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TUESDAY, JULY 18, 1995


Washington, DC.

The hearing was convened, pursuant to notice, at 9:05 a.m., in room SD-215, Dirksen Senate Office Building, Hon. Bob Packwood (chairman of the committee) presiding.

Also present: Senators Grassley, Pressler, Murkowski, Baucus, Breaux, and Moseley-Braun.

OPENING STATEMENT OF HON. BOB PACKWOOD, A U.S. SENATOR FROM OREGON, CHAIRMAN, COMMITTEE ON FINANCE The CHAIRMAN. The Committee will come to order, please. This morning we have a discussion of fuel taxes, some of which were imposed in 1990, some in 1993. Some apply to some industries, not to others. To date, none as applied to the airline industry. Part of it has been applied to other industries.

And then we have an issue involving diesel dyeing, where we clearly had evidence in the past of criminal-and that is the word to use criminal evasion of our tax laws. And we went to diesel dyeing in hopes of stopping that practice. I think we have had some success in stopping it. We have clearly not just inconvenienced Alaska but, in my judgment, we have made a mistake in applying it to Alaska.

And we have made it very difficult for recreational boaters from time to time to be able to find the kind of fuel they need, because small marinas that have to make a choice between selling commercially and selling recreationally, who often only have the capacity to do one, will sell commercially. That is the bigger industry. Therefore, recreational boaters often have to go a long way to find the kind of fuel they need.

With that background, we will see if there are any other opening statements.

Max, do you have an opening statement?

Senator BAUCUS. I do, but I will just put it in the record.

[The prepared statement of Senator Baucus appears in the appendix.]

The CHAIRMAN. Frank?


Senator MURKOWSKI. Thank you, Mr. Chairman. I appreciate your holding this hearing.

And I want to thank you for inviting Alaska's Commissioner of Environmental Conservation, Gene Burden, to testify. He knows better than anyone the havoc that diesel dyeing rules have brought to my State.

I have got a Whitewater hearing and an Energy Committee hearing, so I am going to have to leave before this is over, Bob, but I just want to make a couple of points about diesel dyeing in Alaska. For the last week, as you know, we have been debating on the Senate floor how to bring some common sense to Government regulations. And the diesel dyeing rules as the apply to our State are a perfect example why people are fed up with some of these Government regulations.

More than 95 percent of the diesel used in Alaska is exempt from tax because it is used for heating, power, generating, commercial fishing vessels, and so forth. Yet, the way the rules are written, the refiners have to buy huge quantities of dye and purchase an expensive injection system to dye this nontaxable diesel fuel.

It has been estimated that, if dyeing rules were repealed for Alaska, the Treasury would lose about $500,000 a year. Yet, some refiners are spending as much as $750,000 a year on dyeing alone. Add another $100,000 for injection systems, and you begin to wonder what has happened to the common sense of the regulatory process.

Sixty-five percent of the State's communities are served primarily by barges that move up the river system just once a year for many of these communities.

The fuel oil is the only way they can maintain the power base, and have sufficient supplies for heating. So it is absurd to require these communities to build a second storage facility for undyed taxable fuel simply for the few vehicles in town that are subject to tax.

The IRS regulations would require that millions more be spent, simply to maintain a small supply of taxable diesel in these communities, which certainly makes no sense.

So, as you indicated, Mr. Chairman, we are not interested in evading taxes. In fact, I have never heard that the evasion problems were a problem in our State. We are willing to work with the Treasury to ensure compliance, once these dyeing rules are eliminated.

We have had assurance, as you know, from former Treasury Secretary Bentsen and Secretary Rubin, who supported the efforts to exempt our State from the diesel rules, simply because of the applicability and the cost.

As a consequence, Mr. Chairman, I appreciate the fact that you brought this matter up at this level. And we again plead for relief, since everybody seems to be on our side except the process.

The CHAIRMAN. In this case, Alaska has made a very good case, and I hope we take care of it.

Senator Breaux?


Senator BREAUX. Thank you, Mr. Chairman.

I also have to go over to the Ways and Means Committee to do a little business over there this morning.

The CHAIRMAN. What are you doing over there this morning? Senator BREAUX. Well, we are doing OECD agreements, trade agreements. And I have to be over there for a while.

I thank you for holding these hearings. I think they are very important. I think we made a mistake, not only applying the tax to Alaska, but also in how the recreative boat diesel excise tax is being implemented in Louisiana and the other 48 States as well. I think it was a bad idea, and I think time has proven it right, that it is a bad idea. This issue has its origins back when we adopted the luxury excise tax on boats. We got rid of that tax, and it was paid for by this recreational boat diesel fuel tax proposal, which became very convoluted, and is unworkable in the way it is being administered.

I know Treasury is going to say something different. They say it is starting to work. But I will tell you, I got hundreds of letters from people and marine operators who say it is not working, and people have to travel as much as 170 miles round trip to be able to find tax-exempt fuel for commercial boaters. We have a lot of those in our State and, I guess, in all of the States represented here.

We have introduced two bills to try and correct the recreation boat diesel fuel exise tax problem. One says, let us bring it down to the retail level, and let the marine operator who sells fuel collect it from the recreational boaters, and not collect it from the commercial boaters.

I do not think Treasury thinks that will work. I think it does. Collect it from those who owe it; do not collect it from those who do-other way around.

They say it does not work. So the second suggestion that we have, and have introduced legislation, is to simply suspend the tax for 2 years and require Treasury to come back with a proposal that in fact can work.

It is a serious problem. We are making it unnecessarily complicated by the dyed fuel requirements. Most marine operators are small. They cannot afford two separate tanks, one with dyed fuel and one with clear, taxable fuel.

So I think we have to come up with a solution. Either suspend it for 2 years, or bring the collection point down to the retail level, and let the retail operators who sell the fuel collect it from those who owe it, and not collect it from those who do not owe it.

I appreciate Senator Santorum appearing once again. He is almost an honorary Member of our Finance Committee. And we look forward to hearing his positions.

Thank you.

The CHAIRMAN. Thank you.

I just might note as a word of warning—and I will mention it for the next couple of hearings-new microphones have been installed, but they have an on/off button on them. When you are done, you

may want to turn it off because it will pick up any conversations you may have.

Senator BREAUX. That is very important with me. [Laughter.]
Senator MURKOWSKI. It could be embarrassing as well.

The CHAIRMAN. Senator Santorum?


Senator SANTORUM. Thank you, Mr. Chairman. I appreciate the opportunity testify before the Committee again. I will try to keep my remarks brief, so we can move it along. I would ask that my written statement be submitted for the record, as well as the accompanying charts.

[The prepared statement of Senator Santorum appears in the appendix.]

Senator SANTORUM. I really just want to make three points with regard to the jet fuel tax.

I introduced a bill, S. 304, on January 31 of this year, following up on a pledge that I made during my campaign that we would try to do something about this tax. It is scheduled to go into effect this


The first point I want to make is that, historically, this Committee has made the determination that the airline industry should pay taxes, but they should be in the form of-and I will quote from your own report back in 1970-"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. . . ." That was a statement that was made in the Committee report back in 1970, when the Airport and Airway Revenue Act was enacted. And I think that is fair.

If you look at what the airline industry pays in excise taxes on passengers and cargo, it is about $6.5 billion. That is what these charts will show, the last 3 years of numbers on how much they pay in excise taxes.

Now that would be equivalent to a gasoline tax of 522 cents a gallon. I think that is a pretty fair tax burden for the airline industry, as far as jet fuel taxes are concerned.

The CHAIRMAN. You are taking all of their taxes-at least excise taxes

Senator SANTORUM. Right.

The CHAIRMAN [continuing]. And making them equivalent to a fuel tax.

Senator SANTORUM. That is correct. I am taking what their consumption of fuel is, and just doing a very simple division. If we were going to take this industry and say, here are the taxes you are going to pay fuel-wise, 522 cents a gallon, that is certainly a fairly heavy burden.

The second point I want to make is that we have an industry here that, yes, is beginning to recover somewhat, but it has just been devastated over the past several years, the last 5 or 6 years in particular.

Since 1990, the U.S. airline industry has lost $12.8 billion. Nearly 120,000 airline employees have lost their jobs. Tens of thousands of aircraft manufacturing employees have been laid off in this dec

ade alone. And the airline industry's debt, as a percentage of its total capital, has increased from 54 percent to 65 percent in the last 5 years. And that compares with an average in industry of 40 percent in the United States.

So this already a highly leveraged business. It is a business that has been in decline over the past several years. And this additional tax of half a billion dollars a year really is just piling on at this point. And I believe it is unnecessary.

The last point I want to make is that we did introduce the bill back in January of this year. We have 26 cosponsors in the Senate. A companion bill was introduced by Representative Mac Collins. It has 191 cosponsors in the House.

As you know, Senator Domenici did provide in the budget resolution a space for the repeal of the jet fuel tax, so it is within our resolution to be able to do that.

And I would encourage the Committee, really for the sake of thousands of airline jobs, manufacturing jobs and tourism dollars, to stick with the Budget Committee's recommendation and eliminate this tax increase.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator. I have no questions.
Senator Murkowski?

Rick, thank you for coming.

Senator SANTORUM. Thank you.

The CHAIRMAN. You bet.

Senator Moseley-Braun?

Senator MOSELEY-BRAUN. I am a member of the Banking Committee, as you know. And the Whitewater hearings start in about 15 minutes, so I will be

The CHAIRMAN. This is going to be more exciting than that.

Senator MOSELEY-BRAUN. I think it actually will be, Mr. Chair


So I will not be able to put any questions to this next witness. But I will stay until 9:30.

The CHAIRMAN. Thank you very much. I understand the conflict. Next we will take Secretary Cynthia Beerbower, the Deputy Assistant Secretary for Tax Policy. It is good to have you back with us again.


Ms. BEERBOWER. Thank you very much, Mr. Chairman, and Members of the Committee.

I am pleased this morning to present the views of the Treasury Department on the fuel excise taxes that have been deposited in the general fund of the Treasury for deficit reduction purposes.

You have asked us to comment on whether the delayed effective date for commercial aviation fuel should be further delayed. You have asked us to comment on whether the tax rate on rail diesel fuel is appropriate, and whether we should suspend collection of tax on the diesel fuel used in pleasure boating.

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