Energy Tax Policy: Issues in the 114th Congress

Energy Tax Policy: Issues in the 113th Congress Molly F. Sherlock Specialist in Public Finance September 4December 19, 2013 Congressional Research Service 7-5700 www.crs.gov R43206 Energy Tax Policy: Issues in the 113th Congress Summary The scheduled expiration of a number of energy tax incentives means energy tax policy will likely be considered by the 113th Congress. Under current law, for example, renewable energy projects that begin construction after the end of 2013 will not qualify for the renewable energy production tax credit (PTC). A number of other energy tax incentives, including provisions to support building energy efficiency and renewable fuels, are also scheduled to expire at the end of 2013. In the past, expired and expiring energy tax provisions have been extended as part of “tax extender” legislation. Energy tax policy may also be considered as part of comprehensive tax reform legislation in the 113th Congress. A base-broadening approach to tax reform might consider the elimination of various energy tax expenditures in conjunction with a reduction in overall tax rates. Alternative revenue sources, such as a carbon tax, may also be evaluated as part of the tax reform process. The President’s FY2014 budget proposes a number of changes to energy tax policy. The Obama Administration proposes to repeal a number of existing tax incentives for fossil fuels, while providing new or expanded incentives for alternative and advanced technology vehicles, renewable electricity, energy efficiency, and advanced energy manufacturing. Several energy tax reform proposals have also been put forward in tax reform discussion drafts released by Senate Finance Committee Chairman Max Baucus. Energy tax policy involves the use of one of the government’s main fiscal instruments, taxes (both as an incentive and as a disincentive) to alter the allocation or configuration of energy resources and their use. In theory, energy taxes and subsidies, like tax policy instruments in general, are intended either to correct a problem or distortion in the energy markets or to achieve some economic (efficiency, equity, or even macroeconomic) objective. The economic rationale for government intervention in energy markets is commonly based on the government’s perceived ability to correct for market failures. Market failures, such as externalities, principal-agent problems, and informational asymmetries, result in an economically inefficient allocation of resources—in which society does not maximize well-being. To correct for these market failures governments can utilize several policy options, including taxes, subsidies, and regulation, in an effort to achieve policy goals. In practice, energy tax policy in the United States is made in a political setting, determined by fiscal dictates and the views and interests of the key players in this setting, including policymakers, special interest groups, and academic scholars. As a result, enacted tax policy embodies compromises between economic and political goals, which could either mitigate or compound existing distortions. Congressional Research Service Energy Tax Policy: Issues in the 113th Congress Contents Introduction...................................................................................................................................... 1 Policy Intervention in Energy Markets ............................................................................................ 2 Rationale for Intervention in Energy Markets ........................................................................... 2 Externalities......................................................................................................................... 3 Principal-Agent and Informational Inefficiencies ............................................................... 3 National Security ................................................................................................................. 4 Potential Interventions in Energy Markets ................................................................................ 5 Taxes as a User Charge .............................................................................................................. 7 Current Status of U.S. Energy Tax Policy........................................................................................ 7 Fossil Fuels .............................................................................................................................. 14 Renewables .............................................................................................................................. 14 Energy Efficiency .................................................................................................................... 16 Alternative Technology Vehicles ............................................................................................. 16 Other Provisions ...................................................................................................................... 17 Energy Tax Issues in the 113th Congress........................................................................................ 17 The President’s FY2014 Budget Proposal ............................................................................... 17 Expiring Energy Tax Provisions .............................................................................................. 21 Tax Reform .............................................................................................................................. 22 Selected Energy Tax Legislation .......................and Proposals ...................................................................... 23 Tables Table 1. Energy Tax Provisions ....................................................................................................... 8 Table 2. Energy Tax Proposals in the President’s FY2014 Budget ................................................ 19 Table 3. Energy Tax Incentives Expiring in 2013 .......................................................................... 21 Appendixes Appendix. Energy Tax Legislation in Past Congresses ................................................................. 2526 Contacts Author Contact Information........................................................................................................... 3031 Congressional Research Service Energy Tax Policy: Issues in the 113th Congress Introduction Energy tax policy involves the use of one of the government’s main fiscal instruments, taxes (both as an incentive and as a disincentive) to alter the allocation or configuration of energy resources and their use. In theory, energy taxes and subsidies, like tax policy instruments in general, are intended either to correct a problem or distortion in the energy markets or to achieve some economic (efficiency, equity, or macroeconomic) objective. In practice, however, energy tax policy in the United States is made in a political setting, determined by fiscal dictates and the views and interests of the key players in this setting, including policymakers, special interest groups, and academic scholars. As a result, enacted tax policy embodies compromises between economic and political goals, which could either mitigate or compound existing distortions. U.S energy tax policy as it presently stands aims to address concerns regarding the environment as well as those surrounding national security. Incentives promoting renewable energy production, energy efficiency and conservation, and alternative technology vehicles address both environmental and national security concerns. Tax incentives for the domestic production of fossil fuels also promote energy security by attempting to reduce the nation’s reliance on imported energy sources. The idea of applying tax policy instruments to energy markets is not new. Until the 1970s, however, energy tax policy had been little used, except to promote domestic fossil fuel production. 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, and 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. The direction of U.S. energy tax policy has changed several times since the 1970s.1 During the first session of the 113th Congress, energy tax policy appears to be designed to encourage energy efficiency and renewable energy production while continuing to promote U.S. energy security.2 However, in recent years, major tax-related incentives supporting renewable energy production have expired, with many of the remaining renewable energy and energy efficiency incentives set to expire at the end of 2013.3 In the past, many of these incentives have regularly been extended by Congress, in some cases retroactively. Absent legislative action, renewable electricity projects that begin construction after December 31, 2013, will not qualify for the production tax credit (PTC). Also scheduled to expire at the end of 2013 are several incentives designed to promote energy efficiency, as well as several incentives that promote alternative fuels and biofuels. Many energy tax incentives that had expired at the end of 2011 or 2012 were temporarily extended as part of the American Taxpayer Relief Act (ATRA; P.L. 112240) in the 112th Congress.4 1 For more, see CRS Report R41227, Energy Tax Policy: Historical Perspectives on and Current Status of Energy Tax Expenditures, by Molly F. Sherlock. 2 For an overview of non-tax energy policy issues in the 113th Congress, see CRS Report R42756, Energy Policy: 113th Congress Issues, by Carl E. Behrens. 3 See CRS Report R43124, Tax Provisions Expiring in 2013 (“Tax Extenders”), by Molly F. Sherlock. 4 CRS Report R42894, An Overview of the Tax Provisions in the American Taxpayer Relief Act of 2012 , by Margot L. Crandall-Hollick. Congressional Research Service 1 Energy Tax Policy: Issues in the 113th Congress The President’s FY2014 budget contains proposals that would scale back existing tax incentives for fossil fuels, enhance tax incentives for energy efficiency in commercial buildings, extend expired and expiring tax incentives for renewables, and use tax credits to promote advanced energy manufacturing.5 Similar proposals appeared in the President’s FY2012 and FY2013 budgets. The tax writing committees in both houses of Congress are actively engaged in tax reform processes. The House Committee on Ways and Mean established 11 tax reform working groups, of which one was specifically tasked with examining energy tax issues. The Joint Committee on Taxation (JCT) published findings from these working groups in a May 2013 report.6 The Senate Committee on Finance released a series of options papers for tax reform. The Infrastructure, Energy, and Natural Resources options paper was released on April 25, 2013 Substantial reforms to energy tax policy have been proposed in the Senate Finance Committee’s tax reform discussion drafts on cost recovery and accounting and energy tax reform, released on November 21, 2013, and December 18, 2013, respectively. Earlier in the year, on April 25, 2013, the committee released an infrastructure, energy, and natural resources tax reform options paper.7 The economic rationale for interventions in energy markets helps inform the debate surrounding energy tax policy. This report begins by providing background on the economic rationale for energy market interventions, highlighting various market failures. After identifying possible market failures in the production and consumption of energy, possible interventions are discussed. The report concludes with an analysis of the current status of energy tax policy. The Appendix of this report provides a brief summary of energy tax legislation from the 108th through 112th Congresses that has shaped current energy tax policy. Policy Intervention in Energy Markets The primary goal of taxes in the U.S. economy is to raise revenues. There are times, however, when tax policy can be used to achieve other goals. These include the use of tax policy as an economic stimulus or to achieve social objectives. Tax policy can also be used to correct for market failures (for example, the under- or over-supply of a good), which without intervention result in market inefficiencies. There are a number of market failures surrounding the production and consumption of energy. Tax policy, as it relates to energy, can be used to address these market failures. Rationale for Intervention in Energy Markets There are a variety of circumstances in which government intervention in energy markets may improve market outcomes. Generally, government intervention has the potential to improve market outcomes when there are likely to be market failures. Externalities represent one of the most important market failures in energy’s production and consumption. Market failures in energy markets also arise from principal-agent problems and information failures. Concerns regarding national security are used as a rationale for intervention in energy markets as well. 5 Department of the Treasury, General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals, Washington, DC, April 2013. 6 U.S. Congress, Joint Committee on Taxation, Report to the House Committee on Ways and Means on Present Law and Suggestions for Reform Submitted to the Tax Reform Working Groups, committee print, 113th Cong., May 6, 2013, JCS-3-13. 7 Senate Committee on Finance tax reform options papers can be found at http://www.finance.senate.gov/issue/?id= 6c61b1e9-7203-4af0-b356-357388612063. Congressional Research Service 2 Energy Tax Policy: Issues in the 113th Congress energy markets also arise from principal-agent problems and information failures. Concerns regarding national security are used as a rationale for intervention in energy markets as well. Externalities An externality is a spillover from an economic transaction to a third party, one not directly involved in the transaction itself. Externalities are often present in energy markets as both the production and consumption of energy often involve external costs (or benefits) not taken into account by those involved in the energy-related transaction. Instead, these externalities are imposed on an unaffiliated third party. In the presence of externalities, theThe market outcome will mechanism will likely lead to an economically inefficient level of production or consumption when externalities are present. When externalities are present, markets fail to establish energy prices equal to the full cost to society of supplying the good. The result is a system where price signals are inaccurate, such that the socially optimal level of output, or allocative efficiency, is not achieved. Economic theory suggests that a tax be imposed on activities associated with external costs, while activities associated with external benefits be subsidized—in order to equate the social and private marginal costs. These taxes or subsidies are intended to provide a more efficient allocation of resources. Many energy production and consumption activities result in negative externalities, perhaps the most recognized being environmental damage. Air pollution results from mining activities as well as from the transportation, refining, and industrial and consumer use of oil, gas, and coal. Industrial activity can also produce effluents that contaminate water supplies and lead to other damages to the land. These environmental damages can lead to lung damage and a variety of other health problems. The use of fossil fuels, both in the production of energy (e.g., coal-fired power plants) and at the consumer level (e.g., using gasoline to power automobiles), and the associated greenhouse gas emissions are widely claimed to have contributed to global climate change.8 There may also be market failures associated with external benefits stemming from the process of learning-by-doing. Learning-by-doing refers to the tendency for production costs to decline with experience. As firms become more experienced in the manufacturing and use of energy-efficient technologies their knowledge may spill over to other firms without compensation. In energy markets, early adopters of energy-efficient technologies and practices may not be fully compensated for the value of the knowledge they generate.9 Principal-Agent and Informational Inefficiencies Market failures in energy use may also arise due to the principal-agent problem.10 Generally, the principal-agent problem exists when one party, the agent, undertakes activities on the behalf of another party, the principal. When the incentives of the agent differ from those of the principal, the agent’s activities are not undertaken in a way that is consistent with the principal’s best interest. The result is an inefficient outcome. In energy markets, the principal-agent problem commonly arises when one party is responsible for making equipment purchasing choices while 8 See CRS Report RL34266, Climate Change: Science Highlights, by Jane A. Leggett. Kenneth Gillingham, Richard G. Newell, and Karen Palmer, Energy Efficiency Economics and Policy, Resources for the Future, RFF DP 09-13, Washington, DC, April 2009. 10 The extent of principal-agent problems in residential energy use is quantified in Scott Murtishaw and Jayant Sathaye, Quantifying the Effect of the Principal-Agent Problem on U.S. Residential Energy Use, Lawrence Berkeley National LabratoryLaboratory, August 12, 2006, http://www.escholarship.org/uc/item/6f14t11t. 9 Congressional Research Service 3 Energy Tax Policy: Issues in the 113th Congress interest. The result is an inefficient outcome. In energy markets, the principal-agent problem commonly arises when one party is responsible for making equipment purchasing choices while another party is responsible for paying the energy costs, which are related to the efficiency level of the purchased equipment. For residential rental properties, the incentives for the landlords and tenants surrounding the adoption of energy-savings practices are often not aligned, demonstrating the principal-agent problem. Landlords will tend to under-invest in energy-saving technologies for rental housing when the benefits from such investments accrue to tenants (i.e., tenants are responsible for paying their own utilities) and the landlord does not believe the costs of installing energy-saving devices can be recouped via higher rents. Tenants do not have an incentive to invest in energy-savings technologies in rental units when their expected tenure in a specific property is relatively short, and they will not have enough time to reap the full benefits of the energy-conserving investments. There is also evidence that when utilities are included in the rent, tenants do not engage in energy-conserving behaviors. On the other hand, when tenants pay utilities on their own, energysaving practices are more frequently adopted.11 The implication is that inefficient energy use by tenants in apartments where utilities are included as part of the rent would offset energy-saving investments made by landlords; consequently, landlords under-invest in energy efficiency. In general, the under-investment in energy conservation measures in rental housing provides economic rationale for intervention. In another example, the incentives of homebuilders and homebuyers may not be aligned. Consequently, the principal-agent problem may result in an inefficient utilization of energyefficient products in newly constructed homes. Homebuilders may have an incentive to install relatively low-efficiency products to keep the cost of construction down, if they do not believe that the cost of installing energy-efficient products will be recovered upon sale of the property. The value of installing energy-efficient devices may not be recoverable, if builders are not able to effectively communicate the value of energy-efficient devices once installed. Further, since homebuilders are not able to observe the energy use level of prospective buyers they may not be able to choose the products that best match the use patterns of the ultimate energy consumer. The result may be less energy efficiency in new homes. There are also informational problems that may lead to underinvestment in energy-efficient technologies. For example, homeowners may not know the precise payback or rate of return of a specific energy-efficient device. This may explain the so-called “energy paradox”—the empirical observation that consumers require an abnormally high rate of return to undertake energyefficiency investments.12 National Security Preserving national security is another often-cited rationale for intervention in energy markets. Roughly 40% of the petroleum consumed in the United States is derived from foreign sources.13 There are potentially a number of external costs associated with petroleum importation, especially when imported from unstable countries and regions. First, a high level of reliance on imported oil 11 Arik Levinson and Scott Niemann, “Energy Use by Apartment Tenants when Landlords Pay for Utilities,” Resource and Energy Economics, vol. 26 (2004), pp. 51-75. 12 Gilbert E. Metcalf, “Using Tax Expenditures to Achieve Energy Policy Goals,” American Economic Review, vol. 98, no. 2 (2008), pp. 90-94. 13 While dependence on foreign oil has declined since 2005, about 40% of petroleum consumed in 2012 was imported. See Energy Information Administration, How Dependent are we on Foreign Oil?, May 10, 2013, http://www.eia.gov/ energy_in_brief/article/foreign_oil_dependence.cfm. Congressional Research Service 4 Energy Tax Policy: Issues in the 113th Congress There are potentially a number of external costs associated with petroleum importation, especially when imported from unstable countries and regions. First, a high level of reliance on imported oil may contribute to a weakened system of national defense or contribute to military vulnerability in the event of an oil embargo or other supply disruption. Second, there are costs to allocating more resources to national defense than necessary when relying on high levels of imported oil. Specifically, there is an opportunity cost associated with resources allocated to national defense, as such resources are not available for other domestic policy initiatives and programs. To the extent that petroleum importers fail to take these external costs into account, there is market failure. In addition, the economic well-being and economic security of the nation depends on having stable energy sources. There are economic costs associated with unstable energy supplies. Specifically, increasing unemployment and inflation may follow oil price spikes.14 Potential Interventions in Energy Markets When there are negative externalities associated with an activity, correcting the economic distortion with a tax, if done correctly, can improve economic efficiency.15 While such taxes are theoretically desirable, historically, such taxes have been politically unpopular. Conversely, when there are positive externalities associated with an activity, a subsidy can improve economic efficiency. The tax (subsidy) should be set equal to the monetary value of the damages (benefits) to third parties imposed by the activity.16 The tax serves to increase the price of the activity, and reduce the equilibrium quantity of the activity, while a subsidy reduces the price, increasing the equilibrium quantity of the activity. The production and consumption of fossil fuel energy can have negative externalities via detrimental environmental impacts. While multiple policy options to address this externality exist, economists tend to favor an emissions tax to address this externality because of such a tax’s efficiency advantage.17 In the late 2000s, proponents of greenhouse gas controls favored a cap and trade policy, as proposed in House-passed American Clean Energy and Security Act of 2009 (H.R. 2454). The policy discussion in the 113th Congress, however, has shifted to focus on a carbon tax approach.18 An alternative approach to reducing the use of fossil fuels has been to subsidize energy production from alternative energy sources. There are concerns, however, that using subsidies to stimulate demand for alternative fuels, as an alternative to fossil fuels, may not be economically efficient. First, subsidies reduce the average cost of energy, and as the average cost of energy falls, the quantity of energy demanded increases, countering energy conservation initiatives.19 14 See James D. Hamilton, Causes and Consequences of the Oil Shock of 2007-08, National Bureau of Economic Research, Working Paper 15002, Cambridge, MA, May 2009. Hamilton evaluates the role of the oil shock of 20072008 in the succeeding economic recession. 15 There are non-tax options for addressing energy market failures such as regulation and private sector solutions. These options are beyond the scope of this report. 16 Taxes imposed to correct for negative externalities are also known as Pigovian taxes, named after the economist who developed the concept, Arthur Cecil Pigou. 17 CRS Report R40242, Carbon Tax and Greenhouse Gas Control: Options and Considerations for Congress, by Jonathan L. Ramseur and Larry Parker for a discussion of the relative merits and demerits of carbon taxes and cap-andtrade systems. 18 See CRS Report R42731, Carbon Tax: Deficit Reduction and Other Considerations, by Jonathan L. Ramseur, Jane A. Leggett, and Molly F. Sherlock. 19 Gilbert E. Metcalf, “Tax Policies for Low-Carbon Technologies," National Tax Journal, vol. 63, no. 3 (September 2009), pp. 519-533. Congressional Research Service 5 Energy Tax Policy: Issues in the 113th Congress falls, the quantity of energy demanded increases, countering energy conservation initiatives.19 Second, while the subsidy is intended to enhance economic efficiency, subsidies may be inefficient to the extent they are funded with distortionary taxes.20 Hence, the more economically efficient alternative may be to place a tax on the undesirable activity. Other energy-related activities may have positive externalities. There is the potential for learningby-doing from early adopters of energy-efficient technologies, indicating that there may be positive external effects associated with these activities. For this reason, subsidies given to early adopters may enhance economic efficiency. Further, positive externalities are associated with R&D activities that lead directly to technological innovations.21 In addition to budgeted spending on R&D, the tax code provides incentives for firms to engage in energy R&D (for example, the energy research credit (Internal Revenue Code (IRC) § 41)).22 When principal-agent problems lead to a market failure, economically efficient corrective measures would be those that increase the equilibrium quantity of the underprovided good. The market for energy efficient technologies is one example of this type of market failure. Currently, a taxpayer’s gross income excludes any subsidy provided by a public utility to a consumer for the purchase or installation of energy-saving devices (see IRC § 136). This exclusion subsidizes energy-efficient devices. This exclusion does not specifically target the inefficiency in rental housing created by the principal-agent problem, since the exclusion applies to both owner- and non-owner-occupied property. Nonetheless, the exclusion may serve to ameliorate some of the market failure in the provision of energy-efficiency for rental property. There are also various options for market intervention to address the informational problem associated with energy consumption and energy-efficient technologies. One option would be an information-based solution, such as energy-efficiency labeling and education and awareness campaigns. Alternatively, a tax-incentive-based approach—such as a credit or deduction for the purchase of energy-efficient devices—could be used to address the market inefficiency. Given that this market failure is an informational problem, it might be more efficient to pursue information-based solutions (such as energy-efficiency labeling like the U.S. Environmental Protection Agency and Department of Energy’s Energy Star program). Finally, there are questions regarding the most efficient and effective mode of intervention to address the negative external costs, specifically national and economic security concerns, associated with the consumption of imported oil. One option would be to impose a tax to correct the distortion. There are two problems with imposing such a tax. First, a tax on imported oil is likely to violate trade agreements. This has led policymakers to pursue policies that subsidize domestic petroleum production.23 The second problem is that oil is a commodity priced on world markets. The United States producing oil for its own use does not necessarily insulate consumers from global fluctuations in oil prices. Additionally, to the extent that oil price fluctuations impact export prices in other parts of the world, such as Europe and China, the United States is still likely to experience economic impacts from oil price fluctuations.24 20 19 Gilbert E. Metcalf, “Tax Policies for Low-Carbon Technologies," National Tax Journal, vol. 63, no. 3 (September 2009), pp. 519-533. 20 Gilbert E. Metcalf, “Federal Tax Policy towards Energy,” Tax Policy and the Economy, vol. 21 (2007), pp. 145-184. 21 It should be noted that all R&D, not just R&D related to energy, is likely to have positive externalities. There is no reason to believe that energy R&D has positive externalities that differ from R&D in general, and hence no reason to believe that energy R&D deserves a differential subsidy. 22 See CRS Report RL31181, Research Tax Credit: Current Law and Policy Issues for the 113th Congress, by Gary Guenther for an overview of the research tax credit, an umbrella credit under which the energy research credit falls. 23 Subsidizing domestic production is also problematic in that such policies conflict with environmental objectives. 24 Gilbert E. Metcalf, “Using Tax Expenditures to Achieve Energy Policy Goals,” American Economic Review, vol. 98, (continued...) 21 Congressional Research Service 6 Energy Tax Policy: Issues in the 113th Congress Congressional Research Service 6 Energy Tax Policy: Issues in the 113th Congress export prices in other parts of the world, such as Europe and China, the United States is still likely to experience economic impacts from oil price fluctuations.24 Taxes as a User Charge Energy taxes may be employed as user charges for a public good or a quasi-public good.25 In the United States, non-toll highways and highway infrastructure have the public good property of non-excludability. Highways are not likely to be provided by the market because public goods and quasi-public goods are susceptible to the free-rider problem.26 If the private market fails to provide a public good, like highways, then government intervention via provision of highways can enhance economic efficiency. The federal excise tax on gasoline is often viewed as a user fee for the federal highway system.27 For the tax to be efficient and equitable, it would charge individuals in proportion to their benefit from the public good (the highway system). In practice, gas taxes do not reflect the cost to the user but instead depend on the fuel efficiency of a specific vehicle.28 Furthermore, some of the revenues collected from the federal gas tax serve to subsidize public transportation, undermining the view of the federal gas tax as a highway user fee. Current Status of U.S. Energy Tax Policy Current U.S. energy tax policy is a combination of long-standing provisions and relatively new incentives. Provisions supporting the oil and gas sector reflect desires for domestic energy production and energy security, long-standing cornerstones of U.S. energy policy. Incentives for renewable energy reflect the desire to have a diverse energy supply, also consistent with a desire for domestic energy security. Incentives for energy efficiency are designed to reduce use of energy from all energy sources. Incentives for renewable energy, energy efficiency, and alternative technology vehicles reflect environmental concerns. Table 1 contains a current list of energy-related tax expenditures and other energy tax provisions.29 (...continued)24 Gilbert E. Metcalf, “Using Tax Expenditures to Achieve Energy Policy Goals,” American Economic Review, vol. 98, no. 2 (2008), pp. 90-94. 25 Public goods are those that are both non-rival (one person’s consumption of the good does not diminish another’s ability to consume that same good) and non-excludable (it is either impossible or prohibitively expensive to prevent consumption of the good once the good has been provided). Quasi-public goods are those that are either non-rival or non-excludable. 26 The free-rider problem is the consequence of non-excludability. If all individuals are free to use a good once that good has been provided, no single individual has an incentive to be the provider of that good. Instead, the individual will wait for the good to be provided by another party. In the absence of government intervention, the market may fail to provide goods that are subject to the free-rider problem. 27 For background information on the federal gas tax see CRS Report R40808, The Role of Federal Gasoline Excise Taxes in Public Policy, by Robert Pirog. 28 Another argument is that the federal gas tax should be viewed as correcting the externalities associated with gasolinepowered vehicles. Even if the gas tax were to be viewed as one correcting for emissions, it would make more economic sense to tax emissions rather than just those coming from the burning of fossil fuels by motor vehicles. 29 Tax expenditures are government revenue losses attributable to tax provisions that allow for special exclusions, exemptions, or deductions from income or provisions that provide special tax credits, preferential tax rates, of defer tax liability. Technically, excise tax credits are not considered tax expenditures because they do not directly impact income tax liability. Congressional Research Service 7 Table 1. Energy Tax Provisions (billions of dollars) Tax Provision Description 2013 Cost 2013 – 2017 Cost Expiration Date I.R.C. Section Fossil Fuels Expensing of percentage over cost depletion Firms that extract oil or gas are permitted to deduct 15% of gross income (up to 25% for marginal wells depending on oil prices; 10% for coal and lignite) to recover their capital investment in a mineral reserve. The amount deducted may not exceed 100% of net income in the case of oil and gas properties. Percentage depletion allowances for oil and gas property cannot exceed 65% of taxable income. The alternative to percentage depletion is cost depletion, where deductions are based on a taxpayer’s adjusted basis in the property. Integrated oil and gas companies must use cost depletion. $1.3 $6.7 none 611, 612, 613, 613A Expensing of intangible drilling costs (IDCs) and development expenditures for hard minerals Firms engaged in the exploration and development of oil, gas, or geothermal properties have the option of expensing (deducting in the year paid or incurred) rather than capitalizing (i.e., recovering such costs through depletion or depreciation) certain intangible drilling and development costs (IDCs). Integrated oil and gas companies can expense 70% of qualified IDCs, with the remaining 30% capitalized and amortized over a 60-month period. 70% of the costs paid or incurred for the development of a mine or other natural deposit (other than oil or gas) may be expensed. $0.9 $6.7 none 616, 617, 263(c), 291 Amortization of G&G expenditures associated with oil and gas exploration Under the Modified Accelerated Cost Recovery System (MACRS), the cost of selected types of geological and geophysical (G&G) expenditures is depreciated over 2 years for independent producers and smaller integrated oil companies. $0.1 $0.7 none 167(h) Election to expense 50% of qualified property used to refine liquid fuels A taxpayer may elect to expense 50% of the cost of any qualified property used for processing liquid fuel from crude oil or qualified fuels. The remainder is recovered using a 10-year recovery period under the modified accelerated cost recovery system (MACRS). $0.4 $3.4 12/31/2013 (property must be under contract for construction by 1/1/10) 179C CRS-8 Tax Provision Coal production credits Description 2013 Cost A $6.59-per-ton production credit for refined coal used to produce steam, or a $2.308 per-ton production credit for coal reserves owned by an Indian tribe (all adjusted for inflation from 1992). (i) 2013 – 2017 Cost $0.2 Expiration Date I.R.C. Section 12/31/2011 (refined coal excluding steel industry fuel) 45 Property must be placed in service by 12/31/2008 – no credits paid after 12/31/2013 (Indian coal) Credits for investing in clean coal facilities Tax credit of 20% of investment for integrated gasification combined cycle (IGCC) systems and 15% for other advanced coal technology credit allocations made under the Energy Policy Act of 2005 (P.L. 109-58). 30% credit for IGCC and other advanced coal technology credit allocations under the Energy Improvement and Extension Act of 2008 (P.L. 111-343). $0.2 $1.2 volume limited (credits fully allocated) 48A, 48B Amortization of air and pollution control facilities Allows the pre-1976 5-year amortization period for investments in pollution control equipment for coal-fired electric generation plants available to those plants placed in service on or after January 1, 1976. The 5-year amortization incentive for pre-1976 plants applies only to pollution control equipment with a useful life of 15 years or less. In that case 100% of the cost can be amortized over five years. If the property or equipment has a useful life greater than 15 years, then the proportion of the costs that can be amortized over five years is less than 100%. $0.4 $1.7 none 169 and 291 $1.7 $9.7 12/31/2013 (construction start date) 45 Renewables Credits for electricity production from renewable resources (“PTC” or “production tax credit”) CRS-9 Tax credit of 2.3¢/kWh for electricity produced from wind, closed-loop biomass, and geothermal energy. Tax credit of 1.1¢/kWh for electricity produced from open-loop biomass, solar, small irrigation, landfill gas, trash combustion, qualified hydropower, and marine and hydrokinetic sources. The tax credit is available for 10 years after the date the facility is placed in service. Taxpayers may also elect to receive a 30% ITC in lieu of the PTC. Tax Provision Energy credit (“ITC” or “investment tax credit”) Description Tax credit equal to 10% of investment in energy production using geothermal, microturbine, or combined heat and power methods. The tax credit is equal to 30% of investment in energy production using solar electric, solar hot water, fuel cell or small wind methods. 2013 Cost $0.5 2013 – 2017 Cost $2.9 Expiration Date I.R.C. Section 12/31/2016 (other technologies; solar has permanent 10% credit after 2016) 48 none (geothermal excluding geothermal heat pumps) Section 1603 grants in lieu of tax credits Section 1603 allows taxpayers eligible for the PTC and ITC to receive a one-time cash grant in lieu of tax credits. Eligible facilities may qualify for a grant equal to 10% or 30%, depending on technology type, of a qualifying project’s eligible cost basis. $8.1a $17.2a 12/31/2011 (construction start date) 45, 48 Residential energy-efficient property credit Tax credit for 30% of the cost of the purchase of solar electric property, solar water heating property, geothermal heat pump property, or small wind energy property. Fuel cell power plants receive 30% credit, limited to $500 for each 0.5 kilowatt of capacity. $0.9 $4.9 12/31/2016 25D Five-year cost recovery of certain energy property Accelerated depreciation allowances are provided under the modified accelerated cost recovery system (MARCs) for investments in certain energy property. Specifically, certain solar, wind, geothermal, fuel cell, and biomass property has a five year recovery period. Second-generation biofuel plant property is allowed an additional first-year depreciation deduction equal to 50% of the property’s adjusted basis. $0.3 $1.5 12/31/2013 (placed in service date for secondgeneration biofuel property) 168 None (other technologies) CRS-10 Tax Provision Description 2013 Cost 2013 – 2017 Cost Expiration Date I.R.C. Section Credits for holders of clean renewable energy bonds Provides a tax credit for the holder of the bond against its income tax. Clean Renewable Energy Bonds (“CREBs”) are subject to a volume cap of $1.2 billion with a credit rate set to allow the bond to be issued at par and without interest. New Clean Renewable Energy Bonds (“New CREBs”) are subject to a volume cap of $2.4 billion with a credit rate set at 70% of what would permit the bond to be issued at par and without interest. (i) $0.5 volume limited (fully allocated) 54, 54C Credit for biodiesel, renewable diesel, second-generation (cellulosic) biofuels, and alternative fuels $1 per gallon for biodiesel, agri-biodiesel, and renewable diesel (extra 10¢ for small producers of agri-biodiesel). Alternative fuels (liquefied petroleum gas, P Series Fuels, compressed of liquefied natural gas, liquefied hydrogen, liquid fuel derived from coal using the Fischer-Tropsch process, compressed or liquefied gas or liquid fuel from biomass) qualify for a credit of 50¢ per gallon. Secondgeneration biofuel qualify for a credit of $1.01 per gallon. Depending on the specific incentive, tax credits go to fuel producers and/or blenders. Credits are generally coordinated income and excise tax credits. $2.2b $2.6b 12/31/2013 (secondgeneration biofuel) 40, 40A, 6426, 6427 12/31/2013 (biodiesel, renewable diesel, and alternative fuels) 9/30/2014 for liquefied hydrogen Advanced energy manufacturing tax credit 30% tax credit for qualified investments in advanced energy property. A total of $2.3 billion was allocated for advanced energy property investment tax credits, which were competitively awarded by the Department of Energy (DOE) and the Treasury. $0.3 $1.5 Allocation limit 48C Energy Efficiency Credit for nonbusiness energy property Tax credit for 10% of the amount paid for qualified energyefficiency improvements and expenditures for residential energy property including qualifying improvements to the building’s envelope, the HVAC system, furnaces, or boilers. Credit limited to $500 (limit applies to multiple tax years). $3.0 $5.5 12/31/2013 25C Deduction for expenditures on energy-efficient commercial property Tax deduction for the cost of building envelope components, heating and cooling systems, and lighting. The deduction is limited to $1.80 per square foot for multiple improvements, or $0.60 per square foot for deductions with respect to certain subsystems. $0.2 $1.1 12/31/2013 179D Exclusion of energy conservation subsidies provided by public utilities Subsidies are not taxable as income. (i) $0.1 none 136 CRS-11 Tax Provision Description 2013 Cost 2013 – 2017 Cost Expiration Date I.R.C. Section Energy-efficient new home credit Manufacturers of manufactured homes may claim $1,000 credit for building homes 30% more efficient than the standard; Contractors may claim $2,000 credit for building homes 50% more efficient than the standard. (i) $0.1 12/31/2013 45L Credit for producing energyefficient appliances Tax credit based on energy efficiency. Maximum credit is $75 for dishwashers, $200 for refrigerators, and $225 for clothes washers. $0.2 $0.6 12/31/2013 45M Qualified energy conservation bonds The Federal government has authorized the issue of $3.2 billion in Qualified Energy Conservation Bonds (“QECBs”). QECBs provide a tax credit worth 70% of the tax credit bond rate stipulated by the Secretary of the Treasury. QEC bonds issued by state and local governments must fund an energy-savings project, such as the green renovation of a public building, R&D in alternative fuels, and public transportation projects. (i) $0.3 volume limited (allocated to the States) 54D $0.4 $3.3 Plug-in electric vehicle credit volume capped (200,000) per manufacturer 30, 30B, 30D Alternative Technology Vehicles Plug-in electric vehicles and other alternative fuel vehicles Credits available for plug-in electric vehicles are available up to $7,500 depending on kilowatt hour capacity of vehicle (prior to 2010 the credit limit was higher, up to $15,000 for qualifying heavy vehicles). Fuel cell vehicles receive a base credit of $4,000 for vehicles weighing less than 8,500 pounds. Heavier vehicles qualify for up to a $40,000 credit. An additional credit of up to $4,000 is available for cars and light trucks that exceed the 2002 base fuel economy. 12/31/2014 for fuel cell vehicles 12/31/2013 for electric drive low speed vehicles A 10% credit, up to $2,500, is available for the cost of electricdrive low-speed neighborhood vehicle, motorcycle and threewheeled vehicles. Credits for alternative fuel vehicle refueling property CRS-12 Qualifying property dispenses alternative fuels, including ethanol, biodiesel, natural gas, hydrogen, and electricity. A 30% credit for qualifying property, capped at $30,000 for business property and $1,000 for nonbusiness property. (i) $0.3 12/31/2013 (12/31/14 for hydrogen refueling property) 30C Tax Provision Description 2013 Cost 2013 – 2017 Cost Expiration Date I.R.C. Section Other Exceptions for energy-related publicly traded partnerships Publicly traded partnerships are generally treated as corporations. The exception from this rule occurs if at least 90 percent% of its gross gross income is derived from interest, dividends, real property rents, or certain other types of qualifying income. Qualifying income income includes income derived from certain energy-related activities, such as fossil fuel or geothermal exploration, development, mining, production, refining, transportation, and marketing. $1.2 $6.7 none 7704, 851 Exclusion of interest on State and local government private activity bonds for energy production facilities Exclusion of interest from private activity bonds used to finance privately owned or operated sewage, water, solid waste disposal, and heating and cooling facilities, certain private electric and gas facilities, hydroelectric dam enhancements, qualified green building and sustainable design projects from tax. Generally subject to private activity bond volume cap. (i) $0.3 none 141, 142 Depreciation recovery periods for energy specific items Smart electric distribution property is allowed 10-year depreciation under the modified accelerated cost recovery system (MARCs). Certain electric transmission property is allowed 15year depreciation. Natural gas distribution lines are also allowed 15-year depreciation. $0.4 $2.6 various 168 Deferral of gains from the sale of electric transmission property A taxpayer may elect to recognize the gain from the sale of certain electric transmission property over an eight year period. $-0.2 $-0.6 12/31/2013 451(i) Source: CRS compilation based on data from U.S. Congress, Joint Committee on Taxation, Estimates of Federal Expenditures for Fiscal Years 2012–2017, committee print, 113th Congress, February 1, 2013, JCS-1-13, U.S. Congress, Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 112th Congress, committee print, February 2013, JCS-2-13, and the President’s FY2014 budget, Analytical Perspectives. Notes: Provisions estimated as de minimis (i.e., estimated to have a revenue loss of less than $50 million over the 2013 through 2017 period) are not included in Table 1. (i) = less than $50 million per year for both individuals and corporations; (ii) = This figure includes the reduction in excise tax receipts for alcohol fuels, biodiesel, and alternative fuel mixtures. a. These figures are estimated outlays under the Section 1603 grants in lieu of tax credits program. b. These figures are the cost of extension as enacted as part of the American Taxpayer Relief Act (ATRA; P.L. 112-240). CRS-13 Energy Tax Policy: Issues in the 113th Congress Fossil Fuels There are a number of tax incentives currently available for energy production using fossil fuels. They can be broadly categorized as either enhancing capital cost recovery or subsidizing extraction of high-cost fossil fuels. Certain incentives are designed to support coal, while others tend to support the oil and gas sector. The fossil fuels related incentives listed in Table 1 are estimated to reduce federal tax revenues by $20.6 billion between 2013 and 2017. Among the capital cost subsidies, the allowance of the percentage depletion method is estimated to cost $6.7 billion between 2013 and 2017.30 Under percentage depletion, a deduction equal to a fixed percentage of the revenue from the sale of a mineral is allowed. Total lifetime deductions, using this method, typically exceed the capital invested in the project. To the extent that percentage depletion deductions exceed project investment, percentage depletion becomes a production subsidy, instead of an investment subsidy. Other capital cost recovery provisions include expensing of intangible drilling costs related to exploration and development and a decrease in the amortization period for certain geological and geophysical (G&G) expenditures.31 The expensing of exploration and development costs is estimated to cost the federal government $6.7 billion in revenue losses over the 2013 through 2017 budget window, while the reduced amortization period for G&G expenditures is estimated to cost $0.7 billion over the same time period. Compared to capital cost recover provisions, tax expenditures intended to offset high extraction costs are small. Credits for enhanced oil recovery and oil and gas production from marginal wells are currently phased out due to high oil prices, and thus are not expected to reduce federal revenues in the near term.32 The expensing allowance for tertiary injectants is also estimated to cost less than $50 million over the 2013 through 2017 budget window. There are coal-specific energy tax provisions. These include recently expired coal production credits, as well as tax credits to support the development of clean coal facilities.33 The tax credits for investing in clean coal facilities are estimated to cost $1.2 billion over the 2013 through 2017 budget window. Renewables Several tax incentives subsidize the production of energy from renewable sources. While the specific incentives differ in design, they generally work to increase the after-tax return on an investment in renewable energy production by providing tax incentives on the condition of eligible investment or production. Between 2013 and 2017, the total cost of tax-related provisions supporting the production of renewable energy (tax expenditures and grants designed to replace tax expenditures) is estimated to be $39.6 billion. Of this total, $17.2 billion is for outlays under 30 The tax expenditure for percentage depletion is computed by subtracting the value of cost depletion, the standard depletion method, from the value of percentage depletion. The resulting lifetime excess is the tax expenditure. 31 Expensing costs means to deduct the full cost of an investment in the current tax year, rather than depreciate the costs over a period of time. 32 De minimis tax expenditures are not listed in Table 1. 33 For more information, see CRS Report R40662, Clean Coal Authorizations, Appropriations, and Incentives, by Anthony Andrews and Molly F. Sherlock. Congressional Research Service 14 Energy Tax Policy: Issues in the 113th Congress the Section 1603 grants in lieu of tax credits program. Thus, the cost of tax expenditure and excise tax incentives for renewables is estimated to be $22.4 billion between 2013 and 2017. Historically, the primary tax incentive for renewable electricity has been the production tax credit (PTC). The American Recovery and Reinvestment Act (ARRA; P.L. 111-5) substantially modified this incentive, allowing projects eligible for the renewable PTC or investment tax credit (ITC) to claim a one-time grant in lieu of the tax credits.34 This grant was available for projects that were under construction before the end of 2011. Since grants will be paid out when facilities are placed in service, outlays will continue through 2017. Between 2013 and 2017, this provision is estimated to result in outlays of $17.2 billion. Since the grant is paid out at the start of a project, the cost of the grant program will be partially offset by reduced PTC claims over time.35 Allowing investors to take a one-time grant instead of future tax credits is intended to address uncertainty renewable energy investors may have regarding their future tax positions. Since the grant program was allowed to expire at the end of 2011, new renewable energy projects are not eligible. Renewable energy projects, however, may still be eligible for the investment tax credit (ITC) or PTC, depending on the credit expiration date for various technologies. Several other tax expenditures related to renewable energy have budgetary effects. First, there is the energy credit (sometimes called the investment tax credit (ITC)), which provides a credit equal to either 10% or 30% of eligible investment in renewable energy production. Second, there is the residential energy-efficient property credit, which provides a tax credit for the installation of renewable electricity generating property for a residential dwelling. Third, the reduced depreciable life for renewable energy investments provides an additional subsidy for businesses. Finally, while allocations are not currently available, subsidies for clean renewable energy bonds (CREBs) will continue to have a revenue cost over the 2013 through 2017 budget window.36 Taken together, these four provisions are expected to result in $9.8 billion in federal revenue losses between 2013 and 2017. Several income and excise tax credits are designed to support renewable and alternative fuels. Currently, biodiesel and renewable diesel, second generation biofuels, including cellulosic and algae-based biofuels, as well as a number of other alternative fuels qualify for tax credits. These credits are projected to cost $2.6 billion over the 2013 through 2017 budget window. However, under current law, tax credits for most biofuels and alternative fuels expire at the end of 2013. Extending these incentives beyond 2013 will increase their cost. Through 2011, alcohol fuels (including ethanol) were eligible for a $0.45 per gallon tax credit. Tax credits for alcohol fuels were allowed to expire at the end of 2011. ARRA also provided $2.3 billion in tax credits for advanced energy manufacturing. Most of these tax credits were allocated to projects in 2009, although $150 million was available for a second allocation round in 2013. The federal government is expected to realize revenue losses as investors that were awarded these tax credits make qualifying investments over time. Between 34 See CRS Report R41635, ARRA Section 1603 Grants in Lieu of Tax Credits for Renewable Energy: Overview, Analysis, and Policy Options, by Phillip Brown and Molly F. Sherlock. 35 Projects eligible for the PTC can claim the credit for 10 years. Thus, as projects that began construction before the end of 2011 but are placed in service in 2013 elect to receive a grant rather than claim the PTC, PTC claims in the out years will be less than what they would have been in absence of the grant program. 36 See CRS Report R41573, Tax-Favored Financing for Renewable Energy Resources and Energy Efficiency, by Molly F. Sherlock and Steven Maguire. Congressional Research Service 15 Energy Tax Policy: Issues in the 113th Congress 2013 through 2017 period, revenue losses associated with this provision are estimated to be $1.5 billion. Energy Efficiency Incentives for energy efficiency and conservation primarily operate by providing incentives to owners of residential and commercial property that undertake energy-efficient upgrades. There are also incentives for manufacturers of certain energy-efficient products and for the issuance of qualified energy conservation bonds (QECBs). Between 2013 and 2017, the total cost of tax expenditures related to energy conservation is estimated to be $7.7 billion. The majority of revenue loss from tax expenditures related to energy conservation is attributable to three incentives for property owners to undertake energy-efficiency improvements on existing buildings. Certain residential energy-efficiency improvements made during 2013 may qualify for a 10% tax credit of up to $500. Energy-efficient improvements for commercial property, including upgrades to a building’s envelope, heating and cooling, or lighting system are eligible for a tax deduction, limited to $1.80 per square foot. Incentives for both residential and commercial energy efficiency are scheduled to expire in 2013. The exclusion from income of subsidies provided by utility companies to energy consumers undertaking energy-efficiency upgrades increases the value of such subsidies, encouraging individuals to undertake such improvements. Taken together, these three incentives for building energy efficiency are projected to cost $6.7 billion between 2013 and 2017. Extending tax incentives for residential and commercial energy efficiency beyond their scheduled expiration will increase projected revenue costs. Manufacturers of energy-efficient new homes and energy-efficient appliances may also be eligible for tax incentives. These incentives are also scheduled to expire at the end of 2013. The cost of these incentives between 2013 and 2017 is estimated to be $0.7 billion. The projected cost of manufacturer incentives for energy efficiency will increase if these provisions are extended beyond their 2013 scheduled expiration. Qualified energy conservation bonds (QECBs) also encourage energy conservation, by providing subsidized financing to energy conservation projects and other renewable energy projects.37 All available QECB funds have been allocated to the states, with states responsible for making suballocations and selecting qualifying projects.38 Alternative Technology Vehicles Currently, the primary tax incentive for alternative technology vehicles is the up to $7,500 tax credit for plug-in electric vehicles. 39 The credit will begin to phase out for each manufacturer 37 QECBs can be used to finance a broad range of energy efficiency and renewable energy projects. Eligible projects include energy efficiency upgrades for public buildings, renewable energy projects (including those eligible for CREBs), energy research and development projects, mass commuting facilities, and energy efficiency education campaigns. 38 Official data on QECB issuances is not publicly available. The Energy Programs Consortium tracks known issuances of QECBs. See Energy Programs Consortium, Qualified Energy Conservation Bonds (QECBs), Washington, DC, June 28, 2013, http://www.energyprograms.org/2013/06/qecb-paper/. 39 More information on non-tax incentives can be found in CRS Report R42566, Alternative Fuel and Advanced (continued...) Congressional Research Service 16 Energy Tax Policy: Issues in the 113th Congress once 200,000 qualifying vehicles have been sold.40 In addition, since 2006, the tax code has at times provided incentives for other alternative technology vehicles. Vehicles eligible for tax incentives have included qualified fuel cell vehicles, hybrid vehicles, advanced lean burn technology vehicles, and alternative fuel vehicles, with credit amounts varying by the specific technology and vehicle type. The tax credit for hybrid vehicles, advanced lean burn technology vehicles, and other alternative fuel vehicles expired at the end of 2010. The tax credit for qualified fuel cell vehicles is scheduled to expire at the end of 2014. Between 2011 and 2015, total tax expenditures related to hybrid, alternative technology, and plug-in electric vehicles is estimated to be $3.3 billion. Through the end of 2013 (2014 in the case of hydrogen property) taxpayers installing alternative fuel refueling property may qualify for a tax credit. The estimated cost of this incentive is $0.3 billion between 2013 and 2017. Other Provisions There are a number of other energy tax provisions that arguably do not fall under the fossil fuels, renewable energy, energy efficiency, or alternative technology vehicles categories. The largest of these incentives, in terms of revenue cost, is the special tax treatment for energy-related publicly traded partnerships, costing an estimated $6.7 billion between 2013 and 2017.41 Special depreciation periods for certain energy property, other than renewable energy property, are estimated to cost $2.6 billion between 2013 and 2017. Excluding interest from private activity bonds related to energy production is estimated to cost $0.3 billion between 2013 and 2017. Energy Tax Issues in the 113th Congress In the FY2014 budget, the Obama Administration proposes to eliminate certain tax incentives for fossil fuels, while expanding various incentives for energy efficiency, renewable energy, alternative energy manufacturing, and alternative technology vehicles. Similar proposals have appeared in previous Obama Administration budget proposals. The 113th Congress may also choose to consider extension of various energy tax incentives scheduled to expire at the end of 2013. The President’s FY2014 Budget Proposal The President’s FY2104 budget contains a number of energy-tax related proposals (see Table 2). Specifically, the budget proposes to provide $33.6 billion in new energy tax incentives between 2014 and 2023.42 Most of this cost is attributable to a permanent extension of the renewable energy PTC. The proposal would also make the PTC refundable and available to solar energy (...continued) Vehicle Technology Incentives: A Summary of Federal Programs, by Lynn J. Cunningham et al. and CRS Report R40168, Alternative Fuels and Advanced Technology Vehicles: Issues in Congress, by Brent D. Yacobucci. 40 More information on qualifying vehicles and phase outs can be found at http://www.irs.gov/Businesses/Plug-InElectric-Vehicle-Credit-%28IRC-30-and-IRC-30D%29. 41 The majority of energy-related publicly traded partnerships are for activities in fossil fuels sectors. For more information, see CRS Report R41893, Master Limited Partnerships: A Policy Option for the Renewable Energy Industry, by Molly F. Sherlock and Mark P. Keightley. 42 The cost of these incentives is as scored by the Joint Committee on Taxation (JCT). Congressional Research Service 17 Energy Tax Policy: Issues in the 113th Congress technologies. The President’s FY2014 budget also proposes new tax credits for advanced technology and alternative-fuel vehicles, an expanded deduction for energy-efficient commercial building property, and additional allocations of tax credits for advanced energy manufacturing. The President’s FY2014 budget also proposes to eliminate certain tax incentives that support fossil fuels (see Table 2).43 Eliminating these incentives would raise an estimated $48.0 billion between 2013 and 2023. Amongst these provisions, repealing the Section 199 production activities deduction for fossil fuels would raise the most revenue, an estimated $19.9 billion between 2013 and 2023.44 Under current law, this deduction is available for all domestic manufacturing activities. The President’s FY2014 budget proposal would retain the Section 199 deduction for other manufacturing activities, but disallow the deduction for oil and gas as well as coal and other hard mineral fossil fuels. The President’s FY2014 budget also proposes to repeal expensing of intangible drilling costs (IDCs), percentage depletion, and several other tax incentives for fossil fuels (as listed in Table 2). Also included in the President’s FY2014 budget proposal are several provisions that would affect the energy sector, but are not targeted specifically to energy. For example, the President’s FY2014 budget proposes to repeal last-in, first-out (LIFO) inventory accounting methods. Repealing LIFO would increase tax liability for firms holding inventories that increase in value over time (e.g., oil). The President’s FY2014 budget would also modify the tax treatment of dual-capacity taxpayers, a proposal that would affect oil and gas companies operating abroad. The budget also proposes to modify several other environmental taxes. Specifically, the budget proposes to (1) increase the Oil Spill Liability Trust Fund (OSLTF) excise tax by one cent and expand the scope of the tax to include crudes produced from bituminous deposits and kerogenrich rock;45 (2) reinstate and extend the Superfund excise taxes, including a 9.7-cents-per-barrel excise tax on domestic crude oil and imported petroleum products and a tax on hazardous chemicals and imported materials used in the manufacture of hazardous chemicals, at a rate ranging from 22 cents to $4.87 per ton; and (3) reinstate the corporate environmental income tax, which would levy a 0.12% income tax on the amount by which corporate modified alternative minimum taxable income exceeds $2 million.46 JCT estimates that the proposed modifications to the OSLTF excise tax would raise $1.9 billion between 2013 and 2023, with the Superfund excise tax proposals raising $8.2 billion and the Superfund environmental income tax raising $12.9 billion over the same budget window.47 43 Similar proposals have been included in past Obama Administration budget proposals. For additional background, see CRS Report R42374, Oil and Natural Gas Industry Tax Issues in the FY2013FY2014 Budget Proposal, by Robert Pirog. 44 For additional background on the Section 199 production activities deduction, see CRS Report R41988, The Section 199 Production Activities Deduction: Background and Analysis, by Molly F. Sherlock. Since this provision is widely available, and not specific to the energy industry, it is not listed in Table 1. 45 The purpose of this proposal is to ensure that oil from tar sands are subject to the OSLTF excise tax. See CRS Report R43128, Oil Sands and the Oil Spill Liability Trust Fund: The Definition of "Oil" and Related Issues for Congress, by Jonathan L. Ramseur. 46 Unlike the Superfund excise taxes, the corporate environmental income tax has no direct connection to past or current pollution or polluting activities. 47 U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President's Fiscal Year 2014 Budget Proposal, committee print, 113th Cong., May 10, 2013, JCX-11-13. Congressional Research Service 18 Table 2. Energy Tax Proposals in the President’s FY2014 Budget (billions of dollars) Description 10-Year Revenue Change Estimate New or Extended Incentives Tax Credit for Production of Advanced Technology Vehicles Replace the credit for plug-in electric vehicles with an expanded credit available to a wider range of advanced technology vehicles. Credit capped at $10,000. Credit would be available through December 31, 2020, with a phase down beginning in 2018. -1.7 Tax Credit for Medium- and Heavy-Duty Alternative-Fuel Commercial Vehicles Provide a tax credit for dedicated alternative-fuel vehicles weighing more than 14,000 pounds. Credit capped at $40,000. Credit would be available through December 31, 2019 with a 50% credit available in 2019. -1.0 Tax Credit for Renewable Electricity Production (PTC) Permanently extend the renewable energy PTC, make the credit refundable, and add solar facilities as qualifying property. -24.7 Tax Deduction for Energy-Efficiency Commercial Building Property Permanently extend and increase the maximum value of the energy-efficient commercial building property deduction to $3.00 per square foot, increase the partial deduction to $1.00 per square foot, and provide a deduction for taxpayers achieving certain energy savings targets. Provide a new deduction based on anticipated and realized energy efficiency savings. -4.6 Tax Credit for Advanced Energy Manufacturing Provide an additional $2.5 billion for advanced energy manufacturing tax credits. -1.6 Credit for Enhanced Oil Recovery (EOR) Repeal the investment tax credit for EOR projects. — Credit for Oil and Gas Production from Marginal Wells Repeal the production tax credit for oil and gas from marginal wells. — Expensing of Intangible Drilling Costs (IDCs) Repeal expensing and 60-month amortization for capitalized IDCs. IDCs would instead be capitalized and costs recovered under generally applicable cost-recovery rules. 13.7 Deduction for Tertiary Injectants Repeal the deduction for tertiary injectant expenses. 0.1 Exception to Passive Loss Limitation for Working Interest in Oil and Gas Repeal the exception from the passive loss rules for working interest in oil and gas. 0.2 Incentives to be Repealed CRS-19 Description 10-Year Revenue Change Estimate Percentage Depletion for Oil and Gas and Hard Mineral Fossil Fuels Repeal percentage depletion for oil and gas and hard mineral fossil fuels. Taxpayers with adjusted basis in oil and gas or hard mineral fossil fuel property could claim cost depletion. 11.7 Domestic Manufacturing Deduction for Oil and Gas, Coal, and Other Hard Mineral Fossil Fuels Modify the definition of manufacturing activities such that income from oil and gas, coal, and other hard mineral fossil fuel property does not qualify. 19.9 Reduced Amortization Period for Geological and Geophysical (G&G) Expenditures Increase the amortization period from two to seven years for independent producers’ oil and gas exploration G&G expenditures. 1.3 Expensing of Exploration and Development Costs for Coal Repeal expensing, 60-month amortization, and 10-year amortization of exploration and development costs for coal and other hard-mineral fossil fuels. Costs would instead be capitalized and depreciated or depleted according to generally applicable rules. 0.6 Capital Gains Treatment for Coal Royalties Tax coal and lignite royalties as ordinary income. 0.6 Source: Department of the Treasury, General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals, Washington , DC, April 2013 and U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President's Fiscal Year 2014 Budget Proposal, committee print, 113th Cong., May 10, 2013, JCX-11-13. CRS-20 Energy Tax Policy: Issues in the 113th Congress Expiring Energy Tax Provisions The American Recovery and Reinvestment Act (ARRA; P.L. 111-5) contained a number of provisions that increased tax incentives available for renewable energy and energy efficiency. Support for renewable energy and residential energy efficiency has been reduced with the subsequent expiration of the Section 1603 grants in lieu of tax credits, lack of additional allocations in advanced energy manufacturing tax credits, and reduced limits on tax incentives for residential energy efficiency under the nonbusiness energy property credits. Federal financial support for renewables and energy efficiency will continue to decline if various energy tax incentives are allowed to expire as scheduled at the end of 2013. A list of energy tax incentives scheduled to expire at the end of 2013 can be found in Table 3.48 Absent Congressional action, the PTC will not be available for renewable energy projects that begin construction after 2013. Also scheduled to expire are tax incentives for biodiesel, renewable diesel, second generation biofuels (including cellulosic biofuels), and various alternative fuels. Incentives for energy efficiency in both commercial and residential buildings, as well as incentives for manufacturers of energy-efficient appliances, are also scheduled to expire at the end of 2013. Most recently expiring tax incentives were extended as part of the American Taxpayer Relief Act (ATRA; P.L. 112-240). Table 3. Energy Tax Incentives Expiring in 2013 (billions of dollars) 10-Year Revenue Change from Temporary Extension in P.L. 112-240 Provision Credit for Nonbusiness Energy Property -2.4 Alternative Fuel Vehicle Refueling Property (Non-Hydrogen) * Credit for Two- or Three-Wheeled Plug-In Vehicles *a Second Generation (Formerly Cellulosic) Biofuel Producer Credit -0.1 Incentives for Biodiesel and Renewable Diesel -2.2 Renewable Energy Production Tax Credit (Construction Start Date and ITC in Lieu of PTC Option) Credit for Production of Indian Coal -12.2b * Credit for Construction for New Energy Efficient Homes -0.2 Credit for Energy-Efficient Appliances -0.7 Mine Rescue Team Training Credit * Special Depreciation Allowance for Second Generation Biofuel Plan Property Placed-in-Service Date for Partial Expensing of Certain Refinery Propertyc * — 48 More information on expiring tax incentives can be found in CRS Report R43124, Tax Provisions Expiring in 2013 (“Tax Extenders”), by Molly F. Sherlock. Congressional Research Service 21 Energy Tax Policy: Issues in the 113th Congress Provision 10-Year Revenue Change from Temporary Extension in P.L. 112-240 Energy-Efficient Commercial Building Deductiond — Election to Expense Advanced Mine Safety Equipment ** Special Rule to Implement Electric Transmission Restructuring ** Incentives for Alternative Fuel and Alternative Fuel Mixtures (Other than Liquefied Hydrogen) -0.4 Source: U.S. Congress, Joint Committee on Taxation, List of Expiring Federal Tax Provisions 2013 - 2023, committee print, 113th Cong., January 11, 2013, JCX-3-13 and U.S. Congress, Joint Committee on Taxation, General Explanation Of Tax Legislation Enacted In The 113th Congress, committee print, 112th Cong., February 25, 2013, JCS-2-13. Notes: A “*” indicates an estimated cost of less than $50 million between 2013 and 2022. A “**” indicates that the provision was extended at no revenue cost. A “—“” indicates that the provision was not extended in P.L. 112-240. a. Credits for electric motorcycles and three-wheeled vehicles were modified and extended, but not the credit for low-speed vehicles. b. As part of ATRA, the expiration date for the renewable energy production tax credit (PTC) was modified such that facilities that were under construction but not yet placed in service by the end of 2013 would qualify. The option to claim the ITC in lieu of the PTC was not available prior to 2009. c. To qualify for this incentive, a binding construction contract must have been in place by January 1, 2010. d. This provision was extended for five years, through 2013, as part of the Emergency Economic Stabilization Act (P.L. 110-343). Tax Reform Energy tax policy may be addressed as part of a larger tax reform effort in the 113th Congress.49 One of the 11 House Ways and Means committee tax reform working groups was tasked specifically with reviewing energy tax issues. Comments received by the working groups on energy tax policy were diverse in both scope and purpose.50 Some comments suggested eliminating all or some energy tax expenditures. Other comments suggested a “technology neutral” approach to energy tax policy. Others suggested a carbon tax. A number of the comments were narrow in scope and specific to certain provisions. The Senate Committee on Finance’s Infrastructure, Energy, and Natural Resources options paper included a range of energy tax policies.51 Options ranged from eliminating all or some subset of energy tax expenditures, enacting “technology neutral” incentives, expanding incentives for 49 For background information on tax reform broadly, see CRS Report R43060, Tax Reform in the 113th Congress: An Overview of Proposals, by Molly F. Sherlock. 50 A summary of these comments can be found in U.S. Congress, Joint Committee on Taxation, Report to the House Committee on Ways and Means on Present Law and Suggestions for Reform Submitted to the Tax Reform Working Groups, committee print, 113th Cong., May 6, 2013, JCS-3-13. 51 Senate Committee on Finance tax reform options papers can be found at http://www.finance.senate.gov/issue/?id= 6c61b1e9-7203-4af0-b356-357388612063. Congressional Research Service 22 Energy Tax Policy: Issues in the 113th Congress renewables and efficiency, enacting a carbon tax, and changing tax rules for master limited partnerships (MLPs) for the energy sector. Selected Energy Tax Legislation52Legislation and Proposals52 Dozens of energy tax-related bills have been introduced as of the date of this report in the 113th Congress. This section briefly reviews selected legislation and proposals. Carbon Tax A carbon tax as a policy option has received increased attention in the 113th Congress.53 Legislative initiatives to enact a carbon tax include the following: • The Climate Protection Act of 2013 (S. 332) would establish a carbon pollution fee starting at $20 per ton of CO2, increasing by 5.6% per year for 10 years. • The Waxman / Whitehouse discussion draft would establish a carbon pollution fee, starting in the range of $15 to $35 per ton of CO2 emissions, increasing at an annual rate in the range of 2% - 8%.54 Initiatives opposing a carbon tax have also been put forward. These include the following: • The No Carbon Tax Act of 2013 (H.R. 1486) prohibits the Secretary of the Treasury or the Environmental Protection Agency from implementing a carbon tax. • H.Con.Res. 8 expresses the opposition of Congress to Federal efforts to establish a carbon tax on fuels for electricity and transportation. • H.Con.Res. 24 and S.Con.Res. 4 express the sense of Congress that a carbon tax is not in the economic interest of the United States. • S.Amdt. 261 to S.Con.Res. 8 would create a point of order against legislation that would create a Federal tax or fee on carbon emissions. Interest in the carbon tax approach represents as a shift away from the cap-and-trade option which was more popular in past Congresses. During the 111th Congress the House passed the American Clean Energy and Security Act of 2009 (H.R. 2454) (Waxman/Markey) which would have established cap-and-trade programs. 52 A comprehensive list of all pending energy tax legislation in the 113th Congress is beyond the scope of this report. The proposals included in this section represent prominent energy-tax initiatives. A number of other energy tax-related bills introduced to date in the 113th Congress propose to extend, expand, or create specific energy-related tax provisions. 53 For background, see CRS Report R42731, Carbon Tax: Deficit Reduction and Other Considerations, by Jonathan L. Ramseur, Jane A. Leggett, and Molly F. Sherlock. 54 The full text of this discussion draft and supporting documents can be found at http://democrats.energycommerce.house.gov/index.php?q=news/waxman-whitehouse-blumenauer-and-schatz-releasecarbon-price-discussion-draft. Congressional Research Service 23 Energy Tax Policy: Issues in the 113th Congress Master Limited Partnerships Growing interest in the option of allowing renewables to be taxed as master limited partnerships (MLPs) is reflected in the Master Limited Partnership Parity Act (S. 795 and H.R. 1696).55 Allowing renewables to be taxed as MLPs could reduce financing costs for renewable energy, but it would also likely result in corporate tax base erosion. Other A number of other energy tax bills have been introduced in the 113th Congress. Some legislation would repeal various energy tax incentives using revenues to reduce the corporate tax rate (e.g., the Energy Freedom and Economic Prosperity Act (H.R. 259)). Other legislation would repeal some subset of energy tax expenditures, such as those available to certain oil and gas companies (e.g., the Close Big Oil Tax Loopholes Act of 2013 (S. 307)). There has also been Congressional interest in ensuring that tar sands oil is subject to the Oil Spill Liability Trust Fund (OSLTF) excise tax. Provisions to this effect were included as a revenue offset in the Student Loan Affordability Act (S. 953).56 55 For background, see CRS Report R41893, Master Limited Partnerships: A Policy Option for the Renewable Energy Industry, by Molly F. Sherlock and Mark P. Keightley. 56 For background and other legislation containing similar proposals see CRS Report R43128, Oil Sands and the Oil Spill Liability Trust Fund: The Definition of "Oil" and Related Issues for Congress, by Jonathan L. Ramseur. Congressional Research Service 24 The Senate Committee on Finance tax reform discussion drafts on cost recovery and accounting and energy tax reform, released by Chairman Max Baucus, propose substantial energy tax policy changes. Proposals in the cost recovery and accounting draft would repeal present-law expensing for geological and geophysical expenditures, tertiary injectants, intangible drilling costs (IDCs), and mining exploration and development costs.57 These costs would instead be capitalized and amortized. Accelerated depreciation, including five-year depreciation for renewable energy property (e.g., solar and wind), would also be repealed. The cost recovery and accounting draft proposes a new cost recovery system for tangible assets with asset pools and longer lives, with the goal of better approximating economic depreciation.58 The draft also proposes repealing percentage depletion, instead requiring that costs be recovered using cost depletion. The energy tax reform discussion draft proposes clean energy production and investment tax credits designed to replace existing incentives for renewables and other clean electricity resources (e.g., nuclear, carbon capture, and sequestration).59 These credits would be available for the long term, but are designed to begin phasing out once the annual average greenhouse gas emissions rate for electricity production facilities falls to 372 grams of CO2e per kWh. The proposal also contains a new tax credit for clean transportation fuels, designed to replace the current system of 55 For background, see CRS Report R41893, Master Limited Partnerships: A Policy Option for the Renewable Energy Industry, by Molly F. Sherlock and Mark P. Keightley. 56 For background and other legislation containing similar proposals see CRS Report R43128, Oil Sands and the Oil Spill Liability Trust Fund: The Definition of "Oil" and Related Issues for Congress, by Jonathan L. Ramseur. 57 For a detailed description of the proposal, see U.S. Congress, Joint Committee on Taxation, Technical Explanation of the Senate Committee on Finance Chairman’s Staff Discussion Draft to Reform Certain Business Provisions, committee print, 113th Cong., November 21, 2013, JCX-19-13. 58 The discussion draft also proposes repealing last-in, first-out (LIFO) inventory accounting methods across all industries. As was noted above in the discussion of the President’s FY2014 budget proposal, the energy sector would be substantially affected by this change, even though the policy change would apply to all industries. 59 For a detailed description of the proposal, see U.S. Congress, Joint Committee on Taxation, Technical Explanation of teh Senate Committee on Finance's Staff Discussion Draft to Reform Certain Energy Tax Provisions, committee print, 113th Cong., December 18, 2013, JCX-21-13. Congressional Research Service 24 Energy Tax Policy: Issues in the 113th Congress incentives for biodiesel, renewable diesel, second generation biofuels, and alternative fuels. The summary accompanying the discussion draft indicates that many incentives for energy efficiency, including the § 24C credit for energy-efficiency improvements to existing homes, would be allowed to expire as scheduled at the end of 2013.60 60 The summary, along with the full text of the discussion draft, can be found on the Senate Committee on Finance website at http://www.finance.senate.gov/newsroom/chairman/release/?id=3a90679c-f8d0-4cb6-b775-ca559f91ebb4. Congressional Research Service 25 Energy Tax Policy: Issues in the 113th Congress Appendix. Energy Tax Legislation in Past Congresses This appendix describes legislation during the 108th through 112th Congresses that shaped current energy tax policy. Enacted Legislation in the 108th and 109th Congresses The Working Families Tax Relief Act of 2004 (P.L. 108-311) Several energy tax incentives were extended as part of the Working Families Tax Relief Act of 2004, a $146 billion package of middle class and business tax breaks. This legislation, which was signed into law on October 4, 2004, retroactively extended four energy tax subsidies: the § 45 renewable energy production tax credit, suspension of the 100% net income limitation for the oil and gas percentage depletion allowance, the $4,000 tax credit for electric vehicles, and the deduction for clean fuel vehicles (which ranges from $2,000 to $50,000). The §45 tax credit and the suspension of the 100% net income limitation had each expired on January 1, 2004 but were retroactively extended through December 31, 2005. The electric vehicle credit and the cleanvehicle income tax deduction were in the process of being phased-out (phase-out had begun on January 1, 2004). The Working Families Tax Relief Act of 2004 suspended the phase-out— providing 100% of the tax breaks—through 2005. The tax breaks were resumed beginning on January 1, 2006, when only 25% of the tax break was available. The American Jobs Creation Act of 2004 (P.L. 108-357) The American Jobs Creation Act of 2004 was enacted on October 22, 2004. It included about $5 billion in energy tax incentives primarily targeted at renewable energy as well as alcohol and biofuels. In particular, the act created the production tax credit, eliminated reduced tax rates for most blended alcohol fuels, established the biodiesel fuel and small refiner tax credits, and allowed a credit for oil and gas produced from marginal wells.5761 The Energy Policy Act of 2005 (P.L. 109-58) The Energy Policy Act of 2005 was enacted on August 8, 2005. It included an estimated $9 billion, over five years, in tax incentives distributed among renewable energy, conservation, and traditional energy sources. Among the larger provisions of the act, in revenue cost terms, were the enactment of several alternative technology vehicle credits, enactment of three investment credits for clean coal, and the extension of the production tax credit. 5761 The alcohol fuel mixture tax credit, which became law in 2005, has been the source of controversy as the credit has been claimed by a number of paper companies that burn “black liquor,” a practice that was not anticipated when the legislation was drafted. When the credit was initially enacted, it was expected to cost less than $100 million annually. During the first 6 months of 2009, more than $2.5 billion has been claimed for this tax credit. For more information see Martin A. Sullivan, “IRS Allows New $25 Billion Tax Break for Paper Industry,” Tax Notes, October 19, 2009, pp. 271-272 and Chuck O'Toole, “Baucus, Grassley Draft Bill to End ‘Black Liquor’ Subsidy,” Tax Notes, June 15, 2009, pp. 1312-1313. Congressional Research Service 2526 Energy Tax Policy: Issues in the 113th Congress The Tax Increase Prevention and Reconciliation Act (P.L. 109-222) The Tax Increase Prevention and Reconciliation Act (P.L. 109-222) was enacted May 17, 2006. It reduced the value of the subsidy by raising the amortization period from two years to five years, still faster than the capitalization treatment before the 2005 act, but slower than the treatment under that act. The higher amortization period applies only to the major integrated oil companies—independent (unintegrated) oil companies may continue to amortize all geological and geophysical (G&G) costs over two years—and it applies to abandoned as well as successful properties. This change increased taxes on major integrated oil companies by an estimated $189 million over 10 years, effectively rescinding about 20% of the nearly $1.1 billion 11-year tax for oil and gas production under the Energy Policy Act of 2005. The Tax Relief and Health Care Act of 2006 (P.L. 109-432) At the end of 2006, the 109th Congress enacted a tax extenders package that included extension of numerous renewable energy and excise tax provisions. Many of the renewable energy provisions in this bill had already been extended under the Energy Policy Act of 2005 and were not set to expire until the end of 2007 or later. The Tax Relief and Health Care Act of 2006 provided for one-year extensions of these provisions. Enacted Legislation in the 110th and 111th Congresses Energy tax policy in the 110th Congress represented a shift towards increased tax burden (via the removal of subsidies) on the oil and gas industry while also emphasizing energy conservation and alternative and renewable fuels, as opposed to conventional hydrocarbons.5862 This policy direction appeared to be the result of high crude oil and petroleum product prices and oil and gas industry profits, along with the political realignment of the Congress after the 2006 congressional elections. The shift was manifested by proposals to reduce oil and gas production incentives or subsidies, which were initially incorporated into, but ultimately dropped from comprehensive energy policy legislation. Later in the 110th Congress, enacted legislation focused on increasing incentives for renewable energy production, rather than reducing tax incentives available to the oil and gas industries. The fact that tax incentives for oil and gas were left in place is in part a reflection of the deteriorating business climate during 2008. Energy tax legislation in the 111th Congress continued to provide additional support for renewables and energy efficiency. As was the case in previous Congresses, much of the energy tax legislation enacted during the 111th Congress extended expired or expiring energy-related tax incentives. The American Recovery and Reinvestment Act (ARRA; P.L. 111-5) introduced new incentives for renewable energy and advanced energy manufacturing, while providing enhanced incentives for residential energy efficiency. The 111th Congress also eliminated the “black liquor loophole.” 5862 There is an important economic distinction between a subsidy and a tax benefit. As is discussed elsewhere in this report, firms receive a variety of tax benefits that are not necessarily targeted subsidies (or tax expenditures) because they are available generally. Congressional Research Service 2627 Energy Tax Policy: Issues in the 113th Congress Energy Independence and Security Act of 2007 (P.L. 110-140) The Energy Independence and Security Act of 2007 (P.L. 110-140; H.R. 6) contained a number of provisions designed to increase energy efficiency and the availability of renewable energy. Specifically, the act increased the target fuel efficiency for combined fleets of cars and light trucks, increased renewable fuel standards, and increased a number of energy-efficiency standards for household and commercial appliance equipment. Energy Tax Provisions in the Food, Conservation, and Energy Act of 2008 (P.L. 110-234) The Food, Conservation, and Energy Act of 2008 (P.L. 110-234), otherwise referred to as the 2008 Farm Bill, contained two energy tax provisions.5963 The first provision promotes cellulosic biofuels through a production credit of $1.01 per gallon, which applies to fuels produced from qualifying cellulosic feedstocks. The second provision, the ethanol blender’s tax credit (which applies to both domestic and foreign sourced ethanol), was reduced from $0.51 per gallon to $0.45 per gallon.6064 The Emergency Economic Stabilization Act of 2008 (P.L. 110-343) The Emergency Economic Stabilization Act of 2008 (P.L. 110-343), included $17 billion in energy tax incentives. These provisions were primarily extensions of existing provisions (extenders), but also including several new energy tax incentives. The new provisions included $10.9 billion in renewable energy tax incentives aimed at clean energy production, $2.6 billion in incentives targeted toward cleaner vehicles and fuels, and $3.5 billion in tax breaks to promote energy conservation and energy efficiency. The cost of the energy tax extenders legislation in the Emergency Economic Stabilization Act of 2008 was fully financed, or paid for, by raising taxes on the oil and gas industry (mostly by reducing oil and gas tax breaks) and by other tax increases. The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) ARRA modified incentives for renewable energy production, energy conservation, alternative technology vehicles, as well as a number of other energy tax incentives.6165 Collectively, ARRA’s energy tax provisions lowered the cost of selected renewable energy relative to energy from other sources, such as oil and gas. Provisions enacted under ARRA extended and expanded a number of incentives for investment in renewable energy. The renewable energy production tax credit (PTC) was extended through 2012 for wind and 2013 for other eligible technologies, the energy credit (ITC) was expanded for small wind property, and taxpayers were given the option of receiving a 5963 See CRS Report RL34696, The 2008 Farm Bill: Major Provisions and Legislative Action, coordinated by Renée Johnson for a complete description of the provisions in the 2008 Farm Bill. 6064 For cellulosic ethanol, the value of the cellulosic biofuel production credit is reduced by the value of the ethanol blender’s credit and the small ethanol producer credit—so that the combined value of the credits equals $1.01. Thus, the credit for cellulosic ethanol is currently $0.46 per gallon ($1.01 minus $0.45 minus $0.10 [the small ethanol producer credit]). If the blender’s credit and small ethanol producer credit were reduced (or eliminated), the value of the cellulosic ethanol production credit would increase to keep the combined value at $1.01. 6165 For information on all energy provisions in ARRA see CRS Report R40412, Energy Provisions in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), coordinated by Fred Sissine. Congressional Research Service 2728 Energy Tax Policy: Issues in the 113th Congress direct grant from the Treasury in lieu of tax credits under the Section 1603 grant program.6266 Renewable energy production was also encouraged by ARRA’s provision increasing the funds available for the issuance of new clean renewable energy bonds. Residential incentives for renewable energy property were expanded under ARRA, as property-specific credit caps for residential renewable energy property were removed. ARRA contained two tax provisions intended to encourage energy conservation. The first provision modified the tax credits for energy-efficient improvements to existing homes by temporarily increasing the credit rate and removing credit caps previously associated with specific types of property. For qualified energy-efficiency improvements, such as the installation of energy-efficient building envelope components, furnaces, or boilers, installed during 2009 and 2010, taxpayers could claim a 30% tax credit.6367 ARRA also removed property-by-property caps on the tax credit and replaced them with a $1,500 cap for the total amount of the credit claimed during 2009 and 2010.6468 The second energy conservation provision increased funds available for the issue of qualified energy conservation bonds. To further promote alternative technology vehicles, tax provisions enacted under ARRA modified the credits for alternative fuel vehicles and plug-in electric vehicles. Additionally, a tax credit for plug-in vehicle conversion was enacted. Tax credits for advanced energy manufacturing (IRC § 48C) were also introduced under ARRA. This provision provided $2.3 billion in tax credits to be competitively awarded to qualifying projects. The Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) Energy tax policy—like all tax policy—can lead to unanticipated consequences. Notably, this issue arose in the 111th Congress in its deliberations concerning “black liquor.” In the context of taxes, the term “black liquor” referred to a process in which pulp mills use a mixture of conventional fuel and a byproduct of the pulping process as an energy source for the mill. According to changes enacted in The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (P.L. 109-59; SAFETEA-LU), “black liquor” was eligible for the alternative fuels tax credit, which was not the congressional intent of the provision.6569 The IRS later ruled that black liquor would be eligible for the cellulosic biofuel producer credit after the alternative fuels mixture credit expired at the end of 2009. 6266 The renewable energy PTC for wind facilities was extended through 2012. Prior to ARRA, the credit rate was 10%. 6468 Prior to ARRA, the credit caps ranged from $50 to $300, depending on the type of property installed. The credit was limited to $500 total for the 2006 and 2007 tax years combined. The credit was not available in 2008. The $1,500 limit applies to cumulative spending in the 2009 and 2010 tax years. 63 6567 69 See Martin A. Sullivan, “IRS Allows New $25 Billion Tax Break for Paper Industry,” Tax Notes, October 19, 2009, pp. 271-272 for additional information concerning the original legislative intent of the modification of the alternative fuels tax credit in SAFETEA-LU. When enacted, the modification to the alternative fuels tax credit was estimated to cost less than $100 million annually. During the first six months of 2009, more than $2.5 billion were claimed for this tax credit, mostly by the paper industry. In addition, the Joint Committee on Taxation estimated that $23.6 billion will be saved between 2010-2019 from excluding black liquor from the cellulosic biofuel producers credit. Congressional Research Service 2829 Energy Tax Policy: Issues in the 113th Congress Recognizing the unintended consequence, Senate Finance Committee Chairman Max Baucus66Baucus70 stated in response to draft legislation, “Our measure ensures this tax credit is used consistently as the law intended, not through an unintended loophole.” Senator Charles Grassley67Grassley71 made similar statements, noting “The paper industry was not intended to receive the alternative fuels tax credit when the credit was enacted.” Under The Health Care and Education Reconciliation Act of 2010 (P.L. 111-152), black liquor was made ineligible for the cellulosic biofuel producer credit, reducing revenue losses by $23.6 billion between 2011 and 2019.6872 In addition, with the passage of The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (P.L. 111-312) at the end of 2010, black liquor could no longer qualify for the alternative fuels tax credit. However, taxpayers may still be claiming tax credits for black liquor, as previously unused credits may be carried forward. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) A number of expiring energy tax provisions were temporarily extended in the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). The one-year extension of tax credits for alcohol fuels, including ethanol, was estimated to cost $4.9 billion. Extending the Section 1603 grant in lieu of tax credits program for one year was estimated to cost $3.0 billion. The retroactive extension of tax incentives for biodiesel and renewable diesel, which had expired at the end of 2009, was estimated to cost $2.0 billion. Other provisions that were extended included tax credits for residential energy efficiency improvements,6973 energy efficient appliance manufacturers, and energy efficient new homes. Tax provisions related to refined coal, alternative fuel mixtures, electric transmission restructuring, percentage depletion for oil and gas production, and alternative fuel vehicle refueling property were also extended. Enacted Legislation in the 112th Congress Energy tax legislation enacted in the 112th Congress included measures to extend expired or expiring energy tax incentives. Notably, a number of energy provisions were not extended, including tax credits for ethanol and the Section 1603 grants in lieu of tax credits. Both of these provisions had expired at the end of 2011. The provision allowing for the suspension of the 100%-of-net-income limitation on percentage depletion, which had been part of multiple past tax extenders packages, was also not extended. 6670 U.S. Congress, Senate Committee on Finance, “Baucus, Grassley Release Staff Draft of Legislation to Close Alternative Fuels Tax Credit Loophole,” press release, June 11, 2009, http://finance.senate.gov/press/Gpress/2009/ prg061109.pdf. 6771 Ibid. 6872 See Joint Committee on Taxation, JCX-17-10, available at http://www.jct.gov/publications.html?func=showdown& id=3672. 6973 These credits were extended at a reduced rate, 10% as opposed to 30%. The limit associated with the credit was also reduced, from $1,500 to $500. Property specific caps for certain types of investments were reinstated. Congressional Research Service 2930 Energy Tax Policy: Issues in the 113th Congress The American Taxpayer Relief Act of 2012 (P.L. 112-240)7074 Several expired and expiring energy tax incentives were temporarily extended as part of the American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240). While most expiring energy tax provisions were simply extended through the end of 2013 under ATRA, substantive changes were made to the renewable energy production tax credit (PTC). Specifically, the expiration date for the PTC was changed from a placed-in-service deadline to a construction start date for all qualifying technologies. Extending the PTC for wind for one year and changing the deadline from a placed-in-service to construction start date was estimated to cost $12.2 billion over the 10-year budget window. Other provisions that were extended include credits for biodiesel, renewable diesel, alternative fuels, and second generation (cellulosic) biofuels. The tax credit for cellulosic biofuels was modified to include algae-based fuels. Other incentives related to energy efficiency, including the tax credit for nonbusiness energy property and the credit for the manufacture of energy-efficient appliances, were also extended. Author Contact Information Molly F. Sherlock Specialist in Public Finance msherlock@crs.loc.gov, 7-7797 Acknowledgments Portions of this report are drawn from prior reports written by Donald Marples, Specialist in Public Finance; Salvatore Lazarri, former CRS Specialist in Energy and Environmental Economics; and Margot Crandall-Hollick, Analyst in Public Finance. 7074 For more information, see CRS Report R42894, An Overview of the Tax Provisions in the American Taxpayer Relief Act of 2012 , by Margot L. Crandall-Hollick. Congressional Research Service 3031