CRS Compares Energy Tax Provisions in House, Senate Bills

The Comprehensive American Energy Security and Consumer Protection Act, H.R. 6899, was introduced on September 15, 2008, and approved by the House on September 16, 2008. This plan would allow oil and gas drilling in the Outer Continental Shelf (OCS), and it also incorporates most of the energy tax provisions from an energy tax bill, H.R. 5351, and some of H.R. 6049, both of which were previously approved by the House of Representatives, but have not been taken up by the Senate.

In the Senate, legislative efforts on energy tax incentives and energy tax extenders center around the Senate's substitute amendment, the Energy Improvement and Extension Act, which would be substituted for the energy tax provisions in H.R. 6049 once that bill is allowed to be called up for debate in the Senate. That substitute, the Energy Improvement and Extension Act (no number yet), is a scaled-down version of S. 3478, the $40 billion energy tax bill offered by Finance Committee Chairman Max Baucus and ranking Republican Charles Grassley, and supported by Senate Democratic leadership. Senators Baucus and Grassley reduced the size of the bill due to controversy over revenue offsets generally, and tax increases on the oil and gas industry, particularly over proposed repeal of the tax code's § 199 deduction for the major integrated oil companies.

This report is a side-by-side comparison of energy tax bills H.R. 6899 and the unnumbered substitute amendment of S. 3478. A side-by-side comparison of H.R. 6049 and the original version of S. 3478 is in CRS Report RL34669, by Salvatore Lazzari, September 16, 2008; A side-by-side comparison of H.R. 6899, passed by the House on September 16, and the original version of S. 3478 is in CRS Report RL34674, by Salvatore Lazzari, September 18, 2008.

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Comprehensive energy policy legislation containing numerous tax incentives, and some tax increases on the oil industry, was signed into law on August 8, 2005 (P.L. 109-58). The law, the Energy Policy Act of 2005, contained about $15 billion in energy tax incentives over 11 years, including numerous tax incentives for the supply of conventional fuels, as well as for energy efficiency, and for several types of alternative and renewable resources, such as solar and geothermal. The Tax Relief and Health Care Act of 2006 (P.L. 109-432), enacted in December 2006, provided for one-year extensions of some of these provisions. But some of these energy tax incentives expired on January 1, 2008, while others are about to expire at the end of 2008.

In early December 2007, it appeared that congressional conferees had reached agreement on another comprehensive energy bill, the Energy Independence and Security Act (H.R. 6), and particularly on the controversial energy tax provisions. The Democratic leadership in the 110th Congress proposed to eliminate or reduce tax subsidies for oil and gas and use the additional revenues to increase funding for their energy policy priorities: energy efficiency and alternative and renewable fuels, i.e., reducing fossil fuel demand, rather than increasing energy (oil and gas) supply. In addition, congressional leaders wanted to extend many of the energy efficiency and renewable fuels tax incentives that either had expired or were about to expire.

The compromise on the energy tax title in H.R. 6 proposed to raise taxes by about $21 billion to fund extensions and liberalization of existing energy tax incentives. However, the Senate on December 13, 2007 stripped the controversial tax title from its version of the comprehensive energy bill (H.R. 6) and then passed the bill, 86-8, leading to the President's signing of the Energy Independence and Security Act of 2007 (P.L. 110-140), on December 19, 2007. The only tax-related provisions that survived were (1) an extension of the Federal Unemployment Tax Act surtax for one year, raising about $1.5 billion, (2) higher penalties for failure to file partnership returns, increasing revenues by $655 million, and (3) an extension of the amortization period for geological and geophysical expenditures from five to seven years, raising $103 million in revenues. The latter provision was the only tax increase on the oil and gas industry in the final bill. Those three provisions would offset the $2.1 billion in lost excise tax revenues going into the federal Highway Trust Fund as a result of the implementation of the revised Corporate Average Fuel Economy standards. The decision to strip the much larger $21 billion tax title stemmed from a White House veto threat and the Senate's inability to get the votes required to end debate on the bill. Senate Majority Leader Harry Reid's (D-Nev.) effort to invoke cloture fell short by one vote, in a 59-40 tally.

Since then, the Congress has tried several times to pass energy tax legislation, and thus avoid the impending expiration of several popular energy tax incentives, such as the "wind" energy tax credit under Internal Revenue Code (IRC) § 45, which, since its enactment in 1992, has lapsed three times only to be reinstated.¹ Several energy tax bills have passed the House but not the Senate, where on several occasions, the failure to invoke cloture resulted in the failure to bring up the legislation for consideration. Senate Republicans objected to the idea of raising taxes to offset extension of expiring energy tax provisions, which they consider to be an extension of current tax policy rather than new tax policy. In addition, some Senate Republicans objected to raising taxes on the oil and gas industry, such as by repealing the (IRC) § 199 deduction, and by streamlining the foreign tax credit for oil companies.² The Bush Administration repeatedly threatened to veto these types of energy tax bills, in part because of their proposed increased taxes on the oil and gas industry. Frustrated with the lack of action on energy tax legislation over the last two years, some House Democrats introduced and approved several such bills, such as H.R. 5351, which was approved by the House on February 27, 2008. House Speaker Pelosi and other Democrats sent President Bush a letter February 28, 2008, urging him to reconsider his opposition to the Democratic renewable energy plan, arguing that their energy tax plan would "correct an imbalance in the tax code."³

At this writing, a renewed legislative effort is being made to enact energy tax legislation, although the two chambers were moving in different directions on how to bring the legislation to the floor. In the House, energy tax provisions are part of H.R. 6899, House Democratic leadership's latest draft of broad-based energy policy legislation, the Comprehensive American Energy Security and Consumer Protection Act. Passed on September 16, 2008, the bill would expand oil and gas drilling offshore by allowing oil and gas exploration and production in areas of the outer continental shelf that are currently off limits, except for waters in the Gulf of Mexico off the Florida coast. Under the bill, states could allow such drilling between 50 and 100 miles offshore, while the federal government could permit drilling from 100 to 200 miles offshore.⁴ Revenue from the new offshore leases would be used to assist the development of alternative energy, and would not be shared by the adjacent coastal states. The bill would also repeal the current ban on leasing federal lands for oil shale production if states enact laws providing for such leases and production. H.R. 6899 also would enact a renewable portfolio standard, a requirement that power companies generate 15% of their energy from renewable sources by 2020.

H.R. 6899 includes several tax incentives for renewable energy that would reduce revenue by an estimated $19 billion over 10 years.⁶ At a cost of $6.9 billion over 10 years, it extends a renewable energy production tax credit, covering wind facilities for one additional year, through 2009, and certain other renewable energy production for three years, through 2011, while capping credits for facilities that come into service after 2009. The bill extends for eight years, through 2016, a credit for investing in solar energy and fuel cells, at a cost of $1.8 billion. It also extends the energy-efficient commercial building deduction for five years, the credit for efficiency improvements to existing homes for one year, and a credit for energy-efficient appliances for three years.

The measure provides for the allocation of $2.625 billion in energy conservation bonds, $1.75 billion in clean renewable energy bonds, and $1.75 billion in energy security bonds to finance the installation of natural gas pumps at gas stations; all would be tax-credit bonds, which provide a tax credit in lieu of interest, and projects financed through the bonds would have to comply with Davis-Bacon requirements. It also creates a new tax credit for plug-in electric vehicles, and an accelerated recovery period for smart electric meters and grid systems, and it provides $1.1 billion in tax credits for carbon capture and sequestration projects. The tax title also includes one non-energy tax subsidy: a $1.1 billion provision to restructure the New York Liberty Zone tax incentives to allow for new transportation projects.

H.R. 6899 is fully offset, raising $19 billion in taxes, including many of the same energy tax increases on oil companies also previously approved by the House. The energy tax provisions in H.R. 6899 are entirely offset, mainly by denying the IRC § 199 manufacturing deduction to certain major integrated oil companies (including oil companies controlled by foreign governments, such as CITGO ) and freezing the deduction for all other oil and gas producers at the current rate of 6%.⁷ Earlier § 199 repeal proposals had been criticized for seeking to end the deduction only for U.S.-based major companies, while exempting Venezuelan-controlled CITGO because, not being a crude oil producer, it does not meet the definition of a "major integrated oil and gas producer." The entire provision would raise $13.9 billion over 10 years. Additional revenue -- about $4.0 billion over 10 years -- would come from a provision to streamline the tax treatment of foreign oil-related income so it is treated the same as foreign oil and gas extraction income.

In addition to H.R. 6899, the Republican leadership in the House has introduced its own energy tax bill, H.R. 6566, which also extends and expands some of the energy tax incentives and contains no tax increases (offsets). The energy tax provisions in this bill are, however, smaller and somewhat narrower than those in H.R. 6899.

While most of the tax incentives in the bill are extensions of existing policy and are not controversial, the legislation would need to be paid for through new sources of revenue. One proposed offset -- which has been previously blocked by some Republicans -- would repeal the IRC § 199 manufacturing deduction for the five major oil and gas producers, raising $13.9 billion over 10 years. The bill also would be paid for through a new 13% excise tax on oil and natural gas pumped from the Outer Continental Shelf, a proposal to eliminate the distinction between foreign oil-and-gas extraction income and foreign oil-related income, and an extension and increase in the oil spill tax through the end of 2017. In total, tax increases on the oil and gas industry would account for $31 billion of the $40 billion total cost of the legislation. The final major offset would come from a requirement on securities brokers to report on the cost basis for transactions they handle to the Internal Revenue Service, a provision expected to raise about $8 billion in new revenues over 10 years.

The tax offsets, or tax increases in S. 3478 are not without controversy, however, particularly the repeal of the IRC § 199 manufacturing deduction for the five major oil and gas producers, as discussed previously. Several times the House has approved energy tax legislation, and several times in the Senate such legislation failed a cloture vote and thus could not be brought to the floor for debate.

As noted above, some Republicans have in the past objected to the idea of raising taxes to offset extension of expiring energy tax provisions, which they consider to be an extension of current tax policy rather than new tax policy. In addition, some Senate Republicans have objected to raising taxes on the oil and gas industry, particularly by repealing the IRC § 199 deduction. The Bush Administration threatened also to veto any energy tax bill that would increase taxes on the oil and gas industry. At this writing, it appears that inclusion of the § 199 deduction repeal as an offset might preclude the energy tax bill from coming to the Senate floor -- some believe that it would fail another cloture vote -- so this provision might not survive the process.⁹

Given continued Republican opposition (including a possible Presidential veto), and to avoid another legislative impasse -- a failed cloture vote -- Senators Baucus and Grassley have released a scaled-down version of S. 3478.¹⁰ This energy tax extenders package, i.e., the proposed substitute of S. 3478, would, in turn, be a substitute amendment to the previously House-approved energy tax extenders bill H.R. 6049. This scaled down draft bill is valued at nearly $17 billion, less than half the size of S. 3478, and is fully offset. The modified draft bill would also raise revenue by increasing the tax burden on the oil industry. Unlike the original version of S. 3478, however, which would have repealed the § 199 for major integrated oil companies completely, the substitute bill would freeze the value of the manufacturing deduction for all oil companies at 6%, the current rate. This modification is estimated to raise $4.9 billion over 10 years, about 2/3 less than complete repeal. Because of smaller tax increases, the bill's remaining provisions -- measures to increase tax subsidies for renewable fuels and for energy efficiency -- had to be cut back. Thus, the scaled-down bill drops the nuclear electricity production tax credit provision, scales back the § 45 renewable electricity tax credit, and generally shortens the extension periods.

Finally, the debate in the Senate over energy tax incentives and energy tax extenders is seen as potentially involving three other separate proposals: 1) The Gang of 20 proposal or "New Energy Reform Act of 2008"(this has not yet been introduced); 2) A Bingaman/Baucus bill (also not formally introduced); and 3) the Republican "Gas Price Reduction Act" (introduced by Senator McConnell as Senate Amendment 5108).

A side-by-side comparison of H.R. 6899 and the unnumbered substitute amendment of S. 3478 is in Table 1.¹¹ Revenue estimates were generated by the Joint Committee on Taxation.

   Table 1. Side-by-Side Comparison of the Energy Tax Provisions

² Enacted in 2004 as an export tax incentive, this provision allows a deduction, as a business expense, for a specified percentage of the qualified production activity's income (or profit) subject to a limit of 50% of the wages paid that are allocable to the domestic production during the taxable year. The deduction was 3% of income for 2006, is currently 6%, and is scheduled to increase to 9% when fully phased in by 2010.

³ Several times, the House has approved energy tax legislation, and several times in the Senate such legislation failed a cloture vote and thus could not be brought to the floor for debate. The latest was H.R. 6049, the House tax extenders bill, which was approved by the House on May 21, 2008, but failed three cloture votes in the Senate. Several times recently, the Senate has been prevented from taking action on energy tax legislation due to the failure to invoke cloture on the motion to proceed to the House energy tax extenders bills. The first was June 10, when the motion failed by a vote of 50-44; the second was on June 17, when the motion failed by a vote of 52-44; the third was July 29, when the cloture motion failed by a vote of 53 to 43. In addition, on July 30 the Senate rejected by a vote of 51 to 43 a motion to invoke cloture on a motion to proceed to debate S. 3335, Senator Baucus's energy tax bill.

⁴ The House Democratic leadership's energy proposal is centered around opening the Outer Continental Shelf to oil and gas development. The OCS areas -- the Atlantic OCS, Gulf of Mexico (GOM) OCS, Pacific OCS, and Alaska OCS -- are the offshore lands under the jurisdiction of the U.S. government. Federal law allows or confirms state boundaries and jurisdiction over the continental shelf areas up to 3 nautical miles from the coastline, except that (in the GOM) Texas and Florida offshore boundaries extend up to 9 nautical miles from the coastline. Exclusive federal jurisdiction over resources of the shelf applies from state boundaries out to 200 miles from the U.S. coastline. For a more detailed definition of the OCS and various governmental jurisdictions see: U.S. Library of Congress. Congressional Research Service. Offshore Oil and Gas Development: Legal Framework. CRS Report RL33404, by Adam Vann. May 3, 2006. For a comparison of different proposals see: U. S. Library of Congress. Congressional Research Service. Outer Continental Shelf Leasing: Side-by-Side Comparison of Five Legislative Proposals. CRS Report RL34667 by Marc Humphries. September 15, 2008

⁵ As noted, the House has approved several energy tax bills over the last two years, only to have them stall in the Senate. H.R. 6049, for instance, was approved by the House on May 21, 2008 only to fail several cloture votes in the Senate (see footnote #3).

⁶ U.S. Congress. Joint Committee on Taxation. Estimated Revenue Effects of Title VIII of H.R. 6899, The "Energy Tax Incentives Act of 2008," as Passed by the House of Representatives on September 16, 2008. JCX-68-08. September 17, 2008.

⁷ First enacted in 2004, this provision allows a deduction, as a business expense, for a specified percentage of the qualified production activity's income subject to a limit of 50% of the wages paid that are allocable to the domestic production during the taxable year. The deduction was 3% of income for 2006, is currently 6%, and is scheduled to increase to 9% when fully phased in by 2010. For the domestic oil and gas industry, the deduction applies to oil and gas or any primary product thereof, provided that such product was "manufactured, produced, or extracted in whole or in significant part in the United States." Note that extraction is considered to be manufacturing for purposes of this deduction, which means that domestic firms in the business of extracting oil and gas qualify for the deduction. This deduction was enacted under the American Jobs Creation Act of 2004 (P.L. 108-357, also known as the "JOBS" bill).

⁸ Bureau of National Affairs. Daily Tax Report. "Hope Dims for Broad Compromise in Senate, But Vote on Tax Credit Extension Still Likely." September 22, 2008. p. A-6.

⁹ Bureau of National Affairs. Daily Tax Report. "Plan to Bring Tax Extenders to Floor Scraps Section 199 Deduction Repeal for Oil Firms." September 17, 2008. P. G-13.

¹⁰ The legislative text and summary of the substitute of S. 3478 are in: Bureau of National Affairs. Daily Tax Report. September 18, 2008.

¹¹ A side-by-side comparison of H.R. 6049 and S. 3478 is in CRS Report RL34669, by Salvatore Lazzari, September 16, 2008; A side-by-side comparison of H.R. 6899 and S. 3478 is in CRS Report RL34674, by Salvatore Lazzari, September 18, 2008.