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Collection of and exemptions from the diesel fuel tax

The Omnibus Budget Reconciliation Act of 1993 amended the rules governing imposition and collection of the diesel fuel excise tax. The tax currently is imposed when diesel fuel is removed from a registered and bonded pipeline or barge terminal facility (i.e., at the "terminal rack") (sec. 4081). Present law provides that tax is imposed on all diesel fuel removed from these terminal facilities unless the fuel is destined for a nontaxable use and is indelibly dyed pursuant to Treasury Department regulations (sec. 4082). The 1993 changes were enacted to improve compliance with the diesel fuel excise tax, which formerly was imposed on wholesale sale of the fuel.

In general, the diesel fuel tax does not apply to non-transportation uses of the fuel. Offhighway business uses such as use on a farm for farming purposes and use to power off-highway equipment (e.g., oil drilling equipment) are included within this exemption. Diesel fuel used as heating oil also is exempt from taxation. (Most fuel used as heating oil, commonly referred to as "number 2 fuel oil," is chemically the same as diesel fuel.) The tax also does not apply to fuel used by States and local governments, to exported fuel, and to fuel used in commercial shipping (other than on the inland waterway system).

Nontaxable (and partially taxable intercity bus and rail) users of diesel fuel realize their exemption in one of two ways. First, these persons may use dyed diesel fuel on which tax has not been paid. Alternatively, they may purchase tax-paid, undyed diesel fuel and file a claim for refund of tax paid. In the case of diesel fuel sold to States and local governments and to farmers, the refunds are claimed by registered ultimate vendors who sell the fuel to the consumers without collecting tax. These claims accrue interest unless they are paid within 20 days.

Other nontaxable (and partially taxable) users of diesel fuel may claim refunds in either of two ways. First, the refunds may be claimed on the taxpayers' income tax returns. (Estimated tax payments may be reduced to reflect these refunds.) Second, if the total amount of refund due to a taxpayer exceeds $750 at the end of any of the first three quarters in a calendar year, the person may file a separate refund claim at that time.

Diesel fuel dyeing requirements

To ensure that diesel fuel dye concentrations (which enable law enforcement officials to identify untaxed fuel used in a taxable use) are not reduced, present law imposes a penalty equal to the greater of $1,000 or $10 per gallon on persons who dilute dye concentrations below prescribed minimum levels. In certain circumstances, untaxed kerosene is blended with diesel fuel. When this blending occurs, tax is due on the kerosene unless the fuel is destined for a nontaxable use, in which case dye must be added to the fuel mixture to ensure that required concentrations are maintained.

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Present law also imposes a penalty equal to the greater of $1,000 or of $10 per gallon on persons who sell or use untaxed diesel fuel in a taxable use after the fuel is removed from a registered and bonded terminal facility. For example, the Internal Revenue Service has undertaken a program of spot checks for dyed diesel fuel at truck stops and State highway weigh stations. Truck owners or drivers having dyed diesel fuel in their vehicle tanks are subject to this penalty. Similarly, owners or operators of truck stops having dyed diesel fuel in pumps dispensing the fuel to highway users are subject to the penalty.

A similar dyeing regime exists for diesel fuel under the Clean Air Act. That Act prohibits the use on highways of diesel fuel with a sulphur content exceeding prescribed levels. This "high sulphur" diesel fuel is required by the Environmental Protection Agency to be dyed. The State of Alaska is exempted from the Clean Air Act, but not the excise tax, dyeing regime through September 30, 1996.

Description of Proposals

Adjust General Fund diesel tax rate on rail diesel

As described in Table 1, above, rail diesel will bear a General Fund tax rate of 5.55 cents per gallon after September 30, 1995; other diesel fuel generally will be subject to a General Fund tax rate of 4.3 cents per gallon. The 1.25-cents-per-gallon additional General Fund diesel fuel tax imposed on diesel fuel used in trains over that imposed on diesel fuel used in other transportation modes would be repealed or imposed at a reduced rate on diesel fuel used in all (including rail) transportation modes.

Retail collection of tax on recreational boat diesel fuel (S. 1034)

S. 1034 (Senators Breaux and Chafee) would suspend imposition of the diesel fuel excise tax on fuel used in recreational boats during the two-year period beginning on the date of its enactment. The Treasury Department would be directed to study alternative excise tax collection mechanisms for recreational boat diesel fuel, and to report to Congress within 18 months of the bill's enactment.

Exempt Alaska from diesel dyeing requirement

Diesel fuel sold in the State of Alaska would be exempt from the diesel dyeing requirement during the remainder of the period through September 30, 1996, when fuel sold in that State is exempt from the Clean Air Act dyeing requirement. Thus, undyed diesel fuel could be removed from terminal facilities without payment of tax if destined for a nontaxable use (subject to a certification procedure to be established by the Treasury Department.)

PREPARED STATEMENT OF SUSAN PERRY

Mr. Chairman and members of the Committee:

My name is Susan Perry and I am Senior Vice President-Government Relations of the American Bus Association. We appreciate this opportunity to testify on federal diesel fuel taxes and diesel fuel dyeing requirements of the Omnibus Budget Reconciliation Act of 1993.

ABA is the national trade association of the intercity bus industry with more than 700 bus and tour company members in the United States and Canada. Most of these companies are small businesses, many of which are family-owned. They operate regular route, charter and tour, airport express, special operations, and contract services. The ABA membership also includes another 2,300 travel and tourism organizations and suppliers of bus services and products who work in partnership with the North American motorcoach industry.

THE 4.3 CENTS PER GALLON DEFICIT REDUCTION FUEL TAX

Intercity bus is a passenger mode of transportation competing, both in regular route scheduled service and charters and tours, with the airlines. Since deregulation and the advent of regional airlines and discount air fares, that competition has increased.

Discount air fares not only have hindered the profitability of airlines, they serve as a check on bus fares as well. Thus, the bus industry suffers from the same precarious financial condition as the airline industry. ABA therefore requests that this committee include the bus industry in any exemption from the 4.3 cents per gallon fuel tax imposed in 1993.

Intercity buses carry the very old, the very young, the very poor, and the very rural of our citizens. In spite of that, the industry has received by far the least amount of federal subsidies over the years. As compared by Robert R. Nathan Associates in a 1995 update of a report done originally in 1989, aviation and Amtrak received subsidies totaling $76.9 billion for the period of 1960-1993 while the intercity bus industry received only $622.8 million. Further, according to the Nathan Report, the per passenger subsidy for each mode was 5 cents per trip for bus, $6.38 per trip for airline, and $54.88 for Amtrak. (See Attachment 1: Table A-2. Total Federal Subsidies Per Passenger Trip, Net of User Fees, to Passenger Transportation Systems and Modes, 1960-1993, Nathan Associates, Inc., The Impact of Higher Motor Fuel Taxes on the Intercity Bus Industry, July 1995.)

Even with this inequitable amount of subsidy, the intercity bus serves far more locations in the U.S. than commercial aviation and Amtrak. In fact, although the bus is down to some 5,000 points served (from a one-time high of 20,000), it still serves thousands more locations than are served by the airlines and Amtrak combined.

Since OBRA '93, intercity bus operators have been paying the 4.3 cents per gallon federal diesel fuel tax for deficit reduction. Based on 1993 gallons consumed, the industry total tax per year is $7.4 million. Although this is a small number compared to the estimated $530 million per year potential liability of the airline industry, it is a large number for an industry whose profitability is marginal at best and whose passengers are as described earlier.

Finally, this is an instance where tax policy could promote a national objectiveenergy efficiency and conservation. As reported at the 1993 White House Conference on Global Climate Change, intercity bus service is the most energy efficient passenger transportation mode. In 1991, it was twice as efficient as Amtrak service, three times as efficient as automobiles and mass transit, and four times as efficient as commercial aviation. (See Oak Ridge National Laboratory, Transportation Energy Data Book: Edition 14, May 1994.) Exempting intercity bus from the burdensome 4.3 cents tax would encourage increased use of the country's most fuel efficient mode of transportation.

We strongly urge that, for the sake of long-overdue competitive equity and the additional reasons cited, the intercity bus industry should be exempt from any further liability for this deficit reduction tax. Certainly, if Congress were to extend the aviation exemption, we submit that a bus exemption of some $7.4 million for each of the next three years should be granted as well. It would make a great deal of difference to an industry which is trying to maintain service to many disadvantaged passengers who have no other means of intercity transportation.

THE DIESEL FUEL DYEING REQUIREMENTS OBRA 1993

Intercity bus companies are liable for only a portion of the federal diesel fuel tax. Prior to 1988, they paid the entire amount of the tax and had to file for a rebate

for the amount for which they were not liable. This Committee and the rest of Congress recognized the cash flow problem this was causing these small businesses and rectified it, effective in 1988, by collecting only the portion of the tax that was owed, affording the bus companies an exemption from the rest of it.

This system worked well for the bus companies until the Omnibus Budget and Reconciliation Act of 1993 made all of its changes relative to diesel fuel. Such actions were necessary, we were told, in order to "fix" an estimated billion dollar a year evasion of taxes from the Highway Trust Fund. Ironically, although the intercity bus industry never was accused of being any part of the evasion, it is this industry that is suffering from the solution to the problem.

Two provisions of the "fix"-changing the collection point of the tax and requiring tax-free, low sulfur diesel fuel to be dyed red-have resulted in a tremendous burden on the intercity bus industry. The situation as it now exists in the industry is as follows:

The point of collection of the tax is at the terminal rack. Clear diesel carries the full 24.4 cents per gallon tax when it is dispensed at that point; red-dyed fuel carries no tax. OBRA '93 provides that fuel vendors may purchase clear diesel for farmers and state and local governments (who are totally exempt from federal diesel fuel tax), pay the full tax at the rack, sell it to their customers with no tax, and collect their refund (for the tax they paid) from the Internal Revenue Service expeditiously. Vendors, who are willing to help, are not allowed to do this for intercity bus operators. Where does that leave these bus operators now?

By removing the need for state and local governments to use red-dyed diesel, Congress inadvertently removed the incentive for petroleum manufacturers to make it. The amount that intercity bus operators use is very small compared to that used by state and local governments, which include the nation's public transit systems and all other government vehicles powered by diesel fuel. Because the bulk of the market has been eliminated from the purchase of dyed fuel, this fuel is a very rare commodity. Most of the petroleum companies are not offering it, and the bus industry understands and accepts that. However, it causes a major problem.

In lieu of red-dyed diesel fuel, the bus operators buy the clear diesel. Because the tax comes with the fuel, so to speak, they must pay the full 24.4 cents per gallon federal diesel fuel tax and then apply quarterly to the IRS for their refund. There is no expedited rate of return for the intercity bus operators and, in some cases, companies are owed thousands of dollars for months on end. At the very least, since the filings only are made quarterly, the bus companies are floating a permanent, interest-free loan to the government. This is causing them to encounter large cash flow problems because their operating capital is not being returned to them in a timely fashion. Many of ABA's members have told us of their difficulties and we have tried to relate them to the Congress and the IRS. Several months ago, we were notified by one company that it had received no refunds at all, not even from the first quarter of 1994, and it was owed a total of $350,000. This is a huge amount of money for one independent, privately-owned bus company to be owed by the gov

ernment.

In order to fix these problems, the intercity bus operators need to be treated like state and local governments and farmers for the purpose of purchasing diesel fuel. Vendors (otherwise known as marketers, jobbers, distributors) would buy the clear fuel, pay the full tax, get their refund from the government, and the intercity operators would pay the government the tax they owe-which is what they were doing prior to OBRA '93. When a vendor does not do this for the operators and when the operators buy fuel on the road at the fully-taxed rate, they would continue to file with the IRS for their return.

The American Bus Association supports legislation that would solve the problems and inequities created by OBRA '93 now being endured relative to the purchase of diesel fuel.

Mr. Chairman, that concludes my testimony. I would be happy to try to answer any questions that you might have.

Attachment.

This report presents an analysis of the impact of higher motor fuel taxes on the intercity bus industry. First, we briefly summarize the intercity passenger transportation market by identifying competing transport modes, describing the geographic coverage of each mode, and presenting economic and demographic characteristics of those served by each mode. Next, we present updated estimates of annual federal subsidies to each mode, and identify competitive advantages and disadvantages among modes based on subsidy disparities. In the final section, we present measures of the impact of higher motor fuel taxes.

As part of a legislative package to reduce the federal deficit, the diesel fuel tax was increased by 4.3 cents per gallon, effective October 1, 1993; this tax increase has had a negative impact on the industry as would any future tax increases. In addition, a failure to extend the intercity bus industry's current partial exemption from the diesel fuel tax would impose significant financial hardship on the industry and threaten its ability to continue serving as the nation's only rural, low-cost, energy efficient, and environmentally sound passenger transportation system.

Previous studies have demonstrated the high degree of sensitivity of the intercity bus industry to higher motor fuel taxes. Already facing a significant competitive disadvantage because of the unfair distribution of federal subsidies to competing transport modes, higher taxes would place additional hardship on the bus industry, especially if not applied uniformly across all modes.

In this report, Nathan Associates updates through 1993 its previous estimates of federal transportation subsidies and reexamines the sensitivity of the bus industry to higher taxes. The costs of the 4.3-cent per gallon increase as well as a 5-cent per gallon and 15-cent per gallon increases in the diesel fuel tax are calculated and measured against the industry's subsidy and its net operating income to determine the ability of the industry to continue serving its customers.

Not surprisingly, federal subsidies have continued to keep the bus industry at a competitive disadvantage. Between 1960 and 1993, all other commercial modes of intercity passenger transportation received subsidies at least 39 times greater than the modest subsidy going to the intercity bus. Each passenger trip by bus received a federal subsidy of only 5 cents. In contrast, Amtrak passengers received a subsidy of $54.88 per trip and commercial air carrier passengers received $6.38 per trip.

The 4.3-cent increase in the diesel fuel tax costs the industry $7.4 million per year-one-fourth of its already small annual subsidy. Even small increases will result in a continuing decline in service: in fact, the number of points served by intercity bus has declined by 1.000 since our 1993 report. The losers will be those with fewest transportation alternatives—those who live in rural communities, the elderly, the young, and lower income families.