CRS Compares Energy Tax Incentives Considered By 108th Congress

The 108th Congress is considering two major bills to provide tax incentives to increase the supply of, and reduce the demand for, fossil fuels and electricity: S. 1149, the Energy Tax Incentives Act of 2003, approved by the Senate Finance Committee (SFC) on April 2, 2003 (superseding S. 597), and H.R. 6, introduced as H.R. 1531 and approved by the House on April 11, 2003, by a vote of 247-175.

Both bills would provide a ten-year tax cut of about $18-$20 billion. However, the revenue losses in S. 1149 would be partially offset through additional curbs on corporate tax shelters, an extension of Internal Revenue Service user fees, and other provisions, which would raise about $4.9 billion over 10 years, so that the net energy tax cut is about $15.3 billion. In contrast, the House bill includes less than $100 million in general tax increases, so that its net energy tax cut is about $3 billion greater than the SFC bill.

In comparison with the Senate bill, H.R. 6 confers a larger tax cut, both in absolute and relative terms, for fossil fuels production and for electricity restructuring (or the production of electricity), and a smaller tax cut for energy efficiency and renewable/alternative fuels development. More specifically, H.R. 6 provides about $13.7 billion in tax incentives for increased fossil fuels supply and electricity generation (74% of the total gross tax cut), while S. 1149 provides about $10 billion (about half of the gross tax cut) for fossil fuels and electricity generation. S. 1149 also provides more than $5 billion (about one quarter of the gross tax cut) for alternative and renewable fuels supply, as compared to $3.6 billion under H.R. 6 (20% of the tax cut). For energy efficiency, the Senate committee bill would cut taxes by about $2 billion (about 10% of the gross total), while H.R. 6 would provide $1.3 billion (7%).

Other notable differences between the two bills are: 1) the Senate bill contains tax incentives for clean coal while the House bill does not; 2) the downstream tax incentives for oil and gas refining, distribution, and transportation are relatively larger in the House bill; 3) the tax incentives for electricity restructuring -- basically incentives to increase the generation of electricity -- are significantly larger in the House bill (both in absolute dollar terms and relative to the total tax cut); and 4) the Senate bill's incentives for alternative fuel vehicles (including advanced technology vehicles) and for alternative fuels production are much greater than in the House bill.

The President's FY2004 budget, released in February 2003, proposes a limited number of energy tax incentives -- both new incentives and liberalization of existing energy tax subsidies -- which would reduce energy taxes by about $9 billion over 10 years (about half of the size of the reductions in either S. 1149 or H.R. 6).

This report will be updated as events warrant.

 Contents

On April 3, 2003, the House Ways and Means Committee (WMC) voted 24-12 for an energy tax incentives bill (H.R. 1531). The WMC bill was incorporated into H.R. 6, the House's comprehensive energy policy legislation, which was approved by the House, 247-175, on April 11, 2003. This report provides a summary of the provisions of each of these two bills, presented as a side-by-side comparison in tabular form. Note that this is a summary of complex and extensive tax code provisions. For brevity, much detail is necessarily omitted.

For purposes of this table, tax provisions are organized according to four topics, rather than by either Senate or House bill section number. Thus, a tax provision is classified according to whether it is an incentive 1) for fossil fuel supply (including coal output incentives), 2) to facilitate electricity industry restructuring (which is also an energy supply incentive), 3) to reduce fossil fuel demand through enhanced energy efficiency, or 4) to reduce fossil fuel demand through alternative and renewable fuels output. A miscellaneous category describes provisions that are not easily categorized according to this schema. The last section of the table compares revenue offset provisions in each of the two bills. Thus, the table has six major headings (four with several subheadings), while the House bill is subdivided into four titles, and the SFC bill has seven sections.

The fossil fuels supply category is further subdivided according to whether a particular provision affects oil/gas exploration and production, refining and distribution, or coal output. Similarly, the energy efficiency and renewable fuels tax incentives are further categorized, as closely as possible, according to the energy consuming sector that would be primarily affected, i.e., the business (including commercial and industry), residential, or transportation sectors.

Both bills provide billions of dollars of tax cuts for fossil fuel supply and energy conservation, and incentives for renewable, alternative, and unconventional fuels. However, the mix of tax incentives -- the distribution of the total dollars of cuts among these three broad categories -- differs between the two bills. In general, H.R. 6 confers a larger tax cut, both in absolute and relative terms, for fossil fuels production and for electricity restructuring (or the production of electricity), and a smaller tax cut for energy efficiency and renewable/alternative fuels development.

More specifically, H.R. 6 provides about $13.7 billion in tax incentives for increased fossil fuels supply and electricity generation (74% of the total gross tax cut), while S. 1149 provides about $10 billion (about half of the gross tax cut) for fossil fuels and electricity generation. S. 1149 also provides more than $5 billion (about one quarter of the gross tax cut) for alternative and renewable fuels supply, as compared to $3.6 billion under H.R. 6 (20% of the tax cut). For energy efficiency, the Senate committee bill would cut taxes by about $2 billion (about 10% of the gross total), while H.R. 6 would provide $1.3 billion (7%).

Other notable differences between the two bills are: 1) the Senate bill contains tax incentives for clean coal while the House bill does not; 2) the downstream tax incentives for oil and gas refining, distribution, and transportation are relatively larger in the House bill; 3) the tax incentives for electricity restructuring -- basically incentives to increase the generation of electricity -- are significantly larger in the House bill (both in absolute dollar terms and relative to the total tax cut); and 4) the Senate bill's incentives for alternative fuel vehicles (including advanced technology vehicles) and for alternative fuels production are much greater than in the House bill.

Brief Comparison with Energy Tax Incentives Bills in the 107th Congress

In the 107th Congress, both the House and Senate approved energy tax incentives bills that were incorporated into H.R. 4. (For a comparison of the Senate and House versions of H.R. 4 see CRS Report RL31427, Omnibus Energy Legislation: H.R. 4 Side-by-Side Comparison., Mark Holt and Carol Glover, coordinators.)

In the 107th Congress, on February 13, 2002, the Senate Finance Committee approved the Energy Tax Incentives Act of 2002 (S. 1979), which was added to S. 517, the Senate's energy policy bill, as Amendment #2917. S. 517 was formally renamed the Energy Policy Act of 2002 when the Senate approved the measure on April 25, 2002, as an amendment in the nature of a substitute to the House-passed H.R. 4. The House version of energy tax incentives in the 107th Congress was originally H.R. 2511. This bill was incorporated into H.R. 4, and approved by the House on August 2, 2001. In comparing House and Senate versions of H.R. 4 in the 107th Congress, the House bill proposed larger energy tax cuts, net of some energy tax increases. It reduced energy taxes by about $36.5 billion over 10 years, in contrast to the Senate version, which cut about $15.5 billion over 10 years. On November 13, 2002, the conference committee dropped its consideration of H.R. 4 after eight sessions failed to reconcile major differences.

With the exception of two deleted provisions, both relatively minor, and about $3 billion in corporate revenue increases, S. 1149 (108th Congress) is similar to the Senate energy tax incentives legislation in the 107th Congress (S. 1979).¹ The size of the tax cuts in S. 1149, however, is somewhat larger than in S. 1979, with the additional tax cuts allocated to oil and gas production and refining.

In comparison, the House energy tax incentives bill, H.R. 6 (108th Congress), is a substantially scaled-down version of H.R. 2511 (107th Congress), which would have reduced energy taxes by $36.5 billion. The apportionment of tax savings in H.R. 6 among the three categories -- fossil fuel production, energy efficiency, and alternative/renewable fuels -- is the same as the House bill in the last Congress, but the absolute amounts of the cuts are much smaller.

President Bush's Proposals

The President's FY2004 budget, released in February 2003, proposes a limited number of energy tax incentives -- both new incentives and liberalization of existing energy tax subsidies, which would reduce energy taxes by about $9 billion over 10 years (about half of the size of either S. 1149 or H.R. 6). It would:

• Extend and Liberalize the § 45 Tax Credit for Electricity Produced From Wind, Biomass, and Poultry Waste. The FY2004 budget proposes to extend the placed-in- service rule for wind and biomass facilities, for purposes of the § 45 tax credit, by an additional two years through December 31, 2005. In addition, the definition of biomass would be liberalized to include some types of timber and agricultural waste. Other liberalizations are proposed.

• Tax Credit for Residential Solar Energy Systems. Homeowners purchasing solar energy heating or cooling equipment (including water heating equipment) would qualify for a 15% nonrefundable income tax credit.

• Tax Credit for Hybrid and Fuel Cell Vehicles. An income tax credit of up to $4,000 would be provided to taxpayers that purchase fuel-efficient hybrid vehicles; an income tax credit up to $8,000 would be provided to taxpayers that purchase a qualified fuel-cell vehicle.

• Tax Credit for Production of Landfill Gas. Production and sales of landfill gas from new facilities -- those placed in service from January 1, 2003, through December 31, 2010 -- would be permitted to qualify for the existing income tax credit for fuels produced from a non-conventional energy resource under § 29 of the tax code.

• Tax Credit for Combined Heat and Power Systems. Combined heat and power systems -- cogeneration systems that are more energy efficient than conventional generation and heating technologies -- would be defined as energy property, thus qualifying for the 10% investment tax credit under current law (which is allowed for business investment in solar energy equipment). Qualifying systems would have to meet capacity, output, and efficiency criteria.

• Extension of Excise Tax Exemption and Equivalent Income Tax Credit. The current 5.2¢/gallon excise tax exemption for 10% alcohol-gasoline fuel blends (which generally expires on September 30, 2007) and the equivalent income tax credit of 52¢ per gallon ofethanol (which expires on December 31, 2007) would be extended through December 31, 2010.

• Allocate 2.5¢ Portion of Gasohol Tax Rate to the Highway Trust Fund. Motor fuel blends consisting of 90% gasoline and 10% ethanol are taxed at 13.2¢/gal (they are exempt from 5.2¢ of the 18.4¢ gas tax) with 10.6¢ going into the Highway Trust Fund, 2.5¢ going into the general fund, and 0.1¢ going into the Leaking Underground Storage Tank trust fund. For blends consisting of less than 10% ethanol the tax is pro-rated, but the same amount of 2.5¢ is allocated into the general fund. Under the President's proposal the 2.5¢ portion of the excise tax on ethanol-gasoline blends would be allocated from the general fund into the Highway Trust Fund.

• Extension of Abandoned Mine Land Reclamation Fees. The current fees on the amount of coal mined -- which range from 10¢/ton to 35¢/ton, depending on the type of mine and coal -- would be extended from September 30, 2004, until most significant abandoned mine land problems are fixed.

• Reform the Current Tax Treatment of Nuclear Decommissioning Costs. The FY2004 budget proposes to repeal some of the current-law restrictions to the deductions for nuclear decommissioning costs. In addition, the budget proposes more liberal treatment of such costs.