Since the Commission is not making a specific financing formula or proposal, it is unable to provide this analysis or determination. However, the legislation accompanying this report includes them as factors to consider in the development of a cost-based system.

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