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Hundreds of millions of dollars could be at stake if California cannot solve a yearslong dispute with the Federal Aviation Administration.

The federal agency questions whether California is spending money gleaned from taxing jet fuel according to federal rules, which aim to ensure states are maintaining airport infrastructure. It gave the state’s Finance Department until the end of March to produce detailed records on how it is spending those taxes, or it “reserves the right to take appropriate compliance and enforcement actions as necessary,” according to a letter it sent to the state agency dated March 5.

The finance department responded March 20, telling the FAA that the state spends more on its airports than it collects in jet fuel taxes, and that therefore it is in compliance with the spirit of the regulations. The state will have spent more than $2 billion on its airports from 2020 to 2026, and would have taken in a total of $226 million from the tax revenue over that period, according to the department’s analysis.

California has long reallocated funds from jet fuel tax revenue to other accounts, including its general fund, according to an audit by the U.S. Transportation Departments’ Office of Inspector General published in December 2023. That revenue, based on a tax of 3.9%, fluctuates depending on how much jet fuel is sold to airlines. An analysis of related legislation cites tax-revenue totals much higher than the finance department numbers: more than $100 million a year, based on state Tax and Fee Administration Department data: In 2024, it was $134 million and the previous year it was almost $154 million. The discrepancy may be explained by the finance department’s disagreement with the FAA over grandfathered taxes exempt from the FAA’s policy on jet fuel tax revenue.

FAA spokesperson Cassandra Nolan confirmed that the agency is “assessing” whether California is in compliance, but did not answer CalMatters’ question about what form possible enforcement would take. In a September 2020 letter to the finance department, the FAA said it was “prepared to seek assistance from the U.S. Attorney’s Office” if needed.

At least $650 million in federal funding is pending for eight airports around the state this year, said Jim Lites, executive director of the California Airports Council, a trade group for the state’s airports. The airports with pending federal capital project funding are in San Francisco, Los Angeles, Palm Springs, Burbank, Orange County, Monterey, San Jose and Sacramento.

The state and the FAA have been in contact about the issue for more than a decade, according to the letters seen by CalMatters. It is unclear why the federal government is asking for records of amounts collected, expended, transferred and appropriated now; Nolan did not address that question, either. The FAA is also asking for documentation from accounts using the proceeds from the tax revenue.

For decades, the FAA did not enforce a 1980s mandate that aviation fuel tax revenue be used for airports, according to the audit. The agency signaled it would begin doing so in 2014 and gave states three years to comply. California remains one of four states not in compliance, according to the 2023 audit.

One state senator’s bill addresses the issue while trying to help her constituents at the same time. Senate Bill 661 would ensure that half of that tax revenue supports non-commercial airports. The other half would be retained by the airport where the jet fuel was sold. Currently, according to an analysis of the bill, the state collects fuel taxes from retailers, deposits its share into the general fund and other state funds, then allocates local taxes to the proper jurisdictions.

Besides the Airports Council, other supporters of the bill include the cities of Merced and Bakersfield, whose airports would benefit from allocating tax revenue as mandated, as well as the airline industry. The author of the bill, Sen. Melissa Hurtado, is a Democrat representing Bakersfield. Her bill also proposes a formula for allocations of the tax revenue to better address the needs of all airports in the state, she has said. “Obviously I represent a rural community and the goal is to ensure that these funds are able to go back to those communities, and right now they’re not,” she said to the Assembly Standing Committee on Transportation last summer.

California finance department representatives did not agree to be interviewed about the state’s talks with the FAA, though the department shared some of its correspondence with the federal agency.