DEPARTMENT OF THE TREASURY

 


Statement of

Andrew Lyon, Deputy Assistant Secretary for Tax Analysis

United States Department of the Treasury

Before the Committee on Environment and Public Works

Subcommittee on Transportation, Infrastructure, and Nuclear Safety

United States Senate

Hearing on the Department of Transportation Fiscal Year 2003 Budget

and the Highway Trust Fund

February 11, 2002

 

 

Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity to describe recent trends in actual highway-related excise taxes and discuss the Administration’s FY 2003 Budget forecast of excise taxes dedicated to the Highway Account of the Highway Trust Fund.

 

The Office of Tax Analysis in the Department of the Treasury forecasts most future tax receipts for the President’s Budget.  These forecasts are made using economic models that are constantly updated to incorporate the most current information on tax collections and reported tax liabilities.  The forecast for Fiscal Years 2002 through 2012 incorporates the Administration’s economic assumptions formulated for the Budget by the Troika, which consists of the Council of Economic Advisors, the Office of Management and Budget, and the Department of the Treasury.[1]  Each of the six dedicated Highway Account excise tax sources are separately forecast: (i) Gasoline, (ii) Gasohol fuels, (iii) Diesel and other fuels, (iv) Retail tax on trucks, (v) Highway-type tires, and (vi) Heavy vehicle use tax.  In Table 1, fiscal year receipts for 2000 through 2012 are reported for these six excise tax sources.  The 2000 and 2001 figures are actual receipts drawn from the Highway Account Income Statement, while the 2002 through 2012 figures are projections from the President’s FY 2003 Budget.[2]

 

Recent Excise Tax Receipts

 

There has been a rapid downturn in highway-related excise taxes as the economy weakened over the past year and a half.  Actual tax receipts dedicated to the Highway Account fell $3.4 billion from Fiscal Year 2000 to Fiscal Year 2001, dropping from $30.3 billion to $26.9 billion, an 11.3 percent decline.  As shown in Table 1, five of the six receipt sources were lower in 2001 than in 2000.  Only taxes on gasohol fuels show an increase. 

 

Although the growth in the tax on gasohol fuels might initially appear to be a bright spot in an otherwise disappointing year, the growth is actually a significant factor in the overall reduction in dedicated Highway Account tax receipts.  The increase in taxes on gasohol fuels is evidence of an ongoing substitution of gasohol fuels for gasoline, which may be used interchangeably in cars and light trucks.  We anticipate that there will be an increasing use of gasohol fuels, and corresponding reductions in gasoline consumption as States ban the use of MTBE (methyl tertiary-butyl ether) as a fuel additive.  Since the Highway Account receives 15.44 cents per gallon of gasoline but only about 8 cents per gallon of gasohol, increases in gasohol use at the expense of gasoline consumption will result in a net reduction in Highway Account receipts.  On net, for every billion gallons of gasohol sold in place of gasoline, Highway Account receipts are approximately $78 million lower.  Approximately two-thirds of this negative effect on Highway Account receipts from the substitution of gasohol for gasoline is due to the ethanol tax incentive (currently 53 cents per gallon of ethanol, which at a 10 percent blend is 5.3 cents per gallon of gasohol). The remainder is attributable to the fact that the law dedicates a portion of gasohol tax receipts (typically 2.5 cents per gallon) to the General Fund.

 

The most dramatic declines between FY 2000 and FY 2001, both in percentage terms and in dollars, occurred in excise taxes related to the sales and operations of trucks.  The retail tax on trucks, a 12 percent tax on the first retail sale of heavy trucks, buses, truck tractors, and trailers, was down 55.2 percent, a decline of more than $1.8 billion.  Tax receipts from the tax on truck tires fell 22.5 percent, and truck use tax receipts fell 33.8 percent.  The reductions in retail truck taxes were particularly large because this tax is levied as an ad valorem tax on the first retail sale.  During the investment boom of 1998 and 1999, a large volume of new trucks were purchased at premium prices.  As the economy weakened, large numbers of these slightly used trucks were placed on the market.  This greatly depressed prices and sales in the new heavy truck market, and tax revenues from retail truck taxes declined accordingly.

 

The first quarterly report to show weakness in total collections was for July through September of 2000.  This Highway Trust Fund certification of excise tax receipts was issued in March of 2001.[3]  This certification shows a 4.8 percent drop compared with the same quarter in the prior year.  The subsequent quarterly certification for October through December 2000, issued in late June, showed a 5.6 percent reduction in receipts compared to the prior year.  Based on this weakness, the Mid-Session Review of the FY 2002 Budget reported that Highway Trust Fund revenues would be lower than previously forecast. 

 

New data for the first two quarters of calendar year 2001 have shown further weakness in tax receipts.  The certification for January through March of 2001 showed receipts declining 3.5 percent compared with the prior year, and the certification for April through June of 2001 was 5.5 percent lower than the prior year.  These two quarterly certifications also reflected accelerating increases in gasohol use as gasohol taxes grew by 25.8 percent and 23.7 percent compared with the same quarters in 2000.  This series of weak Highway Account receipt certifications explains why FY 2001 total tax revenues fell to $26.9 billion.[4]

 

Forecast of Future Excise Tax Receipts

 

Looking forward, the Administration projects steady growth in highway-related excise tax receipts.  Net receipts in FY 2003 are projected to be 6.2 percent higher than FY 2001 and 2.9 percent higher than FY 2002.  Average annual growth is forecast to be more than 3 percent per year over the remainder of the budget period.  The FY 2003 Budget forecasts a faster long-run growth in receipts than last year’s Budget; however, this faster rate of growth is relative to a smaller base, so the FY 2003 levels are lower than previously projected.  In the current budget, the Administration forecasts net Highway Account excise tax receipts to be $28.57 billion in FY 2003.

 

During the first five years of the forecast period, gallons of gasoline and gasohol fuels are projected to grow at an average of 2.3 percent per year.  Gasohol fuels grow faster than gasoline due to the increasing reliance on ethanol as an oxygenate to meet clean air requirements.  Because of the difference in the amount per gallon dedicated to the Highway Account, total gasoline and gasohol receipts grow at about 2 percent per year during the first five years of the forecast.

 

The truck related excise tax receipts are projected to grow quickly as the economy recovers.  For FY 2003 compared to FY 2001, retail tax on trucks receipts are projected to grow 22.1 percent and tire tax receipts are projected to grow by 10.6 percent.  Between FY 2003 and FY 2002 retail tax on truck receipts are projected to grow 15.6 percent and tire tax receipts are projected to grow 6.5 percent.  This growth reflects the recovery of the heavy truck market and more generally increased investment in equipment.  Diesel fuel receipts are forecast to decline slightly between FY 2001 and FY 2002 before resuming growth averaging more than 3.5 percent per year.

 

In summary, the Administration’s forecast of highway-related excise taxes reflects the most recent tax collection and liability data available, and the Administration’s economic forecast.  The data reflect the weakness in the economy during 2000 and 2001.  The forecast for future years is based on the expectation that the recession will end in early 2002 and a strong recovery will be underway later in the year.

 

Conclusion

 

I appreciate this opportunity to describe recent trends and present our current forecast to you.



[1] The economic assumptions are described in Chapter 2 of the Analytical Perspectives volume of the Fiscal Year 2003 Budget.

[2] The Income Statement for 2001 includes three quarters of actual tax receipts certified by the IRS.  Receipts for the last quarter of the year are based on an estimated allocation of total excise tax receipts.  Any differences between estimated and actual receipts for the last quarter is adjusted in March and reflected in the Income Statement of the subsequent year.

[3] The Highway Account Certification is issued by the IRS as the final statement of excise tax collections dedicated to the account.  The Certification for a given quarter is issued approximately five and half months after the end of the quarter due to the time required to process the excise tax returns.  This report, based on filed excise tax returns, provides the first detail of tax receipts by specific tax item. 

[4] Total Highway Account receipts including fines and penalties were $29.917 billion in FY 2001.