Order Code IB10054
Issue Brief for Congress
Received through the CRS Web
Energy Tax Policy
Updated January 2, 2003
Salvatore Lazzari
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

---

CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Introduction
Background
Energy Tax Policy From 1918-1970: Promoting Oil and Gas
Energy Tax Policy During the 1970s: Conservation and Alternative Fuels
Reagan’s Free-Market Energy Tax Policy
Energy Tax Policy After Reagan
Energy Tax Proposals in the 106th Congress
Energy Tax Action in the 107th Congress
Bush Administration Proposals
Job Creation and Worker Assistance Act (P.L. 107-147)
Omnibus Energy Bills (H.R. 4)
Oil and Natural Gas Production
Oil and Natural Gas Refining and Distribution
Coal
Electricity Restructuring
Energy Efficiency
Renewable and Alternative Fuels
Miscellaneous Energy Tax Proposals
Renewable Energy Mandates
LEGISLATION
CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS
FOR ADDITIONAL READING

---

IB10054
01-02-03
Energy Tax Policy
SUMMARY
Historically, U.S. federal energy tax
policy focused on reducing petroleum demand
policy promoted the supply of oil and gas.
through incentives for energy efficiency,
However, the 1970s witnessed (1) a signifi-
alternative fuels, and alternative-fueled vehi-
cant cutback in the oil and gas industry’s tax
cles. The Clinton policy also emphasized the
preferences, (2) the imposition of new excise
environmental benefits of reducing green-
taxes on oil, and (3) the introduction of nu-
house gases and global climate change.
merous tax preferences for energy conserva-
tion, the development of alternative fuels, and
The George W. Bush Administration had
the commercialization of the technologies for
originally criticized energy tax measures as
producing these fuels (renewables such as
inconsistent with its free market philosophy.
solar, wind, and biomass, and non-conven-
Nevertheless, President Bush issued a compre-
tional fossil fuels such as shale oil and coalbed
hensive energy policy in 2001, and a global
methane).
climate change initiative in 2002, which
include limited energy tax measures.
The Reagan Administration, using a free-
market approach, advocated repeal of the
Omnibus energy legislation (H.R. 4) ,
windfall profit tax on oil and the repeal or
which would expand energy tax incentives
phase-out of most energy tax preferences —
significantly, was dropped by the conference
for oil and gas, as well as alternative fuels.
committee. Both the Senate and House ver-
Due to the combined effects of the Economic
sions of H.R. 4 included energy tax measures
Recovery Tax Act and the energy tax subsi-
for qualifying energy producers and consum-
dies that had not been repealed, which to-
ers. In terms of revenue loss, the House bill
gether created negative effective tax rates in
would have cut energy taxes by $36.5 billion
some cases, the actual energy tax policy dif-
over the ten-year period FY2002 - FY2011. In
fered from the stated policy.
contrast, the Senate bill’s ten-year projected
revenue loss was about $15.5 billion. If the
The George H. Bush and Bill Clinton
effect of renewable energy mandates on the
years witnessed a return to a much more
use of tax incentives was added, the Senate
activist energy tax policy, with an emphasis on
bill’s tax cut total would have grown to $20.6
energy conservation and alternative fuels.
billion. The House bill provided about $18.5
While the original aim was to reduce demand
billion more for fossil fuels, but the Senate bill
for imported oil, energy tax policy is also
provided $2.0 billion more for non-fossil
being increasingly viewed as a tool for achiev-
measures, and another $5.1 billion more for
ing environmental and fiscal objectives. The
tax incentives driven by the renewable energy
current energy tax structure is dominated by
mandates. The bills included tax measures for
revenue loss for a long-standing gasoline tax.
oil and gas production, oil and gas refining
However, recent debates over energy tax
and distribution, coal production, electricity
policy for fuels and electricity cover a wide
industry restructuring, energy efficiency,
range of tax measures for fossil fuels, alterna-
renewable and alternative fuels, and several
tive fuels, renewable energy, and energy
miscellaneous items. Also, in 2002 certain
efficiency.
energy tax provisions that had expired were
extended retroactively as part of Job Creation
The Clinton Administration’s energy tax
and Worker Assistance Act (P.L. 107-147).
Congressional Research Service ˜ The Library of Congress

---

IB10054
01-02-03
MOST RECENT DEVELOPMENTS
On November 13, 2002, the conference committee dropped its consideration of H.R.
4, the comprehensive energy bill, after eight sessions failed to reconcile major differences.
Both the Senate and House versions of H.R. 4 included a package of energy tax cuts,
primarily tax incentives (or subsidies) for qualifying energy producers and consumers. In
terms of revenue loss, the House bill would have cut energy taxes by $36.5 billion over the
ten-year period FY2002 - FY2011. In contrast, the Senate bill’s ten-year projected revenue
loss was about $15.5 billion. If the effect of renewable energy mandates on the use of tax
incentives is added, the Senate bill’s total grows to $20.6 billion. The House bill provided
about $18.5 billion more for fossil fuels, but the Senate bill provided $2.0 billion more for
non-fossil energy measures, and another $5.1 billion more for tax incentives driven by the
renewable energy mandates. (For more details, see CRS Report RL31427, Omnibus Energy
Legislation: H.R. 4 Side-by-side Comparison.) Some version of these energy tax provisions
is expected to be incorporated into a new comprehensive energy bill, which is a top priority
for the 108th Congress.
On March 9, President Bush signed the Job Creation and Worker Assistance Act of
2002 (P.L. 107-147), a $42 billion, ten-year tax cut that retroactively extends several energy
tax provisions that had expired on December 31, 2001.
BACKGROUND AND ANALYSIS
Introduction
Energy tax policy involves the use of the government’s main fiscal instruments – taxes
(financial disincentives) and tax subsidies (or incentives) – to alter the allocation or
configuration of energy resources. Energy taxes and subsidies are intended to either correct
a problem or distortion in the energy markets or to achieve some social, economic
(efficiency, equity, or even macroeconomic), environmental, or fiscal objective.
The idea of applying tax policy instruments to the energy markets is not new, but until
the 1970s energy tax policy had been little used. Recurrent energy-related problems since the
1970s – oil embargoes, oil price and supply shocks, wide petroleum price variations and
price spikes, large geographical price disparities, tight energy supplies, rising oil import
dependence, as well as increased concern for the environment – have caused policymakers
to look toward energy taxes and subsidies with greater frequency.
This issue brief discusses the history, current posture, and the outlook for federal energy
tax policy. It also discusses recent energy tax proposals, focusing on the major energy tax
provisions included in omnibus energy legislation (H.R. 4) that is now in conference. (For
a general economic analysis of energy tax policy, see CRS Report RL30406, Energy Tax
Policy: An Economic Analysis.)
CRS-1

---

IB10054
01-02-03
Background
The history of federal energy tax policy can basically be divided into four eras: the oil
and gas period from 1916 to 1970, the energy crisis period of the 1970s, the free-market era
of the Reagan Administration, and the post-Reagan era – including the period since 1998,
which has witnessed a plethora of energy tax proposals to address recurring energy market
problems.
Energy Tax Policy From 1918-1970: Promoting Oil and Gas
Historically, federal energy tax policy was focused on increasing domestic oil and gas
reserves and production; there were no tax incentives for energy conservation or for
alternative fuels. Two oil/gas tax code preferences embodied this policy: 1) expensing of
intangible drilling costs (IDCs) and dry hole costs, which was introduced in 1916, and 2) the
percentage depletion allowance, first enacted in 1926 (coal was added in 1932).
Expensing of IDCs (such as labor costs, material costs, supplies, and repairs associated
with drilling a well) gave oil and gas producers the benefit of fully deducting from the first
year’s income (“writing off”) a significant portion of the total costs of bringing a well into
production, costs that would otherwise (i.e., in theory and under standard, accepted tax
accounting methods) be capitalized (i.e., written off during the life of the well as income is
earned). For dry holes, which comprised on average about 80% of all the wells drilled, the
costs were also allowed to be deducted in the year drilled (expensed) and deducted against
other types of income, which led to many tax shelters that benefitted primarily high-income
taxpayers. Expensing accelerates tax deductions, defers tax liability, and encourages oil and
gas prospecting, drilling, and the development of reserves.
The percentage depletion allowance for oil and gas permitted oil and gas producers to
claim 27.5% of revenue as a deduction for the cost of exhaustion or depletion of the deposit,
allowing deductions in excess of capital investment (i.e, in excess of adjusted cost depletion)
— the economically neutral method of capital recovery for the extractive industries.
Percentage depletion encourages faster mineral development than cost depletion (the
equivalent of depreciation of plants and equipment).
These and other tax subsidies discussed later (e.g., capital gains treatment of the sale
of successful properties, the special exemption from the passive loss limitation rules, and
special tax credits) reduced marginal effective tax rates in the oil and gas industries, reduced
production costs, and increased investments in locating reserves (increased exploration).
They also led to more profitable production and some acceleration of oil and gas production
(increased rate of extraction), and more rapid depletion of energy resources than would
otherwise occur. Such subsidies tend to channel resources into these activities that otherwise
would be used for oil and gas activities abroad or for other economic activities in the United
States. Relatively low oil prices encouraged petroleum consumption (as opposed to
conservation) and inhibited the development of alternatives to fossil fuels, such as
unconventional fuels and renewable forms of energy. Oil and gas production increased from
16% of total U.S. energy production in 1920 to 71.1% of total energy production in 1970 (the
peak year).
CRS-2

---

IB10054
01-02-03
Energy Tax Policy During the 1970s: Conservation and Alternative
Fuels
Three developments during the 1970s caused a dramatic shift in the focus of federal
energy tax policy. First, the large revenue losses associated with the oil and gas tax
preferences became increasingly hard to justify in the face of a progressively worsening fiscal
picture – increasing federal budget deficits – and in view of the longstanding economic
arguments against the special tax treatment for oil and gas. Second, heightened awareness
of environmental pollution and concern for environmental degradation, and the increased
importance of distributional issues in policy formulation (i.e., equity and fairness), lost the
domestic oil and gas industry much political support. Thus, it became more difficult to justify
percentage depletion and other subsidies, largely claimed by wealthy individuals and big
vertically integrated oil companies. More importantly, during the 1970s there were two
energy crises: the oil embargo of 1973 – also known as the first oil shock – and the Iranian
Revolution in 1979, which focused policymakers’ attention on the problems (alleged
“failures”) in the energy markets and how these problems reverberated throughout the
economy causing stagflation, shortages, productivity problems, rising import dependence,
and other economic and social problems.
These developments caused the increased use of fiscal subsidies or incentives – special
tax credits, deductions, exclusions etc.– to shift from oil and gas supply toward energy
conservation and alternative energy sources.
Three broad actions through the tax code were taken to implement the new energy tax
policy during the 1970s: First, the oil industry’s two major tax preferences — expensing of
IDCs and percentage depletion — were significantly reduced, particularly the percentage
depletion allowance, which was eliminated for the major integrated oil companies and
reduced for the remaining producers. Other oil and gas tax benefits were also cut back during
this period. For example, oil- and gas-fired boilers used in steam generation (for example,
to generate electricity) could no longer qualify for accelerated depreciation as a result of the
Energy Tax Act of 1978 (as discussed below).
The second broad policy action was the imposition of several new excise taxes on oil
and gas (and later coal). Chief among these was the windfall profit tax (WPT) on oil first
enacted in 1980 (P.L. 96-223). The WPT imposed an excise tax of 15% to 70% on the
difference between the market price of oil and a predetermined (adjusted) base price. This
tax, which was repealed in 1988, was part of a political compromise that decontrolled oil
prices (between 1971 and 1980 oil prices were controlled under President Nixon’s Economic
Stabilization Act of 1970 – the so-called “wage-price freeze”).
Another, but relatively small, excise tax on petroleum was instituted in 1980: the
environmental excise tax on crude oil received at a U.S. refinery. This tax, which was part
of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980
(P.L. 96-510), otherwise known as the “Superfund” program, was designed to charge oil
refineries for the cost of releasing any hazardous materials that resulted from the refining of
crude oil. The tax rate was set initially at 0.79¢ ($0.0079) per barrel, and was subsequently
raised to 9.7¢ per barrel. This tax expired at the end of 1995, but legislation has been
proposed since then to reinstate it as part of Superfund reauthorization. (See CRS Issue Brief
IB10011.)
CRS-3

---

IB10054
01-02-03
The third broad action taken during the 1970s to implement the new and refocused
energy tax policy was the introduction of numerous tax incentives for energy conservation,
the development of alternative fuels (renewable and non-conventional fuels), and the
commercialization of energy efficiency and alternative fuels technologies. Most of these new
tax subsidies were introduced as part of the Energy Tax Act of 1978 (ETA, P.L. 95-618), and
expanded under the WPT, which also introduced additional new energy tax subsidies. The
following list describes these:
! Residential and Business Energy Tax Credits. The ETA provided income
tax credits for homeowners and businesses that invested in a variety of
energy conservation products (e.g., insulation and other energy-conserving
components) and for solar and wind energy equipment installed in a
principal home or a business. The business energy tax credits were 10% to
15% of the investment in conservation or alternative fuels technologies,
such as synthetic fuels, solar, wind, geothermal, and biomass. These tax
credits were also expanded as part of the WPT but they generally expired
(except for business use of solar and geothermal technologies) as scheduled
either in 1982 or 1985. President Clinton’s FY2001 budget included a solar
credit that is very similar to the 1978 residential energy tax credits. A 15%
investment tax credit for business use of solar and geothermal energy, which
was made permanent, is all that remains of these tax credits.
! Tax Subsidies for Alcohol Fuels. The ETA also introduced the excise tax
exemption for gasohol, currently at 5.3¢ per gallon (out of a gasoline tax of
18.4¢/gal.). Subsequent legislation extended the exemption and introduced
the alcohol fuels “blenders” tax credits (which are in lieu of the exemption),
and the 10¢/gal., small ethanol producers tax credit. The 1998
Transportation Equity Act (P.L. 105-178) extended the exemption, which
was scheduled to expire, but at reduced rates. (For more information see
CRS Report 98-435 E, Alcohol Fuels Tax Incentives.)
! Gas Guzzler Tax. The ETA created a federal “gas guzzler” excise tax on
the sale of automobiles with relatively low fuel economy ratings. The tax
currently ranges from $1,000 for an automobile rated between 21.5 and 22.5
miles per gallon (mpg) to $7,700 for an automobile rated at less than 12.5
mpg. This tax is still in effect.
! Percentage Depletion for Geothermal. The ETA made geothermal deposits
eligible for the percentage depletion allowance, at the rate of 22%.
Currently the rate is 15%.
! §29 Tax Credit for Unconventional Fuels. The 1980 WPT included a $3.00
(in 1979 dollars) production tax credit to stimulate the supply of selected
unconventional fuels: oil from shale or tar sands, gas produced from either
geo-pressurized brine, Devonian shale, tight formations, and coalbed
methane, gas from biomass, and synthetic fuels from coal. Adjusted for
inflation, this credit, which is still in effect for wells, mines, or plants placed
in service by June 30, 1998 (for coal and biomass facilities) and December
31, 1991 (for all other facilities and wells), was over $6.00 per barrel of
CRS-4

---

IB10054
01-02-03
liquid fuels and about $1.00 per thousand cubic feet (mcf) of gas in 1999.
The credit for tight sands gas has been fixed at the 1979 rate of $0.50 per
mcf. (For more information, see CRS Report 97-679 E, Economic Analysis
of the Section 29 Tax Credit for Unconventional Fuels.)
! Tax-Exempt Interest on Industrial Development Bonds. The WPT made
facilities for producing fuels from solid waste exempt from federal taxation
of interest on industrial development bonds (IDBs). This exemption was for
the benefit of the development of alcohol fuels produced from biomass, for
solid-waste-to-energy facilities, for hydroelectric facilities, and for facilities
for producing renewable energy. IDBs, which provide significant benefits
to state and local electric utilities (public power), had become a popular
source of financing for renewable energy projects.
(During the 1970s there was also a significant increase in the number of energy laws and
regulations, such as the Corporate Average Fuel Economy (CAFE) standards to reduce
transportation fuel use, and other interventions through the budget and the credit markets.
This included some of the most extensive energy legislation ever enacted. These non-tax
policy measures are not discussed here.)
Reagan’s Free-Market Energy Tax Policy
The Reagan era, the period from 1981-1989, witnessed the first attempt to create a more
free-market energy tax policy by deregulating the energy markets, and by both reducing taxes
and eliminating tax subsidies, both for conservation, alternative fuels, and oil and gas.
President Reagan’s free-market views were well known prior to his election. During
the 1980 presidential campaign, he proposed repeal of the WPT, the deregulation of oil and
natural gas, and the minimization of government intervention, including reduced spending
and taxes. The Reagan Administration opposed using the tax law to promote either oil and
gas development, energy conservation, or the supply of alternative fuels. The idea was to
have a more neutral and less distortionary energy tax policy, which would make energy
markets work more efficiently and generate benefits to the general economy. The Reagan
Administration believed that the responsibility for commercializing conservation and
alternative energy technologies rested with the private sector and that high oil prices – real
oil prices (corrected for inflation) were at historically high levels in 1981 and 1982 – would
be ample encouragement for the development of alternative energy resources. High oil prices
in themselves create conservation incentives and stimulate oil and gas production.
The Reagan Administration’s energy tax policy was professed more formally in several
energy and tax policy studies, including its 1981 National Energy Policy Plan and the 1983
update to this plan; it culminated in a 1984 Treasury study on general tax reform, which also
proposed fundamental reforms of federal energy tax policy. In terms of actual legislation,
many of the Reagan Administration’s objectives were realized, although as discussed below
there were unintended effects. In 1982, the business energy tax credits on most types of non-
renewable technologies – those enacted under the ETA of 1978 – were allowed to expire as
scheduled; other business credits and the residential energy tax credits were allowed to expire
at the end of 1985, also as scheduled. Only the tax credits for business solar, geothermal,
ocean thermal and biomass technologies were extended. And as mentioned above, today the
CRS-5

---

IB10054
01-02-03
tax credit for business investment in solar and geothermal technologies, which has since been
reduced to 10%, is all that remains of these tax credits. A final accomplishment was the
repeal of the WPT, but not until 1988, the end of the Reagan term.
The Reagan Administration’s other energy tax policy proposals, however, were not
adopted. The tax incentives for oil and gas were not eliminated, although they were pared
back as part of the Tax Reform Act (TRA) of 1986:
! ‘Expensing’ was retained, but there were cutbacks for integrated oil
producers (who would be allowed to expense only 70% of such costs
and amortize – deduct evenly over time – the remaining 30%) and
other reductions;
! Percentage depletion would not apply to lease bonuses, advance
royalties, or any other payments made without regard to actual
production from the property. This amendment applied to geothermal
wells as well as oil and gas properties. Another section of TRA denied
capital gains treatment on certain dispositions of interest in oil and gas
property (and to geothermal property);
! The TRA replaced the old minimum taxes with a new alternative
minimum tax that placed limits on the tax benefits to oil/gas
producers from the expensing of IDCs and the percentage depletion
allowance. (Taxpayers must compute both the standard income tax
and the alternative minimum tax imposed on a variety of tax
preferences or subsidies, and pay the larger of the two.) However, in
an effort to mitigate any burdensome effects of this new tax, only the
excess of the deduction above 65% of net income was to be treated as
a preference item;
! Investments in oil and gas properties were exempted from the passive
loss limitation rules that were intended to curb tax shelter investments
– a working interest in an oil and gas property was not treated as a
passive activity. Thus any losses and credits derived from oil and gas
investment activity could be used as a tax shelter to offset the
taxpayer’s other income without limitations under the passive loss
rules.
While the Reagan Administration’s objective was to create a free-market energy policy,
significant liberalization of the depreciation system and reduction in marginal tax rates – both
the result of the Economic Recovery Tax Act of 1981 (ERTA, P.L. 97–34) – combined with
the regular investment tax credit and the business energy investment tax credits, resulted in
negative effective tax rates for many investments, including alternative energy investments
such as solar and synthetic fuels. (See, for instance: CRS Report 84-85 E. Effective Tax
Rates on Solar/Wind and Synthetic Fuels as Compared to Conventional Energy Resources.)
Also, the retention of percentage depletion and expensing of IDCs (even at the reduced rates)
rendered oil and gas investments still favored relative to investments in general. Other energy
tax policy developments during the Reagan era were as follows:
CRS-6

---

IB10054
01-02-03
! The Deficit Reduction Act of 1984 (P.L. 98-369) tinkered with several
energy tax provisions including the WPT and percentage depletion. Also,
the 1984 tax law extended several of the tax incentives for alcohol fuels: (1)
the tax exemption for alcohol fuels mixtures was raised from 5¢ to 6¢; (2)
the law retained the prior 9¢-per-gallon exemption for neat alcohol fuels,
i.e., those that are at least 85% alcohol, derived from alternative substances,
but it provided for a new exemption of 4.5¢ per gallon for alcohol fuels
derived from natural gas; (3) the alcohol “blenders” credit was raised from
50 cents to 60 cents per gallon; and (4) the duty on alcohol imported for use
as a fuel was increased from 50 cents to 60 cents per gallon.
! In 1986 two environmental excise taxes were enacted on oil: 1) under the
Superfund Amendments and Reauthorization Act of 1986 (P.L. 99-499), an
increase in the Superfund oil tax from 0.79¢ to 8.2¢-per-barrel on domestic
oil received and to 11.7¢ per barrel on imported petroleum. This tax
differential violated the General Agreement on Tariffs and Trade (GATT),
and the Steel Trade Liberalization Program Implementation Act of 1989
(P.L. 101-221) made the rates uniform at 9.7¢ per barrel; and 2) under the
Omnibus Budget Reconciliation Act of 1986 (P.L. 99-510), imposition of
the Oil Spill Liability Trust Fund excise tax at 1.3¢ per barrel, which was
subsequently raised to 5.0¢/barrel. Both these taxes expired at the end of
1995.
! In addition, the TRA of 1986 reduced the excise tax exemption for “neat”
alcohol fuels, from 9¢ per gallon to 6¢ per gallon. It also permitted alcohol
imported from certain Caribbean countries to enter free of the 60¢-per-
gallon duty. The TRA also repealed the tax-exempt financing provision for
alcohol-producing facilities and for certain steam-generating facilities.
Energy Tax Policy After Reagan
After the Reagan Revolution, several major energy and non-energy laws were enacted
that amended the energy tax laws in several ways, some major:
! Revenue Provisions of the Omnibus Reconciliation Act of 1990. President
George Herbert Bush’s first major tax law included numerous energy tax
incentives: 1) For conservation (and deficit reduction), the law increased the
gasoline tax by 5¢/gallon and doubled the gas-guzzler tax; 2) for oil and gas,
the law introduced a 10% tax credit for enhanced oil recovery expenditures,
liberalized some of the restrictions on the percentage depletion allowance,
and reduced the impact of the alternative minimum tax on oil and gas
investments; and 3) for alternative fuels, the law expanded the §29 tax credit
for unconventional fuels and introduced the tax credit for small producers
of ethanol used as a motor fuel.
! Energy Policy Act of 1992 (P.L. 102-486). This broad energy measure
introduced the §45 tax credit, at 1.5¢ per kilowatt hour, for electricity
generated from wind and “closed-loop” biomass systems. (Poultry litter was
CRS-7

---

IB10054
01-02-03
added later. This tax credit expired at the end of 2001 for new facilities.)
In addition, the 1992 law 1) added an income tax deduction for the costs,
up to $2,000, of clean-fuel powered vehicles; 2) liberalized the alcohol fuels
tax exemption; 3) expanded the §29 production tax credit for non-
conventional energy resources; 4) liberalized the tax breaks for oil and gas.
! Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66). President
Clinton proposed a differential Btu tax on fossil fuels (a broadly-based
general tax primarily on oil, gas and coal based on the British thermal units
of heat output), which was dropped in favor of a broadly applied 4.3¢/gallon
increase in the excise taxes on motor fuels, with revenues allocated for
deficit reduction rather than the various trust funds.
! Taxpayer Relief Act of 1997 (P.L. 105-34). This law includes a variety of
excise tax provisions for motor fuels, of which some involved tax reductions
on alternative transportation fuels, and some involved increases, such as on
kerosene, which on balance further tilted energy tax policy toward
alternative fuels.
! Tax Relief and Extension Act (Title V of P.L. 106-170). Enacted as part of
the Ticket to Work and Work Incentives Improvement Act of 1999 (P.L.
106-170), this Act extended and liberalized the 1.5¢/kwh renewable
electricity production tax credit, and renewed the suspension of the net
income limit on the percentage depletion allowance for marginal oil and gas
wells.
As this list suggests, the post-Reagan energy tax policy returned more to the
interventionist course established during the 1970s and primarily was directed at energy
conservation and alternative fuels, mostly for the purpose of reducing oil import dependence
and enhancing energy security. However, there is an environmental twist to energy tax policy
during this period, particularly in the more recent years, as the discussion of President
Clinton’s proposals will demonstrate. Fiscal concerns, which for most of that period created
a perennial search for more revenues to reduce budget deficits, have also driven energy tax
policy proposals during the post-Reagan era. This is underscored by proposals, which have
not been enacted, to impose broad-based energy taxes such as the Btu tax or the carbon tax
to mitigate greenhouse gas emissions.
Another interesting feature of the post-Reagan energy tax policy is that while the
primary focus continues to be energy conservation and alternative fuels, no energy tax
legislation has been enacted during this period that does not also include some, relatively
minor, tax relief for the oil and gas industry, either in the form of new tax incentives or
liberalization of existing tax breaks (or both).
Table 2 on page 16 summarizes current energy tax provisions and related revenue
effects. A minus (“-”) sign indicates revenue losses, which means that the provision is a tax
subsidy or incentive, intended to increase the subsidized activity (energy conservation
measures or the supply of some alternative and renewable fuel or technology); no minus sign
means that the provision is a tax, which means that it should reduce supply of, or the demand
CRS-8

---

IB10054
01-02-03
for, the taxed activity (either conventional fuel supply, energy demand, or the demand for
energy-using technologies, such as cars).
Energy Tax Proposals in the 106th Congress
Energy price volatility over the past few years has led to congressional action on energy
tax policy. This action was prompted by energy market problems which some had
characterized as an “energy crisis.”
First, there have been wide fluctuations in crude oil prices. Domestic crude oil prices
reached a low of just over $10 per barrel in the winter of 1998-1999, among the lowest crude
oil prices in history after correcting for inflation. From 1986-1999 oil prices averaged about
$17 per barrel, fluctuating from between $12 and $20 per barrel. These low oil prices hurt
oil producers, benefitted oil refiners, and encouraged consumption. They also served as a
disincentive to conservation and investment in energy efficiency technologies and
discouraged production of alternative fuels and renewable technologies. To address the low
oil prices, there were many tax bills in the first session of the106th Congress (1999) focused
on production tax credits for marginal or stripper wells, but they also included carryback
provisions for net operating losses, and other fossil fuels supply provisions.
By summer 1999, crude oil prices rose to about $20 per barrel, and peaked at more than
$30 per barrel by summer 2000, causing high gasoline, diesel, and heating oil prices. To
address these effects of high crude oil prices, legislative proposals again focused on
production tax credits and other supply incentives. The rationale was not tax relief for a
depressed industry but tax incentives to increase output, reduce prices, and provide price
relief to consumers.
In addition to high petroleum prices there were forces – some of which were understood
(factors such as environmental regulations and pipeline breaks) and others that are still are
not so clearly understood – that caused the prices of these petroleum products to spike. In
response, there were proposals in 2000 to either temporarily reduce or eliminate the federal
excise tax on gasoline, diesel, and other special motor fuels. The proposals aimed to help
consumers (including truckers) cushion the financial effect of the price spikes. (For an
analysis of this legislation, see CRS Report RL30497, Suspending the Gas Tax: Analysis of
S. 2285.) The Midwest gasoline price spike in summer 2000 kept interest in these excise tax
moratoria alive and generated interest in proposals for a windfall profit tax on oil companies
which, by then, were earning substantial profits from high prices. (For more detail on the
windfall profit tax on crude oil that was imposed from 1980 until its repeal in 1988, see CRS
Report 90-442, The Windfall Profit Tax on Crude Oil: Overview of the Issues.)
Despite numerous bills to address these issues, no major energy tax bill was enacted in
the 106th Congress. However, some minor amendments to energy tax provisions were
enacted as part of non-energy tax bills. This includes Title V of the Ticket to Work and
Work Incentives Improvement Act of 1999 (P. L. 106-170), enacted on December 1999.
Also, the 106th Congress did enact a package of $500 million in loan guarantees for small
independent oil and gas producers, which became law (P.L. 106-51) in August 1999.
CRS-9

---

IB10054
01-02-03
Energy Tax Action in the 107th Congress
In early 2001, the 107th Congress faced a combination of fluctuating oil prices, an
electricity crisis in California, and spiking natural gas prices. The gas prices had increased
steadily in 2000 and reached $9 per thousand cubic feet (mcf) at the outset of the 107th
Congress. At one point, spot market prices reached about $30 per mcf, the energy equivalent
of $175 per barrel of oil. The combination of energy problems had developed into an
“energy crisis,” that has prompted congressional action on energy taxes and other energy
policy measures.
Bush Administration Proposals
In 2001, the Bush Administration’s National Energy Policy report proposed a
comprehensive energy plan that included a limited number of energy tax measures, some of
which appeared in the Administration’s FY2002 and FY2003 budget requests and others that
appeared in the President’s 2002 global climate change initiative. Some of these proposals
were incorporated into the Job Creation and Worker Assistance Act and many appeared in
the House version of H.R. 4. (For more on Bush Administration energy policy, see CRS
Report RL31096. Bush Energy Policy: Overview of Major Proposals and Legislation.)
Job Creation and Worker Assistance Act (P.L. 107-147)
The Job Creation and Worker Assistance Act of 2002 (H.R. 3090) was signed into law
by President Bush on March 9, 2002. The Act provides a $42 billion, ten-year tax cut and it
retroactively extended several energy tax provisions:
! §45 Tax Credit for Electricity Produced From Wind, Biomass, and
Poultry Waste. The 1.5¢ per kilowatt hour (in real, 1992 dollars) tax credit
for electricity produced from wind technologies, “closed-loop” biomass, and
poultry waste (as described above), is available for 10 years after the
generating facility is placed in service, for which the previous deadline was
January 1, 2002. Section 603 of the law extends this placed-in-service
deadline to December 31, 2003.
! Tax Credit for Electric Vehicles. The onset of the phase-out of the $4,000
tax credit for the purchase of electric vehicles began on January 1, 2002.
Section 602 of the law defers the onset of the phase-out date by two years.
! Deduction for Clean-Fuel Vehicles and Certain Refueling Property.
The deduction for clean fuel vehicles, which ranges from $2,000 to $50,000,
is to be phased out over 3 years beginning on January 1, 2002. Section 606
of the law defers the start-up of the phase-out to January 1, 2004.
! Dyed Fuels Mandate. Beginning on January 1, 2002, registered terminals
were required to store both dyed diesel fuel and dyed kerosene in order to be
allowed to sell undyed diesel and kerosene. Section 615 of the law repeals
this mandate, retroactive to January 1, 2002.
CRS-10

---

IB10054
01-02-03
! Percentage Depletion Allowance. This measure allows a percentage of
gross income from marginal oil and natural gas wells to be deducted from
taxes. A limit on the allowance was set at 100% of net income, but it was
suspended from December 31, 1997, through January 1, 2002. Section 607
of the law extends this suspension through January 1, 2004.
Omnibus Energy Bills (H.R. 4)
In comparing House and Senate versions of H.R. 4, the House bill proposed larger
energy tax cuts, with some energy tax increases. It reduced energy taxes by about $36.5
billion over 10 years, in contrast to the Senate version, which cut about $15.5 billion over
10 years. However, the Joint Tax Committee estimates that Senate bill would have
encouraged use of an additional $5.1 billion in tax credits over 10 years for two mandates:
a Renewable Energy Portfolio Standard (Sec. 264, $0.3 billion) and Renewable Fuel
Standard (Sec. 820, $4.8 billion). Projected tax revenue effects are shown in Table 1.
The House version emphasized conventional fuels supply, including capital investment
incentives to stimulate production and distribution of oil, natural gas, and electricity. This
focus assumed that recent energy problems were due mainly to supply and capacity shortages
driven by economic growth and low energy prices. In the House bill, as a relative share in
dollar terms, about 75% of the tax cuts were for fossil fuels, 14% were for energy efficiency,
10% were for renewable and alternative fuels, and 1% were for miscellaneous provisions.
In comparison, the Senate bill provided a much smaller amount of tax incentives for
fossil fuels and nuclear power and somewhat fewer incentives for energy efficiency, but
provided more incentives for alternative and renewable fuels. Specifically, as a relative share
in dollar terms, about 43% of the tax cuts were for fossil fuels, 9% were for energy
efficiency, 23% were for renewable and alternative fuels, and 25% were for incentives driven
by the renewable energy mandates.
In contrasting tax provisions of the two bills, some notable differences follow.
Oil and Natural Gas Production. Section 2503 of the Senate bill creates a tax
credit for Alaskan natural gas and there is no related provision in the House bill. However,
Section 3309 of the House bill repeals a limit on the enhanced oil recovery tax credit and
there is no related provision in the Senate bill. Further, for percentage depletion, the House
bill has three provisions that have no match in the Senate bill: it suspends the 65% limit
(Section 3302), it extends the operating loss carryback to five years (Section 3305), and it
repeals the alternative minimum tax on intangible drilling costs (Section 3308).
Oil and Natural Gas Refining and Distribution. There are five House bill
provisions that have no matches in the Senate bill. These provisions are shortening of
accelerated depreciation for petroleum refining assets to seven years (Section 3203), phase
out of the 4.3 cent portion of tax on train diesel fuel (Section 3115), phase out of the 4.3 cent
portion of tax on barge diesel fuel (Section 3115), reduced tax on diesel fuel for highway
vehicles (Section 3116), and exemption of public power utilities from natural gas arbitrage
restrictions under tax exempt bond rules (Section 3213). However, there are also three Senate
bill provisions that have no matches in the House bill. These provisions are increased
exemptions from excise taxes on farm fuels (Section 2506), a new tax credit for excise taxes
CRS-11

---

IB10054
01-02-03
on refuse truck fuels (Section 2009), and expanded exemptions from the ad valorum tax on
certain airline fuels (Section 2506).
Coal. There is one House bill provision with no match in the Senate bill. Section 3209
of the House bill exempts certain stock acquisitions for electric power transmission
transactions from capital gains tax.
Electricity Restructuring. There is one House provision with no match in the
Senate bill. Section 3209 of the House bill creates an exemption from capital gains tax for
the acquisition of stock (or assets) of any controlled corporation in a qualifying electric
transmission transaction.
Energy Efficiency. All tax provisions have some representation in both versions of
the bill. The bills have somewhat different provisions for new homes, existing homes,
appliances, and energy management devices. The bills have identical or nearly identical
provisions for residential solar equipment, business fuel cells, and combined heat and power
(CHP).
Renewable and Alternative Fuels. There are five Senate bill provisions with no
matches in the House bill. These provisions extend a tax credit to small ethanol producer
cooperatives (Section 2005), allocate tax revenue from a 2.5 cent portion of fuel ethanol tax
to the Highway Trust Fund (Section 2006), extend the tax credit for ethanol blends to
Ethylene Tertiary Butyl Ether (ETBE) blends (Section 2007), create a tax credit for vegetable
oil used in biodiesel fuel (Section 2008), and create a tax credit for the retail sale of an
alternative fuel, including ethanol, compressed natural gas, and hydrogen (Section 2004).
Miscellaneous Energy Tax Proposals. There are four Senate bill provisions with
no matches in the House bill. These provisions direct the Treasury Department to study of
the effects of the §29 tax credit on the production of coalbed methane (Section 2309), direct
the Treasury Department to study tax issues resulting from electricity restructuring (Section
2401), direct the General Accounting Office (GAO) to study the effectiveness of tax
incentives for alternative-fueled vehicles and energy efficiency (Section 2502), and make
gasoline or diesel sold in duty-free shops subject to payment of customs duties (Section
2504). Also, there is one House proposal that has no match in the Senate bill. Section 3212
of the House bill repeals a dyeing requirement for tax-exempt diesel and kerosene sold at
terminal facilities. (For more details on energy tax measures in H.R. 4, see CRS Report
RL31427, Omnibus Energy Legislation: H.R. 4 Side-by-side Comparison.)
Renewable Energy Mandates. In addition to estimating the direct impact of tax
measures in H.R. 4, the Joint Tax Committee also estimates the indirect impact of the
Renewable Energy Portfolio Standard and the Renewable Fuels Standard on the use of
related tax provisions. This estimated effect of these mandates is shown in Table 1.
CRS-12

---

IB10054
01-02-03
LEGISLATION
P.L. 107-147, H.R. 3090
Job Creation and Worker Assistance Act of 2002. Has tax incentives for renewable
energy and alternative vehicles. House Committee on Ways and Means reported (H.Rept.
107-251) bill on October 17, 2001, with two-year extension of renewable energy production
tax credit. Passed House October 24. Senate Finance Committee reported (Committee Print
107-49) an amendment in the nature of a substitute with an amendment to the title on
November 9. Section 404 of the Senate version proposed one-year extension of renewable
energy production tax credit. Brought to the floor November 13. Amended in Senate
(S.Amdt. 2896) and passed Senate Feb.14, 2002. House approved agreement with Senate
Amendment March 7, 2002. Signed into law March 9, 2002.
H.R. 4 (House Version)
Securing America’s Future Energy (SAFE) Act of 2001. The energy tax provisions
include about $36.5 billion, over 10 years, of incentives for energy production and
conservation. The tax provision of the bill incorporate measures from H.R. 2511, Energy
Tax Policy Act. Introduced July 27, 2001; referred to Committee on Energy and Commerce,
and to the Committees on Science, Ways and Means, Resources, Education and the
Workforce, Transportation and Infrastructure, the Budget, and Financial Services. Passed
House, amended, August 2, 2001. The conference committee for H.R. 4 began work on June
27, 2002, but has yet to take up the tax provisions.
H.R. 4 (Senate Version)
Energy Policy Act of 2002. Division H has several tax provisions that provide about
$20.6 billion, over 10 years, of incentives for energy conservation and fossil fuels production.
In 2001, hearings were held on tax provisions in S. 389 (Republican bill) and S. 596
(Democratic bill). Many of the provisions in these two bills, some in amended form, were
put forth in S. 1979 (S.Rept. 107-140), which, in turn, was amended and incorporated into
S. 517. S. 517, in turn, was amended and incorporated into the Senate version of H.R. 4 as
an amendment in the nature of a substitute (S.Amdt. 2917). The Senate version of H.R. 4
passed the Senate April 25, 2002. The conference committee for H.R. 4 began work on June
27, 2002, but has yet to take up the tax provisions.
H.R. 1459 (Hayworth)
Electric Power Industry Tax Modernization Act. Provides for increased flexibility in
the treatment of tax-exempt bonds used to improve electric reliability, enhance transmission
infrastructure, and to facilitate access to the electric transmission grid. Introduced April 4,
2001; referred to Committee on Ways and Means.
H.R. 2511 (McCrery)
The Energy Tax Policy Act of 2001. Provides tax incentives to encourage energy
conservation, energy reliability, and energy production. Introduced July 17, 2001. Reported
(H.Rept. 107-157) by the House Committee on Ways and Means July 24, 2001. The bill was
incorporated into H.R. 4.
CRS-13

---

IB10054
01-02-03
S. 979 (Baucus)
Energy Tax Incentives Act of 2001. Creates several energy tax credits and incentives.
Reported (S.Rept. 107-140) March 1, 2002. S.Amdt. 3286 incorporated this bill into S. 517
(S.Amdt. 2917) April 23, 2002.
CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS
U.S. Congress. Joint Committee on Taxation. Estimated Revenue Effects of Division H of
H.R. 4, the “Energy Tax Incentives Act of 2002,” and Certain Mandates, as Amended
by the Senate. JCX-42-02] May 23, 2002. 4 p. [http://www.house.gov/jct/pubs02.html]
----- Comparison of Division C of H.R. 4, the “Energy Tax Policy Act of 2001,” as Passed
by the House of Representatives and Division H of H.R. 4, the “Energy Tax Incentives
Act of 2002,” as Amended by the Senate. [JCX-43-02] May 23, 2002. 56 p.
----- Estimates of Federal Tax Expenditures for Fiscal Years 2002-2006. (Energy taxes
appear on p. 20-21) [JCS-1-02] January 17, 2002.
----- Committee on Finance. The Role of Tax Incentives in Energy Policy. Hearings, July
10, 11, 2001. S. Hrg. 108-267. 226 p.
----- Committee on Finance. Energy Tax Issues. Hearings, July 18, 2000. S. Hrg. 106-711.
109 p.
FOR ADDITIONAL READING
Cato Institute. “Big Oil” at the Public Trough? An Examination of Petroleum Subsidies.
2001. 13 p.
Energy Information Administration. Federal Financial Interventions and Subsidies in the
E n e r g y M a r k e t s : P r i m a r y E n e r g y . S R / O I F / 1 9 9 9 / 0 3 .
[http://www.eia.doe.gov/oiaf/servicerpt/subsidy]
U.S. General Accounting Office. Alternative Motor Fuels and Vehicles: Impact on the
Transportation Sector. 2001. [GAO-01-957T] 7 p.
CRS Reports
CRS Report RL31427. Omnibus Energy Legislation: H.R. 4 Side-by-Side Comparison, by
Mark Holt and Carol Glover.
CRS Report RL30406. Energy Tax Policy: An Economic Analysis, by Salvatore Lazzari.
CRS Report RL30953. Energy Tax Incentives: A Comparison of the National Energy
Security Act of 2001 (S. 389) and the Democratic Alternative (S. 596), by Salvatore
Lazzari.
CRS-14

---

IB10054
01-02-03
Table 1. H.R. 4 Energy Tax Provisions: Summary of Ten-Year Revenue Loss by
Type of Incentive
($ millions)
House Version
Senate Version
House - Senate
Difference
FOSSIL FUELS
Oil & Gas Production
8,762
24.0%
3,615
17.5%
5,147
58.7%
Oil & Gas Refining and
7,719
21.1%
1,558
7.6%
6,161
79.8%
Distribution
Coal
2,991
8.2%
1,907
9.2%
1,084
36.2%
Electricity Restructuring
7,991
21.9%
1,839
8.9%
6,152
77.0%
Subtotal, Conventional
27,463
75.2%
8,919
43.2%
18,544
67.5%
EFFICIENCY, RENEWABLES, AND ALTERNATIVE FUELS
Energy Efficiency
5,048
13.8%
1,793
8.7%
3,255
64.5%
Renewable Energy &
3,515
9.6%
4,769
23.1%
-1,254
-35.7%
Alternative Fuels
Subtotal, Efficiency
8,563
23.5%
6,562
31.8%
2,001
23.4%
MISCELLANEOUS
485
1.3%
39 0.1%
446
92.0%
SUBTOTAL, DIRECT
36,511
100.0%
15,520
75.2%
20,991
57.5%
TAX PROVISIONS
MANDATES
Renewable Energy
0
0.0%
331
1.6%
-331
-----
Portfolio Standard
Renewable Fuels Standard
0
0.0%
4,777
23.2%
-4,777
-----
Subtotal, Mandates
0
0.0%
5,108
24.8%
-5,108
-----
GRAND TOTAL
36,511 100.0%
20,628
100.0%
15,883
43.5%
Source: Joint Tax Committee estimates.
CRS-15

---

IB10054
01-02-03
Table 2. FY2001 Energy Tax Provisions and Estimated Revenue Effects ($ millions)
Category
Provision
Major Limitations
Revenue Effect
CONVENTIONAL FOSSIL FUELS SUPPLY (bpd = barrels per day; < indicates less than)
% depletion–oil/gas
15% of sales (higher
for indep.,up to 1,000 or
- $300
for marginal wells)
equiv. bpd
Expensing of
100% deductible in
corporations expense only
- 600
IDC’s–oil/gas & other
first year
70% of IDC’s
fuels
Enhanced Oil Recovery
15% of the costs
only for specific tertiary
- 200
Credit
methods
% depletion–coal and
10% for coal
must be < 50% of taxable
- < 50
other fuels
income
coal excise tax (fy2000)
$1.10/ton (0.55 for
not to exceed 4.4% of sales
527
surface mines)
price
ALTERNATIVE AND RENEWABLE FUELS
§29, production tax
$6.25/bar. (or
biogas, coal synfuels,
- 1,500
credit
$1.00/mcf)
coalbed methane, etc.
5.3¢ exemption for
exemption from motor
for biomass ethanol only
- 880
gasohol
fuels taxes
§45 credit for renewable
1.7¢/kWh.
wind, closed loop biomass,
- 100
electricity
and poultry waste
exclusion of interest on
interest income exempt
for hydroelectric or
-100
S&L bonds
from tax
biomass facilities used to
produce electricity
tax credits for alcohol
53¢/gal+ 10¢/gal for
only for biomass ethanol
- < 50
fuels
small producer credit
(e.g., corn)
deduction for clean-fuel
$2,000 for cars;
CNG, LNG, LPG,
- < 50
vehicles
$50,000 for
hydrogen, neat alcohols,
trucks;$100,000
and electricity; phases out
deduction for refueling
over 2002-2004
facilities
tax credit for electric
10%, up to $4,000
phase-out from 2002-2004
- < 50
vehicles
credit for solar &
10% investment tax
utilities excluded
- < 50
geothermal tech.
credit for businesses
ENERGY CONSERVATION
fuels taxes (FY2000)
18.4¢/gal of gas
4.4¢-24.4¢ for other fuels
33,500
mass trans. subsidies
exclusion of $65/month
up to $175/month for
- 3,600
parking benefits
gas-guzzler tax (FY2000)
$1,000-$7,700/car
to limos and vehicles
71
weighing 6,000 lbs. or less
exclusion for utility
subsidies not taxable as
any energy conservation
- < 50
conservation subsidies
income
measure
Source: Joint Tax Committee and Internal Revenue Service estimates.
CRS-16

---