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CRS Issue Brief on Energy Tax Policy

APR. 8, 2003

IB10054

DATED APR. 8, 2003
DOCUMENT ATTRIBUTES
  • Authors
    Lazzari, Salvatore
  • Institutional Authors
    Congressional Research Service
  • Subject Area/Tax Topics
  • Industry Groups
    Energy
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2003-11593 (19 original pages)
  • Tax Analysts Electronic Citation
    2003 TNT 90-64
Citations: IB10054

 

CRS Issue Brief

 

 

Energy Tax Policy

 

 

Updated April 8, 2003

 

 

Salvatore Lazzari

 

Resources, Science, and Industry Division

 

 

Prepared for Members and

 

Committees of Congress

 

 

CONTENTS

 

 

 SUMMARY

 

 

 MOST RECENT DEVELOPMENTS

 

 

 BACKGROUND AND ANALYSIS

 

 

 Introduction

 

 

 Background

 

      Energy Tax Policy From 1918-1970: Promoting Oil and Gas

 

      Energy Tax Policy During the 1970s: Conservation and Alternative

 

        Fuels

 

      Reagan's Free-Market Energy Tax Policy

 

      Energy Tax Policy After Reagan

 

 

 Energy Tax Proposals in the 106th Congress

 

 

 Energy Tax Action in the 107th Congress

 

      Omnibus Energy Bills (H.R. 4)

 

      Job Creation at id Worker Assistance Act (P.L. 107-147)

 

 

 Energy Tax Action in the 108th Congress

 

      Comparison of S. 597 and H.R. 1531

 

      Bush Administration Proposals

 

 

 LEGISLATION

 

 

 CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS

 

 

 FOR ADDITIONAL READING

 

Energy Tax Policy

 

 

SUMMARY

[1] Historically, U.S. federal energy tax policy promoted the supply of oil and gas. However, the 1970s witnessed (1) a significant cutback in the oil and gas industry's tax preferences, (2) the imposition of new excise taxes on oil, and (3) the introduction of numerous tax preferences for energy conservation, the development of alternative fuels, and the commercialization of the technologies for producing these fuels (renewables such as solar, wind, and biomass, and non-conventional fossil fuels such as shale oil and coalbed methane).

[2] The Reagan Administration, using a freemarket approach, advocated repeal of the windfall profit tax on oil and the repeal or phase-out of most energy tax preferences -- for oil and gas, as well as alternative fuels. Due to the combined effects of the Economic Recovery Tax Act and the energy tax subsidies that had not been repealed, which together created negative effective tax rates in some cases, the actual energy tax policy differed from the stated policy.

[3] The George H. Bush and Bill Clinton years witnessed it return to a much more activist energy tax policy, with an emphasis on energy conservation and alternative fuels. While the original aim was to reduce demand for imported oil, energy tax policy is also being increasingly viewed as a tool for achievIng environmental and fiscal objectives. The current energy tax structure is dominated by revenue loss for a long-standing gasoline tax. However, recent debates over energy tax policy for fuels and electricity cover a wide range of tax measures for fossil fuels, alternative fuels, renewable energy, and energy efficiency.

[4] The Clinton Administration's energy tax policy focused on reducing petroleum demand through for energy efficiency, alternative fuels, and alternative-fueled vehicles. The Clinton policy also emphasized the environmental benefits of reducing greenhouse gases and global climate change.

[5] The George W. Bush Administration had originally criticized energy tax measures as inconsistent with its free market philosophy. Nevertheless, President Bush issued a comprehensive energy policy in 2001, and a global climate change initiative in 2002, which include limited energy tax measures. The Administration's FY2004 budget proposal includes several energy tax incentives.

[6] H.R.4, omnibus energy legislation in the 107th Congress that would have expanded energy tax incentives significantly, was dropped in conference. Also, in 2002 certain energy tax provisions that had expired were extended retroactively as part of Job Creation and Worker Assistance Act (P.L. 107-147). On April 2, 2003, the Senate Finance Committee approved, by a vote of 18-2, S. 597 (the Energy Tax Incentives Act of 2003). On April 3, the House Ways and Means Committee voted 24-12 for H.R. 1531, its version of energy tax incentives, including about $80 million in revenue offsets. Both bills provide about $18 billion of gross tax cuts for energy conservation and for production of oil and gas, but S. 597 includes about $3 billion of tax and fee increases, while H.R. 1531 includes about $80 million of tax increases. Both bills include tax measures for oil and gas production, oil and gas refining and distribution, electricity industry restructuring, energy efficiency, renewable and alternative fuels, and several miscellaneous items. But S. 597 retains last year's clean coal tax incentives, while the H.R. 1531 does not.

MOST RECENT DEVELOPMENTS

[7] On April 2, 2003, the Senate Finance Committee approved, by a vote of 18-2, S. 597 (the Energy Tax Incentives Act of 2003), a bill to provide about $18 billion of gross tax cuts for energy conservation and for production of oil, gas, and coal, and about $3 billion of tax and fee increases. On April 3, the House Ways and Means Committee voted 24-12 for a bill (H.R. 1531) that would provide $18 billion in energy tax incentives, including about $80 million in revenue offsets. The President's FY2004 budget proposes a limited number of energy tax incentives -- both new incentives, and liberalization of existing energy tax subsidies. On November 13, 2002, the conference committee dropped its consideration of H.R. 4, the comprehensive energy bill, after eight sessions failed to reconcile major differences. Both the Senate and House versions of H.R. 4 included a package of energy tax cuts, primarily tax incentives (or subsidies) for qualifying energy producers and consumers. Some version of these energy tax provisions is expected to be incorporated into a new comprehensive energy bill, which is a top priority for the 108th Congress. On March 9, President Bush signed the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147), a $42 billion, ten-year tax cut that retroactively extends several energy tax provisions that had expired on December 31, 2001.

BACKGROUND AND ANALYSIS

 

Introduction

 

 

[8] Energy tax policy involves the use of the government's main fiscal instruments -- taxes (financial disincentives) and tax subsidies (or incentives) -- to alter the allocation or configuration of energy resources. Energy taxes and subsidies are intended to either correct a problem or distortion in the energy markets or to achieve some social, economic (efficiency, equity, or even macroeconomic), environmental, or fiscal objective.

[9] The idea of applying tax policy instruments to the energy markets is not new, but until the 1970s energy tax policy had been little used. Recurrent energy-related problems since the 1970s -- oil embargoes, oil price and supply shocks, wide petroleum price variations and price spikes, large geographical price disparities, tight energy supplies, rising oil import dependence, as well as increased concern for the environment -- have caused policymakers to look toward energy taxes and subsidies with greater frequency.

[10] This issue brief discusses the history, current posture, and the outlook for federal energy tax policy. It also discusses recent energy tax proposals, focusing on the major energy tax provisions included in omnibus energy legislation (H.R. 4) that is now in conference. (For a general economic analysis of energy tax policy, see CRS Report RL30406, Energy Tax Policy: An Economic Analysis.)

 

Background

 

 

[11] The history of federal energy tax policy can basically be divided into four eras: the oil and gas period from 1916 to 1970, the energy crisis period of the 1970s, the free-market era of the Reagan Administration, and the post-Reagan era -- including the period since 1998, which has witnessed a plethora of energy tax proposals to address recurring energy market problems.

Energy Tax Policy From 1918-1970: Promoting Oil and Gas

[12] Historically, federal energy tax policy was focused on increasing domestic oil and gas reserves and production; there were no tax incentives for energy conservation or for alternative fuels. Two oil/gas tax code preferences embodied this policy: 1) expensing of intangible drilling costs (IDCs) and dry hole costs, which was introduced in 1916, and 2) the percentage depletion allowance, first enacted in 1926 (coal was added in 1932).

[13] Expensing of IDCs (such as labor costs, material costs, supplies, and repairs associated with drilling a well) gave oil and gas producers the benefit of fully deducting from the first year's income ("writing off") a significant portion of the total costs of bringing a well into production, costs that would otherwise (i.e., in theory and under standard, accepted tax accounting methods) be capitalized (i.e., written off during the life of the well as income is earned). For dry holes, which comprised on average about 80% of all the wells drilled, the costs were also allowed to be deducted in the year drilled (expensed) and deducted against other types of income, which led to many tax shelters that benefitted primarily high-income taxpayers. Expensing accelerates tax deductions, defers tax liability, and encourages oil and gas prospecting, drilling, and the development of reserves.

[14] The percentage depletion allowance for oil and gas permitted oil and gas producers to claim 27.5% of revenue as a deduction for the cost of exhaustion or depletion of the deposit, allowing deductions in excess of capital investment (i.e, in excess of adjusted cost depletion) -- the economically neutral method of capital recovery for the extractive industries. Percentage depletion encourages faster mineral development than cost depletion (the equivalent of depreciation of plants and equipment).

[15] These and other tax subsidies discussed later (e.g., capital gains treatment of the sale of successful properties, the special exemption from the passive loss limitation rules, and special tax credits) reduced marginal effective tax rates in the oil and gas industries, reduced production costs, and increased investments in locating reserves (increased exploration). They also led to more profitable production and some acceleration of oil and gas production (increased rate of extraction), and more rapid depletion of energy resources than would otherwise occur. Such subsidies tend to channel resources into these activities that otherwise would be used for oil and gas activities abroad or for other economic activities in the United States. Relatively low oil prices encouraged petroleum consumption (as opposed to conservation) and inhibited the development of alternatives to fossil fuels, such as unconventional fuels and renewable forms of energy. Oil and gas production increased from 16% of total U.S. energy production in 1920 to 71.1% of total energy production in 1970 (the peak year).

Energy Tax Policy During the 1970s: Conservation and Alternative

 

Fuels

 

 

[16] Three developments during the 1970s caused a dramatic shift in the focus of federal energy tax policy. First, the large revenue losses associated with the oil and gas tax preferences became increasingly hard to justify in the face of a progressively worsening fiscal picture -- increasing federal budget deficits -- and in view of the longstanding economic arguments against the special tax treatment for oil and gas. Second, heightened awareness of environmental pollution and concern for environmental degradation, and the increased importance of distributional issues in policy formulation (i.e., equity and fairness), lost the domestic oil and gas industry much political support. Thus, it became more difficult to justify percentage depletion and other subsidies, largely claimed by wealthy individuals and big vertically integrated oil companies. More importantly, during the 1970s there were two energy crises: the oil embargo of 1973 -- also known as the first oil shock -- and the Iranian Revolution in 1979, which focused policymakers' attention on the problems (alleged "failures") in the energy markets and how these problems reverberated throughout the economy causing stagflation, shortages, productivity problems, rising import dependence, and other economic and social problems.

[17] These developments caused the increased use of fiscal subsidies or incentives -- special tax credits, deductions, exclusions etc. -- to shift from oil and gas supply toward energy conservation and alternative energy sources.

[18] Three broad actions through the tax code were taken to implement the new energy tax policy during the 1970s: First, the oil industry's two major tax preferences -- expensing of IDCs and percentage depletion -- were significantly reduced, particularly the percentage depletion allowance, which was eliminated for the major oil companies and reduced for the remaining producers. Other oil and gas tax benefits were also cut back during this period. For example, oil- and gas-fired boilers used in steam generation (for example, to generate electricity) could no longer qualify for accelerated depreciation as a result of the Energy Tax Act of 1978 (as discussed below).

[19] The second broad policy action was the imposition of several new excise taxes on oil and gas (and later coal). Chief among these was the windfall profit tax (WPT) on oil first enacted in 1980 (P.L. 96-223). The WPT imposed an excise tax of 15% to 70% oil the difference between the market price of oil and a predetermined (adjusted) base price. This tax, which was repealed in 1988, was part of a political compromise that decontrolled oil prices (between 1971 and 1980 oil prices were controlled under President Nixon's Economic Stabilization Act of 1970 -- the so-called "wage-price freeze").

[20] Another, but relatively small, excise tax on petroleum was instituted in 1980: the environmental excise tax on crude oil received at a U.S. refinery. This tax, which was part of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 P.L. 90-510), otherwise known as the "Superfund" program, was designed to charge oil refineries for the cost of releasing any hazardous materials that resulted from the refining of crude oil. The tax rate was set initially at 0.79¢ ($0.0079) per barrel, and was subsequently raised to 9.7¢ per barrel. This tax expired at the end of 1995, but legislation has been proposed since then to reinstate it as part of Superfund reauthorization. (See CRS Issue Brief IB10011.)

[21] The third broad action taken during the 1970s to implement the new and refocused energy tax policy was the introduction of numerous tax incentives for energy conservation, the development of alternative fuels (renewable and non-conventional fuels), and the commercialization of energy efficiency and alternative fuels technologies. Most of these new tax subsidies were introduced as part of the Energy Tax Act of 1978 (ETA, P.L. 95-618), and expanded under the WPT, which also introduced additional new energy tax subsidies. The following list describes these:

  • Residential and Business Energy Tax Credits. The ETA provided income tax credits for homeowners and businesses that invested in a variety of energy conservation products (e.g., insulation and other energy-conserving components) and for solar and wind energy equipment installed in a principal home or a business. The business energy tax credits were 10% to 15% of the investment in conservation or alternative fuels technologies, such as synthetic fuels, solar, wind, geothermal, and biomass. These tax credits were also expanded as part of the WPT but they generally expired (except for business use of solar and geothermal technologies) as scheduled either in 1982 or 1985. President Clinton's FY2001 budget included a solar credit that is very similar to the 1978 residential energy tax credits. A 15% investment tax credit for business use of solar and geothermal energy, which was made permanent, is all that remains of these tax credits.

  • Tax Subsidies for Alcohol Fuels. The ETA also introduced the excise tax exemption for gasohol, currently at 5.3¢ per gallon (out of a gasoline tax of 18.4¢/gal.). Subsequent legislation extended the exemption and introduced the alcohol fuels "blenders" tax credits (which are in lieu of the exemption), and the 10¢/gal., small ethanol producers tax credit. The 1998 Transportation Equity Act (P.L. 105-178) extended the exemption, which was scheduled to expire, but at reduced rates. (For more information see CRS Report 98-435 E, Alcohol Fuels Tax Incentives.)

  • Gas Guzzler Tax. The ETA created a federal "gas guzzler" excise tax on the sale of automobiles with relatively low fuel economy ratings. The tax currently ranges from $1,000 for an automobile rated between 21.5 and 22.5 miles per gallon (mpg) to $7,700 for an automobile rated at less than 12.5 mpg. This tax is still in effect.

  • Percentage Depletion for Geothermal. The ETA made geothermal deposits eligible for the percentage depletion allowance, at the rate of 22%. Currently the rate is 15%.

  • § 29 Tax Credit for Unconventional Fuels. The 1980 WPT included a $3.00 (in 1979 dollars) production tax credit to stimulate the supply of selected unconventional fuels: oil from shale or tar sands, gas produced from either geo-pressurized brine, Devonian shale, tight formations, and coalbed methane, gas from biomass, and synthetic fuels from coal. Adjusted for inflation, this credit, which is still in effect for wells, mines, or plants placed in service by June 30, 1998 (for coal and biomass facilities) and December 11, 1991 (for all other facilities and wells), was over $6.00 per barrel of liquid fuels and about $1.00 per thousand cubic feet (mcf) of gas in 1999. The credit for tight sands gas has been fixed at the 1979 rate of $0.50 per mcf. (For more information, see CRS Report 97-679 E, Economic Analysis of the Section 29 Tax Credit for Unconventional Fuels.)

  • Tax-Exempt Interest on Industrial Development Bonds. The WPT made facilities for producing fuels from solid waste exempt from federal taxation of interest on industrial development bonds (IDBs). This exemption was for the benefit of the development of alcohol fuels produced from biomass, for solid-waste-to-energy facilities, for hydroelectric facilities, and for facilities for producing renewable energy. IDBs, which provide significant benefits to state and local electric utilities (public power), had become a popular source of financing for renewable energy projects.

 

[22] (During the 1970s there was also a significant increase in the number of energy laws and regulations, such as the Corporate Average Fuel Economy (CAFE) standards to reduce transportation fuel use, and other interventions through the budget and the credit markets. This included some of the most extensive energy legislation ever enacted. These non-tax policy measures are not discussed here.)

Reagan's Free-Market Energy Tax Policy

[23] The Reagan era, the period from 1981-1989, witnessed the first attempt to create a more free-market energy tax policy by deregulating the energy markets, and by both reducing taxes and eliminating tax subsidies, both for conservation, alternative fuels, and oil and gas.

[24] President Reagan's free-market views were well known prior to his election. During the 1980 presidential campaign, he proposed repeal of the WPT, the deregulation of oil and natural gas, and the minimization of government intervention, including reduced spending and taxes. The Reagan Administration opposed using the tax law to promote either oil and gas development, energy conservation, or the supply of alternative fuels. The idea was to have a more neutral and less distortionary energy tax policy, which would make energy markets work more efficiently and generate benefits to the general economy. The Reagan Administration believed that the responsibility for commercializing conservation and alternative energy technologies rested with the private sector and that high oil prices -- real oil prices (corrected for inflation) were at historically high levels in 1981 and 1982 -- would be ample encouragement for the development of alternative energy resources. High oil prices in themselves create conservation incentives and stimulate oil and gas production.

[25] The Reagan Administration's energy tax policy was professed more formally in several energy and tax policy studies, including its 1981 National Energy Policy Plan and the 1983 update to this plan; it culminated in a 1984 Treasury study on general tax reform, which also proposed fundamental reforms of federal energy tax policy. In terms of actual legislation, many of the Reagan Administration's objectives were realized, although as discussed below there were unintended effects. In 1982, the business energy tax credits on most types of nonrenewable technologies -- those enacted under the ETA of 1978 -- were allowed to expire as scheduled; other business credits and the residential energy tax credits were allowed to expire at the end of 1985, also as scheduled. Only the tax credits for business solar, geothermal, ocean thermal and biomass technologies were extended. And as mentioned above, today the tax credit for business investment in solar and geothermal technologies, which has since been reduced to 10%, is all that remains of these tax credits. A final accomplishment was the repeal of the WPT, but not until 1988, the end of the Reagan term.

[26] The Reagan Administration's other energy tax policy proposals, however, were not adopted. The tax incentives for oil and gas were not eliminated, although they were pared back as part of the Tax Reform Act (TRA) of 1986:

  • 'Expensing' was retained, but there were cutbacks for integrated oil producers (who would be allowed to expense only 70% of such costs and amortize -- deduct evenly over time -- the remaining 30%) and other reductions;

  • Percentage depletion would not apply to lease bonuses, advance royalties, or any other payments made without regard to actual production from the property. This amendment applied to geothermal wells as well as oil and gas properties. Another section of TRA denied capital gains treatment on certain dispositions of interest in oil and gas property (and to geothermal property);

  • The TRA replaced the old minimum taxes with a new alternative minimum tax that placed limits on the tax benefits to oil/gas producers from the expensing of IDCs and the percentage depletion allowance. (Taxpayers must compute both the standard income tax and the alternative minimum tax imposed on a variety of tax preferences or subsidies, and pay the larger of the two.) However, in an effort to mitigate any burdensome effects of this new tax, only the excess of the deduction above 65% of net income was to be treated as a preference item;

  • Investments in oil and gas properties were exempted from the passive loss limitation rules that were intended to curb tax shelter investments -- a working interest in an oil and gas property was not treated as a passive activity. Thus any losses and credits derived from oil and gas investment activity could be used as a tax shelter to offset the taxpayer's other income without limitations under the passive loss rules.

 

While the Reagan Administration's objective was to create a free- market energy policy, significant liberalization of the depreciation system and reduction in marginal tax rates -- both the result of the Economic Recovery Tax Act of 1981 (ERTA, P.L. 97-34) -- combined with the regular investment tax credit and the business energy investment tax credits, resulted in negative effective tax rates for many investments, including alternative energy investments such as solar and synthetic fuels. (See, for instance: CRS Report 84-85 E. Effective Tax Rates on Solar Wind and Synthetic Fuels as Compared to Conventional Energy Resources.) Also, the retention of percentage depletion and expensing of IDCs (even at the reduced rates) rendered oil and gas investments still favored relative to investments in general. Other energy tax policy developments during the Reagan era were as follows:
  • The Deficit Reduction Act of 1984 (P.L. 98-369) tinkered with several energy tax provisions including the WPT and percentage depletion. Also, the 1984 tax law extended several of the tax incentives for alcohol fuels: (1) the tax exemption for alcohol fuels mixtures was raised from 5¢ to 6¢; (2) the law retained the prior 9¢ per-gallon exemption for neat alcohol fuels, i.e., those that are at least 85% alcohol, derived from alternative substances, but it provided for a new exemption of 4.5 ¢ per gallon for alcohol fuels derived from natural gas; (3) the alcohol "blenders" credit was raised from 50 cents to 60 cents per gallon; and (4) the duty on alcohol imported for use as a fuel was increased from 50 cents to 60 cents per gallon.

  • In 1986 two environmental excise taxes were enacted on oil: 1) under the Superfund Amendments and Reauthorization Act of 1986 (P.L. 99-499), an increase in the Superfund oil tax from 0.79¢ to 8.2¢-per-barrel on domestic oil received and to 11.7¢ per barrel on imported petroleum. This tax differential violated the General Agreement on Tariffs and Trade (GATT), and the Steel Trade Liberalization Program Implementation Act of 1989 (P.L. 101-221) made the rates uniform at 9.7¢ per barrel; and 2) under the Omnibus Budget Reconciliation Act of 1986 (P.L. 99-510), imposition of the Oil Spill Liability Trust Fund excise tax at 1.3¢ per barrel, which was subsequently raised to 5.0¢ barrel. Both these taxes expired at the end of 1995.

  • In addition, the TRA of 1986 reduced the excise tax exemption for "neat" alcohol fuels, from 9¢ per gallon to 6¢ per gallon. It also permitted alcohol imported from certain Caribbean countries to enter free of the 60¢-per-gallon duty. The TRA also repealed the tax-exempt financing provision for alcohol-producing facilities and for certain steam-generating facilities.

 

Energy Tax Policy After Reagan

[27] After the Reagan Revolution, several major energy and non-energy laws were enacted that amended the energy tax laws in several ways, some major:

  • Revenue Provisions of the Omnibus Reconciliation Act of 1990. President George Herbert Bush's first major tax law included numerous energy tax incentives: 1) For conservation (and deficit reduction), the law increased the gasoline tax by 5¢/gallon and doubled the gas-guzzler tax; 2) for oil and gas, the law introduced a 10% tax credit for enhanced oil recovery expenditures, liberalized some of the restrictions on the percentage depletion allowance, and reduced the impact of the alternative minimum tax on oil and gas investments; and 3) for alternative fuels, the law expanded the § 29 tax credit for unconventional fuels and introduced the tax credit for small producers of ethanol used as a motor fuel.

  • Energy Policy Act of 1992 (P.L. 102-486). This broad energy measure introduced the § 45 tax credit, at 1.5¢ per kilowatt hour, for electricity generated from wind and "closed-loop" biomass systems. (Poultry litter was added later. This tax credit expired at the end of 2001 for new facilities.) In addition, the 1992 law 1) added an income tax deduction for the costs, up to $2,000, of clean-fuel powered vehicles; 2) liberalized the alcohol fuels tax exemption; 3) expanded the § 29 production tax credit for non- conventional energy resources; 4) liberalized the tax breaks for oil and gas.

  • Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66). President Clinton proposed a differential Btu tax on fossil fuels (a broadly-based general tax primarily on oil, gas and coal based on the British thermal units of heat output), which was dropped in favor of a broadly applied 4.3¢/gallon increase in the excise taxes on motor fuels, with revenues allocated for deficit reduction rather than the various trust funds.

  • Taxpayer Relief Act of 1997 (P.L. 105-34). This law includes a variety of excise tax provisions for motor fuels, of which some involved tax reductions on alternative transportation fuels, and some involved increases, such as on kerosene, which on balance further tilted energy tax policy toward alternative fuels.

  • Tax Relief and Extension Act (Title V of P.L. 106-170). Enacted as part of the Ticket to Work and Work Incentives Improvement Act of 1999 (P.L. 106-170), this Act extended and liberalized the 1.5¢/kWh renewable electricity production tax credit, and renewed the suspension of the net income limit on the percentage depletion allowance for marginal oil and gas wells.

 

[28] As this list suggests, the post-Reagan energy tax policy returned more to the interventionist course established during the 1970s and primarily was directed at energy conservation and alternative fuels, mostly for the purpose of reducing oil import dependence and enhancing energy security. However, there is an environmental twist to energy tax policy during this period, particularly in the more recent years, as the discussion of President Clinton's proposals will demonstrate. Fiscal concerns, which for most of that period created a perennial search for more revenues to reduce budget deficits, have also driven energy tax policy proposals during the post-Reagan era. This is underscored by proposals, which have not been enacted, to impose broad-based energy taxes such as the Btu tax or the carbon tax to mitigate greenhouse gas emissions.

[29] Another interesting feature of the post-Reagan energy tax policy is that while the primary focus continues to be energy conservation and alternative fuels, no energy tax legislation has been enacted during this period that does not also include some, relatively minor, tax relief for the oil and gas industry, either in the form of new tax incentives or liberalization of existing tax breaks (or both).

[30] Table 1 on page 16 summarizes current energy tax provisions and related revenue effects. A minus ("-") sign indicates revenue losses, which means that the provision is a tax subsidy or incentive, intended to increase the subsidized activity (energy conservation measures or the supply of some alternative and renewable fuel or technology); no minus sign means that the provision is a tax, which means that it should reduce supply of, or the demand for, the taxed activity (either conventional fuel supply, energy demand, or the demand for energy-using technologies, such as cars).

 

Energy Tax Proposals in the 106th Congress

 

 

[31] Energy price volatility over the past few years has led to congressional action on energy tax policy. This action was prompted by energy market problems which some had characterized as an "energy crisis."

[32] First, there have been wide fluctuations in crude oil prices. Domestic crude oil prices reached a low of just over $10 per barrel in the winter of 1998-1999, among the lowest crude oil prices in history after correcting for inflation. From 1986-1999 oil prices averaged about $17 per barrel, fluctuating from between $12 and $20 per barrel. These low oil prices hurt oil producers, benefitted oil refiners, and encouraged consumption. They also served as a disincentive to conservation and investment in energy efficiency technologies and discouraged production of alternative fuels and renewable technologies. To address the low oil prices, there were many tax bills in the first session of the 106th Congress (1999) focused on production tax credits for marginal or stripper wells, but they also included carry back provisions for net operating losses, and other fossil fuels supply provisions.

[33] By summer 1999, crude oil prices rose to about $20 per barrel, and peaked at more than $30 per barrel by summer 2000, causing high gasoline, diesel, and heating oil prices. To address these effects of high crude oil prices, legislative proposals again focused on production tax credits and other supply incentives. The rationale was not tax relief for a depressed industry but tax incentives to increase output, reduce prices, and provide price relief to consumers.

[34] In addition to high petroleum prices there were forces -- some of which were understood (factors such as environmental regulations and pipeline breaks) and others that are still are not so clearly understood -- that caused the prices of these petroleum products to spike. In response, there were proposals in 2000 to either temporarily reduce or eliminate the federal excise tax on gasoline, diesel, and other special motor fuels. The proposals aimed to help consumers (including truckers) cushion the financial effect of the price spikes. (For an analysis of this legislation, see CRS Report RL30497, Suspending the Gas Tax: Analysis of S. 2285.) The Midwest gasoline price spike in summer 2000 kept interest in these excise tax moratoria alive and generated interest in proposals for a windfall profit tax on oil companies which, by then, were earning substantial profits from high prices. (For more detail on the windfall profit tax on crude oil that was imposed from 1980 until its repeal in 1988, see CRS Report 90-442, The Windfall Profit Tax on Crude Oil: Overview of the Issues.)

[35] Despite numerous bills to address these issues, no major energy tax bill was enacted in the 106th Congress. However, some minor amendments to energy tax provisions were enacted as part of non-energy tax bills. This includes Title V of the Ticket to Work and Work Incentives Improvement Act of 1999 (P.L. 106-170), enacted on December 1999. Also, the 106th Congress did enact a package of $500 million in loan guarantees for small independent oil and gas producers, which became law (P.L. 106-51) in August 1999.

 

Energy Tax Action in the 107th Congress

 

 

[36] In early 2001, the 107th Congress faced a combination of fluctuating oil prices, an electricity crisis in California, and spiking natural gas prices. The gas prices had increased steadily in 2000 and reached $9 per thousand cubic feet (mcf) at the outset of the 107th Congress. At one point, spot market prices reached about $30 per mcf, the energy equivalent of $175 per barrel of oil. The combination of energy problems had developed into an "energy crisis," that prompted congressional action on a comprehensive energy policy bill -- the first since 1992 -- which included a significant expansion of energy tax incentives and subsidies and other energy policy measures.

Omnibus Energy Bills (H.R. 4)

[37] In comparing the energy tax measures of the House and Senate versions of H.R. 4, the House bill proposed larger energy tax cuts, with some energy tax increases. It would have 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. However, the Joint Tax Committee estimates that Senate bill would have encouraged use of an additional $5.1 billion in tax credits over 10 years for two mandates: a Renewable Energy Portfolio Standard (Sec. 264, $0.3 billion) and Renewable Fuel Standard (Sec. 820, $4.8 billion).

[38] The House version emphasized conventional fuels supply, including capital investment incentives to stimulate production and distribution of oil, natural gas, and electricity. This focus assumed that recent energy problems were due mainly to supply and capacity shortages driven by economic growth and low energy prices. In the House bill, as a relative share in dollar terms, about 75% of the tax cuts were for fossil fuels, 14% were for energy efficiency, 10% were for renewable and alternative fuels, and 1% were for miscellaneous provisions.

[39] In comparison, the Senate bill would have provided a much smaller amount of tax incentives for fossil fuels and nuclear power and somewhat fewer incentives for energy efficiency, but provided more incentives for alternative and renewable fuels. Specifically, as a relative share in dollar terms, about 51% of the tax cuts were for fossil fuels, 14% were for energy efficiency, 23% were for renewable and alternative fuels, and 25% were for incentives driven by the renewable energy mandates. (For more details, see CRS Report RL31427, Omnibus Energy Legislation: H.R. 4 Side-by-side Comparison.)

Job Creation and Worker Assistance Act (P.L. 107-147)

[40] The Job Creation and Worker Assistance Act of 2002 (H.R. 3090) was signed into law by President Bush on March 9, 2002. The Act provides a $42 billion, ten-year tax cut and it retroactively extended several energy tax provisions:

  • § 45 Tax Credit for Electricity Produced From Wind, Biomass, and Poultry Waste. The 1.5¢ per kilowatt hour (in real, 1992 dollars) tax credit for electricity produced from wind technologies, "closed-loop" biomass, and poultry waste (as described above), is available for 10 years after the generating facility is placed in service, for which the previous deadline was January 1, 2002. Section 603 of the law extends this placed-in-service deadline to December 31, 2003.

  • Tax Credit for Electric Vehicles. The onset of the phase-out of the $4,000 tax credit for the purchase of electric vehicles began on January 1, 2002. Section 602 of the law defers the onset of the phase-out date by two years.

  • Deduction for Clean-Fuel Vehicles and Certain Refueling Property. The deduction for clean fuel vehicles, which ranges from $2,000 to $50,000, is to be phased out over 3 years beginning on January 1, 2002. Section 606 of the law defers the start-up of the phase-out to January 1, 2004.

  • Dyed Fuels Mandate. Beginning on January 1, 2002, registered terminals were required to store both dyed diesel fuel and dyed kerosene in order to be allowed to sell undyed diesel and kerosene. Section 615 of the law repeals this mandate, retroactive to January 1, 2002.

  • Percentage Depletion Allowance. This measure allows a percentage of gross income from marginal oil and natural gas wells to be deducted from taxes. A limit on the allowance was set at 100% of net income, but it was suspended from December 31, 1997, through January 1, 2002. Section 607 of the law extends this suspension through January 1, 2004.

Energy Tax Action in the 108th Congress

 

 

Comparison of S. 597 and H.R. 1531

[41] On April 2, 2003, the Senate Finance Committee (SFC) approved S. 597 (the Energy Tax Incentives Act of 2003) by a vote of 18-2. The bill would provide a ten-year tax cut of just over $18.0 billion for energy conservation and for production of oil, gas, and coal. With the exception of two deleted provisions, both relatively minor, and about $3 billion in corporate revenue increases, S. 597 is similar to the energy tax incentives legislation (S. 1979) that was brought to the floor in April 2002 and incorporated into the Senate's version of H.R. 4. (For more information see CRS Report RL31828. The Energy Tax Incentives Act of 2003 (S. 597): Summary of Provisions.). The size of the tax cuts in S. 597 however, is somewhat larger than in S. 1979 (107th Congress), with the additional tax cuts allocated to oil and gas production and refining. The revenue losses in S. 597 would be partially offset through additional curbs on corporate tax shelters, limits on corporate and individual expatriates, and an extension of Internal Revenue Service user fees, which would raise about $3.2 billion over 10 years, so that the net energy tax cut is about $15.5 billion.

[42] On April 3, the House Ways and Means Committee (WMC) voted 24-12 for a bill (H.R. 1531) that would also provide about $18 billion in energy tax incentives. The Ways and Means Committee bill includes less than $100 million in general tax increases so that its energy tax cut is about $3 billion greater than the SFC bill. Unlike S. 597, H.R. 1531 is a substantially scaled down version of the House energy tax bill passed last year (H.R. 2511) which included about $33 billion in energy tax cuts over 10 years. The relative weights among the three categories -- fossil fuel production, energy efficiency, and alternative/renewable fuels -- are the same as last years bills, but the absolute amounts of dollar cuts are obviously much smaller than in last years bill's. H.R. 1531 does not include the clean coal tax cuts, while the SFC bill retains the clean coal tax provisions that were in S. 1979 (107th Congress).

[43] Overall, while both the current Senate and House bills increase the fraction of tax cuts for oil and gas production, H.R. 1531 reduces the absolute dollar tax cuts for oil and gas, (because the total tax cuts in H.R. 1531 are much smaller than last year's bill, H.R. 2511), while the SFC bill increases the dollar amounts for oil and gas production (because it is somewhat larger than last year's bill, S. 1979).

Bush Administration Proposals

[44] In 2001, the Bush Administration's National Energy Policy report proposed a comprehensive energy plan that included a limited number of energy tax measures, some of which appeared in the Administration's FY2002 and FY2003 budget requests and others that appeared in the President's 2002 global climate change initiative. Some of these proposals were incorporated into the Job Creation and Worker Assistance Act and many appeared in the House version of H.R. 4. (For more on Bush Administration energy policy, see CRS Report RL31096. Bush Energy Policy: Overview of Major Proposals and Legislation.)

[45] The President's FY2004 budget, promulgated in February 2003, proposes a limited number of energy tax incentives -- both new incentives, and liberalization of existing energy tax subsidies:

  • 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 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, 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.

  • Provide 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 an 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 a 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 of ethanol (which expires on December 31, 2007) are extended through December 31, 2010.

  • Allocate 2.5¢ Portion of Gasohol Tax Rate to the Highway Trust Fund. The 2.5¢ portion of the taxable part 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 form 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.

 

LEGISLATION

H.R. 109 (Hayworth)

[46] Amends the Internal Revenue Code of 1986 to allow a credit for residential solar energy property. Introduced January 7, 2003; referred to Committee on Ways and Means.

H.R. 465 (King)

[47] Amends the Internal Revenue Code of 1986 to allow allocation of small ethanol producer credit to patrons of cooperative, and for other purposes. Introduced January 29, 2003; referred to Committee on Ways and Means.

H.R. 497 (Sensenbrenner)

[48] Amends the Internal Revenue Code of 1986 to suspend all motor fuel taxes for six months, and permanently repeals the 4.3-cent per gallon increases in motor fuel taxes enacted in 1993. Introduced January 29, 2003; referred to Committee on Ways and Means.

S. 154 (Dayton)

[49] Provides emergency disaster assistance to agricultural producers, imposes tariff-rate quotas on certain casein and milk protein concentrates, and amends the Internal Revenue Code of 1986 to provide tax relief for farmers and the producers of biodiesel, and for other purposes. Introduced January 14, 2003; referred to Committee on Finance.

S. 207 (Smith)

[50] Amends the Internal Revenue Code of 1986 to provide a 10-year extension of the credit for producing electricity from wind. Introduced January 23, 2003; referred to Committee on Finance.

S. 240 (Fitzgerald)

[51] Amends the Internal Revenue Code of 1986 to allow allocation of small ethanol producer credit to patrons of cooperative, and for other purposes. Introduced January 29, 2003; referred to Committee on Finance.

S. 597 (Grassley)

[52] Amends the Internal Revenue Code of 1986 to provide tax incentives for oil, gas, and coal, and for energy efficiency and alternative and renewable fuels. Also, addresses several tax issues of concern to the electric utility industry in a restructured environment. Introduced on March 11, 2003; referred to Committee on Finance.

 

CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS

 

 

[53] U.S. Congress. Joint Committee on Taxation. Estimated Revenue Effects of Division H of H.R. 4, the "Energy Tax Incentives Act of 2002," and Certain Mandates, as Amended by the Senate. JCX-42-02] May 23, 2002. 4 p. [http://www.house.gov/jct/pubs02.html]

[54] ___ Comparison of Division C of H.R. 4, the "Energy Tax Policy Act of 2001," as Passed by the House of Representatives and Division H of H.R. 4, the "Energy Tax Incentives Act of 2002," as Amended by the Senate. [JCX-43-02] May 23, 2002. 56 p.

[55] ___ Estimates of Federal Tax Expenditures for Fiscal Years 2002-2006. (Energy taxes appear on p. 20-21) [JCS-1-02] January 17, 2002.

[56] ___ Committee on Finance. The Role of Tax Incentives in Energy Policy. Hearings, July 10, 11, 2001. S. Hrg. 108-267. 226 p.

[57] ___ Committee on Finance. Energy Tax Issues. Hearings, July 18, 2000. S. Hrg. 106-711. 109 p.

FOR ADDITIONAL READING

Cato Institute. "Big Oil" at the Public Trough? An Examination of Petroleum Subsidies. 2001. 13 p.

Energy Information Administration. Federal Financial Interventions and Subsidies in the Energy Markets: Primary Energy. SR/OIF/1999/03. [http://www.eia.doe.gov/oiaf/servicerpt/subsidy]

U.S. General Accounting Office. Alternative Motor Fuels and Vehicles: Impact on the Transportation Sector. 2001. [GAO-01-957T] 7 p.

CRS Reports

CRS Report RL-31427. Omnibus Energy Legislation: H.R. 4 Side-by-Side Comparison, by Mark Holt and Carol Glover.

CRS Report RL-30406. Energy Tax Policy: An Economic Analysis, by Salvatore Lazzari.

CRS Report RL-30953. Energy Tax Incentives: A Comparison of the National Energy Security Act of 2001 (S. 389) and the Democratic Alternative (S. 596), by Salvatore Lazzari.

    Table 1. Energy Tax Provisions and Estimated Revenue Effects

 

                       (FY2003, $ millions)

 

 

     Category          Provision      Major Limitations    Revenue

 

                                                           Effect

 

 

 CONVENTIONAL FOSSIL FUELS SUPPLY (bpd barrels per day;

 

 < indicates less than)

 

 

 % depletion - oil/gas 15% of sales       for indep.,       - $400

 

                       (higher for        up to 1,000

 

                       marginal           or equiv.

 

                       wells)             bpd

 

 

 Expensing of          100% deductible    corporations       - 600

 

 IDC's - oil/gas       in first year      expense only

 

 & other fuels                            70% of IDC's

 

 

 Enhanced Oil          15% of the costs   only for           - 200

 

 Recovery Credit                          specific

 

                                          tertiary

 

                                          methods

 

 

 % depletion - coal    10% for coal       must be < 50%     - < 50

 

 and other fuels                          of taxable

 

                                          income

 

 

 coal excise tax       $1.10/ton (0.55    not to exceed        550

 

 (FY2001)              for surface        4.4% of sales

 

                       mines)             prices

 

 

 ALTERNATIVE AND RENEWABLE FUELS

 

 

 § 29,                 $6.25/bar. (or     biogas, coal  - 1000

 

 production tax        $1.00/mcf)         synfuels,

 

 credit                                   coalbed

 

                                          methane, etc.

 

 

 5.3 cents             exemption from     for biomass      - 1,100

 

 exemption for         motor fuels taxes  ethanol only

 

 gasohol

 

 

 § 45 credit       1.7 cents/kWh.     wind, closed      - < 50

 

 for renewable                            loop biomass

 

 electricity                              and poultry

 

                                          waste

 

 

 exclusion of          interest income    for hydro-         - 100

 

 interest on           exempt from tax    electric or

 

 S&L bonds                                biomass

 

                                          facilities

 

                                          used to

 

                                          produce

 

                                          electricity

 

 

 tax credits for       53 cents/gal+      only for          - < 50

 

 alcohol fuels         10cents/gal for    biomass

 

                       small producer     ethanol (e.g.,

 

                       credit             corn

 

 

 deduction for         $2,000 for cars;   CNG, LNG, LPG,    - < 50

 

 clean-fuel            $50,000 for        hydrogen, neat

 

 vehicles              trucks; $100,000   alcohols, and

 

                       deduction for      electricity;

 

                       refueling          phases out over

 

                       facilities         2002-2004

 

 

 tax credit for        10%, up to         phase-out from    - < 50

 

 electric vehicles     $4,000             2002-2004

 

 

 credit for solar &    10% investment     utilities         - < 50

 

 geothermal tech.      tax credit for     excluded

 

                       businesses

 

 

 ENERGY CONSERVATION

 

 

 fuels taxes (FY2000)  18.4 cents/gal     4.4 cents-        29,600

 

                       of gas             24.4 cents for

 

                                          other fuels

 

 

 mass trans.           exclusion of       up to $190/      - 3,700

 

 subsidies             $100/month         month for

 

                                          parking

 

                                          benefits

 

 

 gas-guzzler tax       $1,000-$7,700/car  to limos and          78

 

 (FY2001)                                 vehicles

 

                                          weighing 6,000

 

                                          lbs. or less

 

 

 exclusion for         subsidies not      any energy        - < 50

 

 utility               taxable as         conservation

 

 conservation          income             measure

 

 subsidies

 

 

 Source: Joint Tax Committee and Internal Revenue Service estimates.
DOCUMENT ATTRIBUTES
  • Authors
    Lazzari, Salvatore
  • Institutional Authors
    Congressional Research Service
  • Subject Area/Tax Topics
  • Industry Groups
    Energy
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2003-11593 (19 original pages)
  • Tax Analysts Electronic Citation
    2003 TNT 90-64
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