Aviation Reform Left on the Runway

by Demian Brady / /

The Trump Administration’s budget blueprint for FY 2018 includes a proposal to save taxpayers’ money and spur innovation by transforming management of the nation’s aviation network. The plan would convert the Federal Aviation Administration’s (FAA) air traffic control (ATC) system into a new independent, nonprofit corporation. The President’s plan mirrors legislation introduced by Representative Bill Shuster (R-PA) in the previous Congress, the Aviation Innovation, Reform, and Reauthorization Act of 2016. Unfortunately, the Congressional Budget Office’s (CBO) flawed analysis of the effort was a factor in preventing the reform from taking flight last year.

Our ATC program needs reform. The FAA has struggled for over a decade now to fully-implement its new Next Generation Air Transportation System (NextGen). This system would replace and upgrade the current outdated radar system with GPS tracking and other digital communications. Congress initially tasked the FAA with constructing a 21st century air traffic control network in 2003. Since then, management of the program has been mired in typical bureaucratic inefficiency, cost overruns, and delays – several components of the project have been deferred until 2030.

A significant event that disrupted air travel exposed the need for swifter implementation of NextGen. Because of the current fragmented system of regional zones for air traffic control, a 2014 fire at the Chicago Air Route Traffic Control Center shut down incoming traffic to the O’Hare and Midway airports, ultimately cancelling thousands of flights. NextGen would provide the capability to switch control over a zone to any other route center, flexibility that would help prevent a regional traffic problem from spreading gridlock nationwide.

A follow up report from the Department of Transportation Inspector General about the incident warns that the FAA is still not fully prepared to respond to major disruptions of service and that the “overall cost and timeframe for implementing [NextGen capabilities] is uncertain.”    

The plan would also set the new entity on stable financial footing by providing a dedicated annual funding stream from user fees through airlines and airports. ATC would no longer be dependent on the vagaries of Congressional funding nor be impacted by government shutdowns or furloughs. These fees would replace existing excise taxes. Unfortunately, the reform effort was ultimately grounded in the last Congress, in part by a faulty CBO budget score which was, as the Competitive Enterprise Institute deftly put it, based on “nonsensical assumptions.”

Last year, CBO reported an estimate on Shuster’s bill to reauthorize the FAA and reform ATC, and determined that it would add $19.8 billion to the deficit over ten years. This is an odd finding, given that CBO itself indicated that spending related to ATC would largely follow historical patterns under the new corporation. Outlays would increase by $525 million per year to expedite NextGen implementation and due to early retirement costs and health benefits related to the transfer of federal employees.

Moreover, there would be significant reductions in budget authority and outlays for the FAA after the Corporation assumes responsibility for ATC starting in FY 2020.

The crux of the problem lies in CBO’s analysis of the fees included in the bill – and those it assumes in its baseline. Currently, most funding for aviation programs is financed through excises on airline passengers collected through the Airport and Airway Trust Fund, totaling $14.4 billion as of 2016. At the time, most of the excise taxes were set to expire March 31, 2016, just a few weeks after CBO released its analysis. However, CBO’s projections assumed that such taxes would continue beyond their scheduled expiration date (oddly enough, CBO does not make this same assumption for spending whose authorizations will expire, even though they often do: for examples, see CBO’s annual report on expired authorizations).

The legislation gives the corporation authority to assess fees on users of its services to cover its annual expenses. CBO estimated that it would raise approximately 70 percent of its projected baseline of the current tax, $12.1 billion in 2020, growing to $14.5 billion in 2026. One would think that this essentially would be a swap from most of the existing excise taxes on airline passengers that finance current aviation programs. Under the reform, the existing excises should be reduced because the FAA would require less funding: its role would be far more limited, largely to overseeing safety regulation instead of operating the entire ATC system. Yet under CBO’s assumption, the user fee is piled on top of the full existing tax.

CBO applied a dynamic score on the new user fees under the corporation: because excise taxes “reduce the base of income and payroll taxes, higher amounts of those indirect business taxes would lead to reductions in revenues from income and payroll taxes. As a result, revenues from the fees collected by the corporation would be partially offset in the federal budget by a loss of income and payroll tax receipts equal to about 25 percent of the fees each year.” This indirect impact on CBO’s forecast of income and payroll taxes was the source of the deficit projection in the agencies overall analysis of the reform bill.

A more realistic approach to scoring the bill would be to assume a corresponding decrease in the existing passenger ticket fees, which would have a corresponding positive impact on labor and wages. This resulting economic activity would provide a boost to federal tax receipts that would, on net, balance out the deficit impact in CBO’s projection of the corporation’s replacement user fees. Further scoring refinements could account for efficiency improvements due to shifting air traffic control toward a non-government model. Ample experience from systems around the world that have undergone similar transformations could inform such refinements.

There are also questions regarding the appropriateness of including the new Corporation in the budget at all. As the Competitive Enterprise Institute’s Marc Scribner notes, the bill specifically provides that it would be a non-profit, non-federal entity, and that there is absolutely no federal guarantee of debt assumed by the new entity.

CBO’s highly-questionable deficit score presented a major political obstacle to passage of the reform. The agency’s estimate was cited prominently in a "dear colleague" letter distributed last year urging opposition to the bill, and is still being cited as a reason why the reform should remain stalled on the tarmac. This is another example of how a Taxpayers’ Budget Office will provide transparency and accountability in budget scorekeeping as a foundation for substantive policy discussions.