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Dividing both sides by Q, and AP, and rearranging terms we get:

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Note here that the term on the left-hand-side is our expression for elasticity. Hence, this expression suggests that the initial value of E will be different from 1 if there is to be no net change in total revenues. In fact, since – 1 < _Q/Q, < 0 we know that the following must be true.

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Hence, given the assumption of a linear demand curve, a zero net revenue change implies that the initial elasticity value, E, lies between zero and - 1.. Furthermore, the value of E will approach - 1 as the change in price becomes infinitesimally small (i.e., as AQ/Q, approaches zero).

This proof provides an explanation of why air carriers experience a loss of revenue for an initial elasticity value of -1.0 (see Table 7-5) as well as for an initial value of -0.8 when the price increase is sufficiently large (e.g., greater then 50% of the adult fare).


Mr. Chairman and members of the committee, I am Edwin L. Harper, President and Chief Executive Officer of the Association of American Railroads. I appreciate this opportunity to call your attention to a threatened tax inequity against the nation's freight railroads. Unless Congress acts before October 1, 1995, the railroads will be singled out as the only transportation mode paying the 1.25 cents-per-gallon deficit reduction fuel tax. It is simply discriminatory to require railroads to pay 1.25 cents more per gallon towards deficit reduction than their major competitors. To avoid putting the railroads at a competitive disadvantage, the Association of American Railroads respectfully urges that all modes of transportation contribute equally to deficit reduction. This can be done fairly and with no negative impact on revenue. I. RAILROADS AND THEIR MAJOR COMPETITORS CURRENTLY CONTRIBUTE EQUALLY TO DEFICIT REDUCTION

Prior to 1990, the sole purpose of the transportation fuels tax was to finance the Highway Trust Fund. Therefore, railroads (like other non-highway users) did not pay this tax. The 1990 Reconciliation Act extended the fuel tax beyond its historical role as a highway user fee, by introducing a 2.5 cents-per-gallon deficit reduction tax on transportation fuels.

The original 2.5 cents tax was payable by the railroad and trucking industries into the general fund of the Treasury. The 1993 Reconciliation Act imposed an additional 4.3 cents-per gallon deficit reduction rate on all surface transportation modes. At present and until October 1, 1995, both railroads and trucks pay a combined deficit reduction rate of 6.8(4.3 plus 2.5) cents-per-gallon of transportation fuel.


Under the 1993 Reconciliation Act, on October 1, 1995, the entire 1990 2.5 cents tax paid by highway users will be redirected into the Highway Trust Fund instead of being dedicated to deficit reduction. At that time, the railroad rate will be reduced to 1.25 cents, but railroads will be left as the only payers of the 1990 deficit reduction tax. Thus, highway users and inland water carriers will pay only 4.3 cents-per-gallon into the Treasury's general fund, while railroads will pay 5.55 (4.3

plus 1.25) cents-per-gallon for deficit reduction. Unless the deficit reduction rate levied on the railroads is reduced to the level of its competitors, the railroad industry will be subject to tax discrimination as shown:

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Tax equity begins with recognition of the differences between railroads and their competitors on infrastructure funding. The Highway Trust Fund, paid for by highway user taxes, provides the financing for the construction and maintenance of the public roads used by trucks. The railroad industry operates over its own privatelyfunded rights-of-way, with respect to which the industry also pays significant property taxes and interest on debt. Moreover, because the railroads do not enjoy, require, or want a trust fund, the diversion of the excise tax paid by trucks into the Highway Trust Fund, which benefits their rights-of-way, should be balanced by the repeal of the fuel tax paid by railroads.

If, on the other hand, a fuel tax is deemed appropriate for deficit reduction, all transporters should be required to make equal contributions. This can be done without creating a revenue shortfall. If commercial airlines continue to be excluded from paying fuel taxes, a .0311 cents-per-gallon tax (that is, 4.3 cents plus .031 cents, or 4.331 cents) on fuel used by the same transporters, including railroads, subject to the 1993 deficit reduction tax would raise the same revenue as the 1.25 cents discriminatory tax on railroads.2 This proposal would allow fuel taxes paid by the other modes to continue to be directed into their respective trust funds, with the participating modes contributing equally to deficit reduction. This is illustrated in the following table:

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Competing modes of surface transportation should be required to make equal contributions to deficit reduction. The Association of American Railroads urges the elimination of the discriminatory 1.25 cents-per-gallon deficit reduction tax on railroads (scheduled to take effect on October 1, 1995) as a matter of fairness.


Mr. Chairman, thank you for holding this hearing today on the so-called "deficit reduction" fuel taxes. The Clinton Administration led the way in raising these taxes

1The approximate $45 million generated by the 1.25 cents-per-gallon tax on railroad fuel purchases would be recouped by a .031 cents-per-gallon tax applied equally to railroads, motor carriers and other highway users, barges, and general aviation. The .031 number is an update of an earlier .028 cents-per-gallon estimate which was adjusted to reflect more recent data.

2The additional .031 cents-per-gallon would change to .029 cents-per-gallon if the revenue attributable to the 1.25 cents-per-gallon discriminatory tax currently imposed solely on the railroads were distributed among four transportation modes: railroads, highway users, inland water carriers, and commercial airlines.

sharply over the past few years, and I believe that it is time to reevaluate the wisdom of these decisions.

I opposed the increase in these fuel taxes in 1993 because I believed they would damage the economy, slow growth, and destroy jobs. They simultaneously weaken the transportation industry and increase prices for consumers. Apparently, the destructive effects of these tax hikes are becoming clear. This collection of misguided laws was enacted without a full understanding of the consequences. Hopefully, today's hearing will clear the air, and we will be able to carefully assess the impact of these provisions.

Among the topics to be discussed at today's hearing, the pending tax increase for airline fuel concerns me most. This industry has lost billions of dollars over the last four years, and all but one of the major airlines have a junk bond credit ratinga testimony to the industry's poor financial health. Already, airlines pay a total of $6.5 billion a year in taxes and fees.

This quarter, the airline industry succeeded in turning a profit. While this is laudable, we must remember that this is only the first quarter of profit after five years of losses totalling $13 billion. The industry would need to keep the same level of profit for five more years just to balance out the prior five years of red ink.

And, let me point out, Mr. Chairman, that a major reason the airline industry has been able to rise up into the black recently is the strict cost cutting measures the airlines have taken over the past few years. Without these, the industry would still be in the red.

This cost cutting isn't just about the balance sheets; the downturn in airline profitability has cost people their jobs. Over 120,000 airline employees have lost their jobs over the past five years, and an equal number lost jobs in the high-paying aircraft manufacturing industry when airplane orders had to be cancelled.

All of this is combined with discount competitors and regular fare wars that drive prices down and recent tax hikes that keep costs high. This is an industry already in jeopardy. This additional tax increase could easily turn a precarious take-off into a mid-air collision with financial disaster. Many Utahns who work in my state's airline industry could well find their jobs threatened by this measure.

Senator Santorum has introduced a bill to prevent this damaging provision's enactment. Without congressional action, the 4.3 cent per gallon jet fuel tax will go into effect October 1 of this year. As a cosponsor of Senator Santorum's bill, I hope we can find a revenue-neutral way to keep this poorly conceived aviation hike permanently grounded.

DESCRIPTION OF CERTAIN MOTOR FUELS EXCISE TAX PROPOSALS (Prepared by the Staff of the Joint Committee on Taxation-JCX-32–95)


The Senate Committee on Finance has scheduled a public hearing on July 18, 1995, on certain proposals relating to the aviation and diesel fuels excise taxes.

This document,' prepared by the staff of the Joint Committee on Taxation, provides a description of present law and proposals relating to (A) the transportation fuels tax exemption for fuels used in commercial aviation (S. 304, introduced by Senators Santorum, Hatch, D'Amato, Pressler, Moseley-Braun, and others) and (B) the diesel fuel excise tax on rail transportation and on recreational motorboats (S. 1034, introduced by Senators Braux and Chafee), and certain diesel fuel dyeing requirements.

1 This document may be cited as follows: Joint Committee on Taxation, Description of Certain Motor Fuels Excise Tax Proposals (JCX-32-95), July 17, 1995.



A. Transportation Fuels Tax Exemption for Fuels Used in Commercial Aviation (S. 304: Senators Santorum, Hatch, D'Amato, Pressler, Moseley-Braun, and others)

Present Law

A 4.3-cents-per-gallon excise tax is imposed on fuels used in most transportation modes. Fuels subject to the tax include gasoline (including gasoline blended with alcohol, "gasohol"), diesel fuel, special motor fuels, propane, compressed natural gas, aviation fuels (jet fuel and gasoline), and any motor fuel used in shipping on the inland waterway system. The transportation modes subject to tax include highway, rail, air, inland waterway, and recreational boating. Fuel consumed before October 1, 1995, in commercial aviation, defined as the transportation of persons or property for hire, is exempt from this tax.

The 4.3-cents-per-gallon transportation fuels tax was enacted by the Omnibus Budget Reconciliation Act of 1993, as a deficit reduction measure. The two-year exemption for fuel used in commercial aviation was included because of the economic condition of the commercial aviation industry in 1993.'

Revenues from this transportation fuels tax are deposited in the General Fund of the Treasury. This tax is separate from, and in addition to, any user-based excise taxes imposed to fund the Highway Trust Fund, the Airport and Airway Trust Fund, the Leaking Underground Storage Tank Trust Fund, the Inland Waterways Trust Fund, or the Aquatic Resources Trust Fund.

The excise taxes paid (or collected) by commercial aviation to fund the Airport and Airway Trust Fund are: a 10-percent tax on domestic passenger tickets; a 6.25 percent tax on domestic freight transportation; and, a $6 per person international departure tax. Noncommercial aviation is subject to fuels taxes of 17.5 cents per gallon (jet fuel) and 15 cents per gallon (gasoline) for this Trust Fund.

Description of Proposal

S. 304 would make permanent the exemption from the 4.3-cents-per-gallon transportation fuels tax for fuel used in commercial aviation.

'See, statement by Senator Slade Gorton regarding the "desperate nature of the domestic airline industry...." 139 Cong. Rec. S. 7885 (daily ed., June 24, 1993).

B. Diesel Fuel Excise Tax Modifications


Present Law

Diesel fuel tax rates

An excise tax totaling 24.4 cents per gallon generally is imposed on diesel fuel (Code sec. 4081). This excise tax is comprised of several component rates, with various uses of this fuel being subject only to certain rates, as shown in Table 1.

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1 Relevant industry trust funds are the Highway Trust Fund (highway transportation), the Inland Waterways Trust Fund (inland waterway transportation), and the Airport and Airway Trust Fund (aviation).

2 The Leaking Underground Storage Tank Trust Fund.


The tax on recreational boat diesel fuel was enacted as a revenue offset for repeal of the luxury excise tax on boats costing more than $100,000.

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