Revenue Impact of Diesel Fuel Dyeing

• Since 1986, the Internal Revenue Service (IRS) and the Federal Highway Administration (FHWA) have worked cooperatively to reduce fuel tax evasion by supporting changes in tax collection procedures and additional enforcement resources. Enforcement activities, such as audits and criminal prosecutions, directly contribute hundreds of millions of dollars to the Highway Trust Fund (HTF) and State transportation funds, a yield estimated at $10 to $20 per dollar spent on these programs.

• The Omnibus Budget Reconciliation Act of 1993 required tax exempt diesel fuel to be dyed and moved the point of collection from the distributor to the terminal level beginning January 1, 1994. On July 18, 1995 the Treasury Department testified as follows: "Complete data for 1994 have now been reviewed. The total amount of 1994 receipts available for the trust funds increased by $1.23 billion over the prior year, again adjusting for the rate increase. Taking into account increased refunds and credits, and attributing some of the increase to economic growth, the Treasury Department estimates that diesel fuel tax receipts, net of refunds, were $600-$700 million higher in 1994 than in 1993 due to improved compliance alone."

• Based on the increased revenue experience, the Treasury has revised the future projections of diesel fuel tax deposits to the HTF. For the 5-year period, 1994-1998, the diesel tax revenue projection has increased from $22.3 billion, prior to the diesel dyeing requirements, to $27.3 billion in the latest estimate, an increase of $5 billion (based on the same diesel fuel tax rate deposited in the HTF).

• More than 25 States have adopted diesel fuel tax legislation recognizing the dyeing requirements for untaxed fuel and adopting penalties for improper use of dyed fuel. Many States realized a substantial diesel fuel tax revenue gain in 1994 versus 1993, largely attributed to the spill over compliance benefit of the Federal dyeing requirements and associated enforcement activities. Overall, taxable diesel fuel use reported by the States increased 6.9 percent in 1994 compared to 1993, nearly twice the expected growth in diesel fuel use. Assuming half the increase was additional compliance resulting from the dyed diesel program, State transportation funds received a revenue bonus of over $150 million. Several States have seen double digit percentage increases in diesel fuel tax revenue over the past 2 years, attributed in part to changes in tax law or increased enforcement efforts.

• A continuing commitment to motor fuel tax enforcement will be needed to perpetuate these gains. Unfortunately, many agencies are experiencing erosion of tax enforcement resources as part of broader budget cutting efforts. For example, the FHWA funds for tax evasion programs, authorized at $5 million per year in the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), are reduced about 12.5 percent in FY 1996, as part of the Section 1003(c) authorization cap in ISTEA.