PREPARED STATEMENT OF SENATOR RICK SANTORUM

Good morning Mr. Chairman and members of the Committee. Thank you for providing me the opportunity to speak on an issue so critical to Pennsylvania and the nation as a whole.

I introduced S. 304 on January 31st this year following a pledge I made to Pennsylvanians last fall to repeal a tax which is unfair, ill advised, and will cost my state thousands ofjobs. Working closely with Senator Gorton and Senator Bryan, we have crafted a bipartisan bill designed to save jobs and a financially troubled industry central to the economic well being and competitiveness of American business. Simply stated, the Commercial Aviation Fuel Tax Repeal Act of 1995 repeals a 4.3 cents per gallon jet fuel tax scheduled to take effect October 1, 1995. This repeal, which would generate approximately 527 million dollars a year in added tax burdens, is needed for two reasons.

First, the tax is unprecedented and, in light of other taxes, fundamentally unfair. Historically, the airline industry has paid cargo and excise taxes in lieu of a fuel tax. As far back as 1970, the Senate Finance Committee Report to accompany the Airport and Airway Revenue Act stated that the Act was to "have the use of the aircraft be subject either to the taxes on transportation of persons and freight or else to the fuel taxes, but not to both ." (S. Rep. No. 706, 91st Cong., 2d Sess., 1970-1 C.B. 386, 396). In lieu of a fuel tax, the industry will pay an estimated 6.4 billion dollars in 1995. This is equivalent to a 52.5 cents per gallon tax. The airline industry has never paid commercial jet fuel taxes, and this would be a disastrous time to start.

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Second, since 1990, the U.S. airline industry has lost 12.8 billion dollars, and nearly 120,000 airline employees have lost their jobs. Tens of thousands of aircraft manufacturing employees have been laid off this decade alone. The airline industry's debt as a percent of its total capital has increased from 54% to 65% in the last five years, compared to an industry average in the United States of 40%. The airline industry is only just beginning to show signs of financial recovery. As the demand for air travel is so elastic, airlines will not be able to pass this new tax onto the consumer. Independent analyses of the industry conclude that for every one percent airline tickets increase in price, there is a one percent decline in passenger traffic. Clearly, the imposition of yet another tax in two and a half months would have a devastating effect on a key component of this country's infrastructure. A tax costing the industry over one half of a billion dollars a year would wipe out recent gains, which barely make a dent in the billions of dollars of already lost this decade. Through repeal, we have the opportunity to help secure both jobs and continued growth in this crucial industry.

The impact of the airline industry's financial troubles has been particularly acute in Pennsylvania. USAir, for instance, has hubs in Pittsburgh and Philadelphia. In fact, Pennsylvania is the only state with two major airline hubs. In my state alone, USAir employs 14,821 people and spends over 1.5 billion dollars a year. This generates 11 billion dollars a year in economic activity statewide. However, of the major airlines, USAir has experienced some of the greatest financial difficulties. The airline has not had a profitable year since 1988. In 1994 alone, the company experienced a loss of almost half a billion dollars in operating income. Further, USAir is second only to American Airlines in fuel consumption, having used over 2.5 billion gallons in 1994. This translates into an added tax burden of $50 million if the jet fuel tax takes effect. This would have a devastating impact on an airline critical to Pennsylvania's economic viability. Pennsylvania cannot suffer the resulting job losses from such a tax. As subsequent witnesses will testify, corporations and unions alike recognize this and are unanimous in their opposition to this tax.

There has been broad bipartisan support for repeal of the jet fuel tax since it was first incorporated as part of President Clinton's proposed energy tax during the 1993 Omnibus Budget Act debate. Members representing a wide range of state and constituent interests have recognized that such a tax will negatively impact tourism and aircraft manufacturing as well as the airline industry itself. In fact, during the debate on the Senate Floor in June, 1993, Senator Gorton garnered strong bipartisan support and successfully amended the bill to exempt airlines from paying a fuel tax. The amendment was adopted without a roll call vote, however it had the support of at least sixty three other Senators. Last minute negotiations reincorporated the tax into the budget, but granted a two year waiver until it went into effect. This support continues. Last fall, fifty-nine Senators and four future Senators, myself included, wrote to President Clinton seeking relief from this tax. The bill I introduced in January, S. 304, currently has 26 cosponsors. Representative Mac Collins companion bill in the House currently has 191 cosponsors including support from the Speaker. As you know, S. 304 receive the support of Senator Domenici and the

Budget Committee, and I hope to engender the same support amongst the distinguished members of the Finance Committee.

Thank you for considering this testimony. I hope my statement and that of subsequent witnesses today will make clear the critical need for relief from this tax. I will be happy to provide any further information or to answer any questions you may have. Thank you Mr. Chairman.

Taxes Paid by the Airline Industry in FY 1993, FY 1994 & FY 1995

Listed below is a complete breakout of the estimated excise taxes and user fees paid by airlines in 1994. Please keep in mind that these taxes are in addition to (over and above) the taxes that are paid by all industries, including airlines:

PREPARED STATEMENT OF MICHAEL SCIULLA

I am Michael Sciulla, Vice President of Boat Owners Association of The United States. With over 500,000 members, BOAT/U.S. is the nation's largest organization of recreational boat owners in the country. I appreciate the opportunity to appear before you today regarding the fuel problems now being experienced by recreational boat owners due to the Omnibus Budget Reconciliation Act of 1993 and the diesel fuel regulations issued by the Treasury Department on November 30, 1993.

As you know, the 1993 Act levied a 24.4 cents per gallon tax on diesel fuel used only by recreational boat owners. To collect this tax, the Treasury Department issued regulations mandating that diesel fuel be dyed-red for nontaxed commercial marine use and clear for taxed recreational use. An unintended consequence of these regulations is that fuel availability problems have arisen throughout the country where many "mom and pop" fuel retailers-who only have one diesel tank and pump-have been forced to choose between selling to commercial or to recreational boats.

We have received reports from recreational boaters over the past 18 months that clear "taxed" diesel fuel is now either difficult to obtain or entirely unavailable for miles along major stretches of our waterways. This is especially true in those areas

where recreational boating and commercial fishing co-exist. Since fishing vessels generally purchase hundreds, if not thousands of gallons at a time every day, in comparison to the occasional 10 to 300 gallons for a recreational boat, the market has simply dried up for clear diesel fuel in these areas.

For example, there is no clear diesel fuel available along the entire 300-mile stretch of the Intracoastal Canal, a major transit route, between Gulfport, Mississippi and Galveston, Texas. Clear fuel may be obtained at Vermillion Bay and Lake Charles, but these locations require side trips of at least a two-hour duration. Further south in Venice, La. there is only one marina carrying clear fuel. "This has created a monopoly on this fuel and the marina can charge any price it wants for taxed fuel," reports a diesel boat owner.

In New England, Taylor Marine Corp. reports that they sell the only diesel fuel in a 20-mile stretch between Plymouth Harbor and Scituate Harbor, Massachusetts. Since 80% of their business is commercial, they will no longer sell to recreational boats. In Rhode Island, O'Neill Oil Service of Peace Dale reports that since they sell most of their fuel to commercial boats they no longer serve recreational vessels. Along Maine's coast, many fuel docks, except those near major urban areas, cater solely to the commercial fishing trade.

On Florida's Gulf Coast, Yankeetown Boat Company no longer sells diesel fuel to recreational boaters forcing customers to travel 75 miles to Tampa Bay. In Crystal River, all fuel retailers have chosen to service the commercial trade. Recreational boaters must travel 50 miles to Tarpon Springs for clear fuel.

On the West Coast, the fuel docks at Santa Cruz and Port San Luis, California no longer sell clear fuel and in Monterey, Breakwater Cove Marina, which used to sell fuel to boats cruising south, reports that recreational boats must now travel 90 miles to obtain clear diesel fuel.

In Astoria, Oregon, the owner of a 32-foot powerboat reports that he must now travel one and one-half hours up the Columbia River to Cathlamet in Washington state in order to obtain clear diesel fuel. There were five facilities in Astoria where he could purchase diesel fuel prior to the imposition of this federal dyeing scheme. "Cruisers come to our marina for extended visits each summer. They will avoid our city now that they can't get fuel for their boats. Furthermore, if I wanted to sell my boat in the area, who would buy it now," he asks.

It is not, however, simply a matter of inconvenience when a recreational boat owner is turned away by a diesel fuel retailer. It can be a serious safety issue. Unlike the highways where there is diesel fuel on almost every other corner, diesel fuel docks on our waterways may be located hours, if not days apart. The owner of a truck or automobile running out of diesel fuel may lose some time. The skipper of a boat running out of fuel in bad weather conditions or at night can lose his life. Not only are these regulations making it difficult or impossible for recreational boaters to find fuel, but many family-owned marina's have suffered significant business losses. For example, a marina in New Bern, North Carolina has one tank and pump. The operator reports that by choosing to sell clear fuel to recreational boaters he is, in effect, being forced by the government to give up all of his commercial fuel customers. The reverse holds true for the Holiday Harbor Marina in Pensacola, Florida which used to sell nearly 40% of their fuel to recreational customers and now only sells to commercial boats.

Installing an additional fuel tank and pump is just not a viable option for most small marine fuel retailers due to prohibitive costs and environmental regulations. According to J.R. Wynne of PetroPac, Ft. Lauderdale, Florida, the cost of installing a second fuel tank and dispensing equipment, including the monitoring devices and alarms which are required for environmental protection, could cost a marine fuel retailer from $12,000 to $100,000 depending largely on whether an above ground or inground tank is installed.

Given these costs, it is highly unlikely that a marine fuel retailer, whose primary business is serving commercial vessels, will make the added investment necessary to provide clear "taxed" diesel fuel to recreational boats. Simply put, it would just take too long to recoup the expense.

Mr. Chairman, it is clear to us that it was never the intent of Congress to cause this potential safety problem and to create this hardship for consumers, many of whom have considerable investments in their diesel-powered boats, or to force small "family" businesses to lose business. Since the Treasury Department maintains that existing law affords it very little flexibility in interpreting how the diesel tax should be collected from recreational boats, we urge you to include the provisions of S. 1034, sponsored by Sens. Breaux and Chafee, in the next tax bill considered by this committee.

S. 1034 would (1) require the Treasury Department to assess the effectiveness of various procedures for collecting excise taxes on diesel fuel used by recreational

boaters and report to Congress within 18 months the results of the study, including any recommendations; (2) suspend collection of the tax for two years while the Treasury Department conducts this study and; (3) re-institute the tax and the current collection procedure at the end of this two-year moratorium if Congress has not enacted legislation to create a new collection procedure.

The other option would be to simply eliminate the tax on recreational diesel fuel. As you know, this tax is due to expire in four years at the end of this decade. It was initially conceived of as a temporary retail tax by Congress in order to raise revenues to offset the repeal of the infamous "luxury" tax on boats. As you may recall, that tax did not hurt the so-called "rich." They simply stopped buying boats. Instead, hundreds of thousands of boat builders and their employees lost their jobs before the tax was repealed.

The elimination of the tax would involve very modest revenues. According to a 1992 report by Price Waterhouse for the U.S. Fish and Wildlife Service, recreational boats consume less than one percent of all fuel sold and diesel fuel used by the nation's 400,000 diesel boat owners amounts to only five percent of this amount, or about 46.6 million gallons. A tax of 24.4 cents per gallon should be generating about $11,370,000 per year. I am at a total loss to understand how "offsets" as high as $40 million per year have been estimated by the Joint Committee on Taxation.

On behalf of the thousands of BOAT/U.S. members who own diesel-powered boats, I would like to thank you for the opportunity to present our concerns. I am happy to answer any questions that you or other members of the panel may have.

COMMUNICATIONS

STATEMENT OF CAPTAIN J. RANDOLPH BABBITT

Good morning Mr. Chairman, and members of the Committee, I am Captain Randolph Babbitt, president of the Air Line Pilots Association, which represents 43,000 pilots who fly for 35 airlines. I am also a former member of the National Commission to Ensure A Strong Competitive Airline Industry, which was created in 1993 by Public Law 103-13. I appreciate this opportunity to discuss with you the devastating effect the 4.3 cents per gallon tax on commercial jet fuel will have on our industry, if it is allowed to take effect On October 1.

As you know, the airline industry, in recent years, has experienced staggering financial losses. Since 1990, U.S. carriers have lost a combined total of nearly $13 billion and 1,000 aircraft orders or options have been deferred. While this financial suffering has been substantial, what is clearly most distressing is the human toll of these losses. During this time, 120,000 U.S. airline employees and 125,000 U.S. aircraft manufacturing employees have lost their jobs. Time and time again, airlines have asked employees for relief and they have responded with pay and benefit concessions totaling in the billions of dollars. It is significant to note that at one company, employees recently gave wage and benefit concessions in excess of $4.9 billion over six years in exchange for majority ownership. At other carriers, employee givebacks have averaged between 10 and 14%.

After this disastrous economic period, our airline industry is finally beginning to make a slight recovery. According to industry sources, U.S. carriers ended 1994 with a cumulative loss for the year of $100 million, compared to a $2.1 billion loss in 1993. Further we didn't experience any bankruptcies, and no significant sales or mergers occurred. Both domestic and international passenger traffic is beginning to increase, and capacity is becoming rationalized as carriers learn to live in low yield markets.

This very modest turnaround may, however, be quickly wiped out if the government is allowed to impose the 4.3 cents per gallon tax on jet fuel beginning on October 1 of this year. It is estimated that this new tax will cost the industry more than $527 million annually, and due to the elasticity of air travel demand, airlines will simply not be able to pass the tax on to the consumer. Industry analysts have in fact conclude that each 1% increase in the price of an airline ticket results in a 1% decrease in passenger traffic. We believe that imposition of this tax will not only invalidate the employee concessions I alluded to earlier but could lead to an untold number of lost jobs, and perhaps, lost airlines.

Commercial jet fuel has never been taxed, and it never should be. The airline industry already reels under a host of taxes and user fees that are estimated at $6.5 billion annually. These include the 10% excise tax on airline tickets and a 6.25% excise tax on cargo shipments, a $6.00 International Departure Tax, a $6.50 Customs User Fee, a $6.00 Immigration User Fee, a $1.45 Agricultural Inspection Fee, and at many airports, a $3.00 Passenger Facility Charge. These are in addition to the Federal and state income, local property, and other taxes which businesses must pay. Taken together, the taxes and fees paid by the airlines are equal to a 52.5 cents per gallon tax.

Nearly two years ago, the Administration and the Congress established the National Commission to Ensure a Strong Competitive Airline Industry, on which I was proud to serve. After careful and exhaustive examination of the industry's precarious financial condition, we concluded that the airlines are already over taxed and imposition of any new taxes, particularly the fuel tax, would be ill-advised. The Commission could see no good public policy reason for changing the tax treatment of airline fuel, one of the industry's two highest cost items. I strongly supported that decision then and I do now. All this tax can do is hurt-hurt airline travelers, hurt (110)