Energy Tax Policy: Issues in the 114^th 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 114^th 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 A number of renewable energy and energy efficiency incentives expired at the end of 2013, before being retroactively extended through 2014 by the Tax Increase Prevention Act of 2014 (P.L. 113-295).³ The Tax Relief Extension Act of 2015 (S. 1946) would extend expired energy tax provisions for two years, through 2016. Absent further legislative action in the 114^th Congress, renewable electricity projects that begin construction after December 31, 2014, will not qualify for the production tax credit (PTC). Other provisions that expired at the end of 2014 include incentives designed to promote energy efficiency, as well as incentives that promote alternative fuels and biofuels.

The President's FY2016 budget proposed a number of changes to energy tax policy. Specifically, the Obama Administration has proposed repealing a number of existing tax incentives for fossil fuels, while providing new or expanded incentives for carbon sequestration, alternative and advanced technology vehicles, renewable electricity, energy efficiency, and advanced energy manufacturing. Similar proposals appeared in past Obama Administration budgets.

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 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.

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.

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. The market 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.⁴

Market failures in energy use may also arise due to the principal-agent problem.⁶ 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 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, energy-saving practices are more frequently adopted.⁷ 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 energy-efficient 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 energy-efficiency investments.⁸

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.⁹ 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.¹⁰

When there are negative externalities associated with an activity, correcting the economic distortion with a tax, if done correctly, can improve economic efficiency.¹¹ 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.¹² 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.¹³ 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, however, has shifted to focus on a carbon tax or emissions fee approach.¹⁴

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.¹⁵ Second, while the subsidy is intended to enhance economic efficiency, subsidies may be inefficient to the extent they are funded with distortionary taxes.¹⁶ 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 learning-by-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.¹⁷ 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]).¹⁸

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.¹⁹ 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.²⁰

Energy taxes may be employed as user charges for a public good or a quasi-public good.²¹ 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.²² 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.²³ 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.²⁴ 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.

Among the capital cost subsidies, the allowance of the percentage depletion method is estimated to cost $8.7 billion between 2014 and 2018.²⁶ 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. In other words, taxpayers may be able to claim allowances that reduce tax liability even after the cost of investment is fully recovered. 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.²⁷ The expensing of exploration and development costs is estimated to cost the federal government $6.5 billion in revenue losses over the 2014 through 2018 budget window, while the reduced amortization period for G&G expenditures is estimated to cost $0.7 billion over the same time period.

(billions of dollars)

Tax Provision

Description

2014 Cost

2014-2018 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.

$1.2

$8.7

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

$6.5

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 two years for independent producers and smaller integrated oil companies.

$0.1

$0.7

none

167(h)

Coal production credits

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)

12/31/2011 (refined coal excluding steel industry fuel)

Property must be placed in service by 12/31/2008—no credits paid after 12/31/2014 (Indian coal)

45

Credits for investing in clean coal facilities

$0.2

$1.0

Allocation limit

48A, 48B

$0.4

$1.8

none

169 and 291

Renewables

Credits for electricity production from renewable resources ("PTC" or "production tax credit")

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.

$1.5

12/31/2014 (construction start date)

45

Energy credit ("ITC" or "investment tax credit")

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.

$0.6

$2.9

12/31/2016 (other technologies; solar has permanent 10% credit after 2016)

none (geothermal excluding geothermal heat pumps)

48

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.

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.

$1.1

$4.3

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

168

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

Allocation limit

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. Second-generation 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.

12/31/2014 (second-generation biofuel)

12/31/2014 (biodiesel, renewable diesel, and alternative fuels)

9/30/2014 for liquefied hydrogen

40, 40A, 6426, 6427

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

$1.3

Allocation limit

48C

Energy Efficiency

Credit for nonbusiness energy property

Tax credit for 10% of the amount paid for qualified energy-efficiency 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).

$0.6

12/31/2014

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

12/31/2014

179D

Exclusion of energy conservation subsidies provided by public utilities

Subsidies are not taxable as income.

(i)

$0.1

none

136

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)

12/31/2014

45L

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)

$0.2

Allocation limit (allocated to the States)

54D

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.

$0.2

$1.2

Plug-in electric vehicle credit volume capped (200,000) per manufacturer

12/31/2014 for fuel cell vehicles

30, 30B, 30D

Credits for alternative fuel vehicle refueling property

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)

12/31/2014

30C

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% of its gross income is derived from interest, dividends, real property rents, or certain other types of qualifying income. Qualifying income includes income derived from certain energy-related activities, such as fossil fuel or geothermal exploration, development, mining, production, refining, transportation, and marketing.

$1.1

$5.8

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 a state private activity bond volume cap.

(i)

$0.2

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 15-year depreciation. Natural gas distribution lines are also allowed 15-year depreciation.

$0.6

$2.8

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.

$1.8

12/31/2014

451(i)

In addition to the energy-related provisions that expired at the end of 2014, several energy-related provisions expired at the end of 2013. Specifically, the Tax Increase Prevention Act of 2014 (P.L. 113-295) did not extend the credit for energy-efficient appliance manufacturers or the credit for electric-drive motorcycles and three-wheeled vehicles. However, the Tax Relief Extension Act of 2015 (S. 1946) proposed to extend the credit for two-wheeled plug-in electric drive motorcycles. The placed-in-service deadline for partial expensing of certain refinery property was also not extended beyond 2013 (this incentive was only available for property under contract for construction before January 1, 2010, and thus was effectively already expired).

(billions of dollars)

(billions of dollars)

Description

2015-2025 Revenue Change Estimate

New or Extended Incentives or Modifications 

Credit for Renewable Electricity Production Tax Credit and Investment Tax Credit

Permanently extend the renewable PTC, make the credit refundable, add solar facilities as qualifying property, expand eligibility of credit to electricity consumed by the producer, and allow individuals to claim PTC for residential energy efficient property installed on a dwelling unit. Permanently extend the renewable ITC as the credit is structured in 2016, and permanently extend the election to claim the ITC in lieu of the PTC,

-35.8

Deduction for Energy-Efficient Commercial Building Property

Permanently extend and increase the maximum value of the energy-efficient commercial building property deduction to $3.00 per square foot, and increase partial deductions to $2.00 and $1.00 per square foot depending on energy savings. Provide a new deduction based on projected energy savings.

-6.6

Carbon Dioxide Investment and Sequestration Tax Credit

Authorize $2.0 billion to provide a 30% refundable investment tax credit for eligible carbon dioxide transportation and storage infrastructure used on new or retrofitted electric generating units. Provide a refundable sequestration tax credit of $50 per metric ton of carbon dioxide sequestered and not beneficially reused and $10 per metric ton of carbon dioxide sequestered and beneficially reused. The credit would be limited to a maximum of 20 years of production.

-5.9

Credit for Advanced Energy Manufacturing

Provide an additional $2.5 billion for advanced energy manufacturing tax credits.

-1.6

Credit for Second Generation Biofuel Production

Retroactively extend the credit for blending cellulosic fuel at $1.01 per gallon through 2020, and phasing out the credit through the end of 2024.

-0.9

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, and limited to vehicles less than 14,000 pounds. Credit would be available through December 31, 2023, with a phase out beginning in 2020.

-2.8

Credit for Medium- and Heavy-Duty Alternative-Fuel Commercial Vehicles

Provide a tax credit of $25,000 for dedicated alternative-fuel vehicles weighing between 14,000 and 26,000 pounds, and a credit of $40,000 for vehicles weighing more than 26,000 pounds. Credit would be available through December 31, 2022, with a 50% credit available in 2021.

-1.2

Credit for the Construction of Energy-Efficient New Homes

Extend the current $1,000 tax credit for energy efficient new homes through 2026. Provide a new $4,000 tax credit for the construction of new qualified DOE Zero Energy Ready Home.

-2.1

Excise Taxes on Liquefied Natural Gas (LNG)

Lower the excise tax on LNG from 24.3 cents per gallon to 14.1 cents per gallon.

*

Incentives to be Repealed

Credit for Enhanced Oil Recovery (EOR)

Repeal the investment tax credit for EOR projects.

**

Credit for Oil and Gas Production from Marginal Wells

Repeal credit for oil and gas production 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.

13.5

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

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.

17.9

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.

12.4

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.

1.1

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.

0.8

Capital Gains Treatment for Coal Royalties

Tax coal and lignite royalties as ordinary income.

0.4

Exemption from Corporate Taxation for Fossil Fuels Publicly Traded Partnerships

Treat publicly-traded partnerships for fossil fuels as C-corporations for tax purposes beginning after 2020.

1.2

Revenue Raisers

Increase Oil Spill Liability Trust Fund Financing Rate and Update the Law to Include Other Sources of Crudes

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 kerogen-rich rock.

1.3

Reinstate Superfund Taxes: Excise Taxes

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.

5.5

Reinstate Superfund Taxes: Environmental Income Tax

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.

16.4

Notes: A "*" indicates an estimated cost of less than $50 million in the 10-year budget window. A "**" indicates that the provision was extended at no revenue cost.

a.

Members of the 114^th Congress have introduced various pieces of energy-tax-related legislation. This section briefly reviews selected legislation and proposals.

Taxes or Fees on Carbon Emissions⁵⁷

Other

There has also been congressional interest in ensuring that tar sands oil is subject to the Oil Spill Liability Trust Fund (OSLTF) excise tax. S.Amdt. 123 to S. 1 (the Keystone XL Pipeline Act) expressed the sense of the Senate that all forms of unrefined and unprocessed petroleum should be subject to the OSLTF excise tax. Similar provisions were proposed as a revenue offset in the Student Loan Affordability Act (S. 953) in the 113^th Congress.⁵⁹

This appendix describes legislation during the 108^th through 113^th Congresses that shaped current energy tax policy.

Enacted Legislation in the 108^th and 109^th Congresses

Author Contact Information

Acknowledgments

Footnotes

For more, see CRS Report R41227, Energy Tax Policy: Historical Perspectives on and Current Status of Energy Tax Expenditures, by [author name scrubbed].

For an overview of non-tax energy policy issues in the 114^th Congress, see CRS Report R42756, Energy Policy: 114th Congress Issues, by [author name scrubbed].

See CRS Report R43124, Expired and Expiring Temporary Tax Provisions ("Tax Extenders"), by [author name scrubbed].

See CRS Report RL34266, Climate Change: Science Highlights, by [author name scrubbed].

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.

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 Laboratory, August 12, 2006, http://www.escholarship.org/uc/item/6f14t11t.

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.

Gilbert E. Metcalf, "Using Tax Expenditures to Achieve Energy Policy Goals," American Economic Review, vol. 98, no. 2 (2008), pp. 90-94.

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.

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 2007-2008 in the succeeding economic recession.

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.

Taxes imposed to correct for negative externalities are also known as Pigovian taxes, named after the economist who developed the concept, Arthur Cecil Pigou.

CRS Report R40242, Carbon Tax and Greenhouse Gas Control: Options and Considerations for Congress, by [author name scrubbed] and [author name scrubbed] for a discussion of the relative merits and demerits of carbon taxes and cap-and-trade systems.

See CRS Report R42731, Carbon Tax: Deficit Reduction and Other Considerations, by [author name scrubbed], [author name scrubbed], and [author name scrubbed].

Gilbert E. Metcalf, "Tax Policies for Low-Carbon Technologies," National Tax Journal, vol. 63, no. 3 (September 2009), pp. 519-533.

Gilbert E. Metcalf, "Federal Tax Policy towards Energy," Tax Policy and the Economy, vol. 21 (2007), pp. 145-184.

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.

See CRS Report RL31181, Research Tax Credit: Current Law and Policy Issues for the 114th Congress, by [author name scrubbed] for an overview of the research tax credit, an umbrella credit under which the energy research credit falls.

Subsidizing domestic production is also problematic in that such policies conflict with environmental objectives.

Gilbert E. Metcalf, "Using Tax Expenditures to Achieve Energy Policy Goals," American Economic Review, vol. 98, no. 2 (2008), pp. 90-94.

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.

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.

For background information on the federal gas tax see CRS Report RL30304, The Federal Excise Tax on Motor Fuels and the Highway Trust Fund: Current Law and Legislative History, by [author name scrubbed] and CRS Report R40808, The Role of Federal Gasoline Excise Taxes in Public Policy, by [author name scrubbed].

Another argument is that the federal gas tax should be viewed as correcting the externalities associated with gasoline-powered 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.

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 affect income tax liability.

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.

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.

For more information, see CRS InFocus IF10026, Lower Oil Prices 2015, by [author name scrubbed].

For more information, see CRS Report R43690, Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief, by [author name scrubbed] and [author name scrubbed].

See CRS Report R43453, The Renewable Electricity Production Tax Credit: In Brief, by [author name scrubbed].

See CRS Report R41635, ARRA Section 1603 Grants in Lieu of Tax Credits for Renewable Energy: Overview, Analysis, and Policy Options, by [author name scrubbed] and [author name scrubbed].

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.

See CRS Report R41573, Tax-Favored Financing for Renewable Energy Resources and Energy Efficiency, by [author name scrubbed] and [author name scrubbed].

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.

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.

More information on non-tax incentives can be found in CRS Report R42566, Alternative Fuel and Advanced Vehicle Technology Incentives: A Summary of Federal Programs, by [author name scrubbed] et al. and CRS Report R40168, Alternative Fuels and Advanced Technology Vehicles: Issues in Congress, by [author name scrubbed].

More information on qualifying vehicles and phase outs can be found at http://www.irs.gov/Businesses/Plug-In-Electric-Vehicle-Credit-IRC-30-and-IRC-30D.

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 [author name scrubbed] and [author name scrubbed].

More information on expiring tax incentives can be found in CRS Report R43898, Tax Provisions that Expired in 2014 ("Tax Extenders"), by [author name scrubbed].

The tax credits related to biodiesel and renewable diesel are scheduled for a one-year extension before transitioning to a producer credit that would expire at the end of 2016.

U.S. Congress, Joint Committee on Taxation, A Report to the Congressional Budget Office of the Macroeconomic Effects of the "Tax Relief Extension Act of 2015," as Ordered to be Reported by the Senate Committee on Finance, August 4, 2015, JCX-107-15.

U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President's Fiscal Year 2016 Budget Proposal, committee print, 114^th Congress, March 6, 2015, JCX-50-15.

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 FY2014 Budget Proposal, by [author name scrubbed].

U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President's Fiscal Year 2016 Budget Proposal, committee print, 114^th Congress, March 6, 2015, JCX-50-15.

For more information on the percentage depletion deduction see CRS Report R42374, Oil and Natural Gas Industry Tax Issues in the FY2014 Budget Proposal, by [author name scrubbed]

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 [author name scrubbed].

Unlike the Superfund excise taxes, the corporate environmental income tax has no direct connection to past or current pollution or polluting activities.

U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President's Fiscal Year 2016 Budget Proposal, committee print, 114^th Congress, March 6, 2015, JCX-50-15.

For more information, see CRS Report R43453, The Renewable Electricity Production Tax Credit: In Brief, by [author name scrubbed].

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, 113^th Cong., November 21, 2013, JCX-19-13.

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.

For a detailed description of the proposal, see U.S. Congress, Joint Committee on Taxation, Technical Explanation of the Senate Committee on Finance's Staff Discussion Draft to Reform Certain Energy Tax Provisions, committee print, 113^th Cong., December 18, 2013, JCX-21-13.

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.

A comprehensive list of all pending energy tax legislation in the 114^th 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 114^th Congress propose to extend, expand, or create specific energy-related tax provisions.

For background, see CRS Report R42731, Carbon Tax: Deficit Reduction and Other Considerations, by [author name scrubbed], [author name scrubbed], and [author name scrubbed] and Donald Marron, Eric Toder, and Lydia Austin, Taxing Carbon: What, Why, and How, Tax Policy Center, June 2015, available at http://www.taxpolicycenter.org/UploadedPDF/2000274-Taxing-Carbon-What-Why-and-How.pdf.

For background, see CRS Report RL30304, The Federal Excise Tax on Motor Fuels and the Highway Trust Fund: Current Law and Legislative History, by [author name scrubbed].

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 [author name scrubbed].

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.

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.

See CRS Report RL34696, The 2008 Farm Bill: Major Provisions and Legislative Action, coordinated by [author name scrubbed] for a complete description of the provisions in the 2008 Farm Bill.

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.

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 [author name scrubbed].

The renewable energy PTC for wind facilities was extended through 2012.

Prior to ARRA, the credit rate was 10%.

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.

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 and 2019 from excluding black liquor from the cellulosic biofuel producer's credit.

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.

Ibid.

See Joint Committee on Taxation, JCX-17-10, available at http://www.jct.gov/publications.html?func=showdown&id=3672.

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.