Order Code IB10054
Issue Brief for Congress
Received through the CRS Web
Energy Tax Policy
Updated March 28, 2003
Salvatore Lazzari
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Introduction
Background
Energy Tax Policy From 1918-1970: Promoting Oil and Gas
Energy Tax Policy During the 1970s: Conservation and Alternative Fuels
Reagan’s Free-Market Energy Tax Policy
Energy Tax Policy After Reagan
Energy Tax Proposals in the 106th Congress
Energy Tax Action in the 107th Congress
Omnibus Energy Bills (H.R. 4)
Job Creation and Worker Assistance Act (P.L. 107-147)
Energy Tax Action in the 108th Congress
The Energy Tax Incentives Act of 2003 (S. 597)
Bush Administration Proposals
LEGISLATION
CONGRESSIONAL HEARINGS, REPORTS, AND DOCUMENTS
FOR ADDITIONAL READING

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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
The Reagan Administration, using a free-
Administration’s FY2004 budget proposal
market approach, advocated repeal of the
includes several energy tax incentives.
windfall profit tax on oil and the repeal or
phase-out of most energy tax preferences —
H.R. 4, omnibus energy legislation in the
for oil and gas, as well as alternative fuels.
107th Congress that would have expanded
Due to the combined effects of the Economic
energy tax incentives significantly, was
Recovery Tax Act and the energy tax subsi-
dropped in conference. Both the Senate and
dies that had not been repealed, which to-
House versions of H.R. 4 included energy tax
gether created negative effective tax rates in
measures for qualifying energy producers and
some cases, the actual energy tax policy dif-
consumers. The bills included tax measures
fered from the stated policy.
for oil and gas production, oil and gas refining
and distribution, coal production, electricity
The George H. Bush and Bill Clinton
industry restructuring, energy efficiency,
years witnessed a return to a much more
renewable and alternative fuels, and several
activist energy tax policy, with an emphasis on
miscellaneous items. In terms of revenue loss,
energy conservation and alternative fuels.
the House bill would have cut energy taxes by
While the original aim was to reduce demand
$36.5 billion over the ten-year period FY2002
for imported oil, energy tax policy is also
- FY2011. In contrast, the Senate bill’s ten-
being increasingly viewed as a tool for achiev-
year projected revenue loss was about $15.5
ing environmental and fiscal objectives. The
billion. Also, in 2002 certain energy tax provi-
current energy tax structure is dominated by
sions that had expired were extended retroac-
revenue loss for a long-standing gasoline tax.
tively as part of Job Creation and Worker
However, recent debates over energy tax
Assistance Act (P.L. 107-147). On March 11,
policy for fuels and electricity cover a wide
2003, four bipartisan Senate committee lead-
range of tax measures for fossil fuels, alterna-
ers introduced S. 597, the Energy Tax Incen-
tive fuels, renewable energy, and energy
tives Act of 2003, which is virtually the same
efficiency.
as the energy tax incentives in the Senate
version of the comprehensive energy legisla-
The Clinton Administration’s energy tax
tion that failed in 2002.
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
On March 11, 2003, four bipartisan Senate committee leaders introduced S. 597, the
Energy Tax Incentives Act of 2003, which is virtually the same as the energy tax incentives
in the Senate version of the comprehensive energy legislation that failed in 2002. The
President’s FY2004 budget proposes a limited number of energy tax incentives – both new
incentives, and liberalization of existing energy tax subsidies. On November 13, 2002, the
conference committee dropped its consideration of H.R. 4, the comprehensive energy bill,
after eight sessions failed to reconcile major differences. Both the Senate and House versions
of H.R. 4 included a package of energy tax cuts, primarily tax incentives (or subsidies) for
qualifying energy producers and consumers. Some version of these energy tax provisions is
expected to be incorporated into a new comprehensive energy bill, which is a top priority for
the 108th Congress. On March 9, President Bush signed the Job Creation and Worker
Assistance Act of 2002 (P.L. 107-147), a $42 billion, ten-year tax cut that retroactively
extends several energy tax provisions that had expired on December 31, 2001.
BACKGROUND AND ANALYSIS
Introduction
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.)
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,
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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).
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
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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.)
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
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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
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.)
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! 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 (CAFÉ) 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
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.
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The Reagan Administration’s other energy tax policy proposals, however, were not
adopted. The tax incentives for oil and gas were not eliminated, although they were pared
back as part of the Tax Reform Act (TRA) of 1986:
! ‘Expensing’ was retained, but there were cutbacks for integrated oil
producers (who would be allowed to expense only 70% of such costs
and amortize – deduct evenly over time – the remaining 30%) and
other reductions;
! Percentage depletion would not apply to lease bonuses, advance
royalties, or any other payments made without regard to actual
production from the property. This amendment applied to geothermal
wells as well as oil and gas properties. Another section of TRA denied
capital gains treatment on certain dispositions of interest in oil and gas
property (and to geothermal property);
! The TRA replaced the old minimum taxes with a new alternative
minimum tax that placed limits on the tax benefits to oil/gas
producers from the expensing of IDCs and the percentage depletion
allowance. (Taxpayers must compute both the standard income tax
and the alternative minimum tax imposed on a variety of tax
preferences or subsidies, and pay the larger of the two.) However, in
an effort to mitigate any burdensome effects of this new tax, only the
excess of the deduction above 65% of net income was to be treated as
a preference item;
! Investments in oil and gas properties were exempted from the passive
loss limitation rules that were intended to curb tax shelter investments
– a working interest in an oil and gas property was not treated as a
passive activity. Thus any losses and credits derived from oil and gas
investment activity could be used as a tax shelter to offset the
taxpayer’s other income without limitations under the passive loss
rules.
While the Reagan Administration’s objective was to create a free-market energy policy,
significant liberalization of the depreciation system and reduction in marginal tax rates – both
the result of the Economic Recovery Tax Act of 1981 (ERTA, P.L. 97–34) – combined with
the regular investment tax credit and the business energy investment tax credits, resulted in
negative effective tax rates for many investments, including alternative energy investments
such as solar and synthetic fuels. (See, for instance: CRS Report 84-85 E. Effective Tax
Rates on Solar/Wind and Synthetic Fuels as Compared to Conventional Energy Resources.)
Also, the retention of percentage depletion and expensing of IDCs (even at the reduced rates)
rendered oil and gas investments still favored relative to investments in general. Other energy
tax policy developments during the Reagan era were as follows:
! The Deficit Reduction Act of 1984 (P.L. 98-369) tinkered with several
energy tax provisions including the WPT and percentage depletion. Also,
the 1984 tax law extended several of the tax incentives for alcohol fuels: (1)
the tax exemption for alcohol fuels mixtures was raised from 5¢ to 6¢; (2)
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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
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
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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
for, the taxed activity (either conventional fuel supply, energy demand, or the demand for
energy-using technologies, such as cars).
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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 carry back
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.
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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 prompted congressional action on a comprehensive energy policy bill – the first
since 1992 – which included a significant expansion of energy tax incentives and subsidies
and other energy policy measures.
Omnibus Energy Bills (H.R. 4)
In comparing the energy tax measures of the House and Senate versions of H.R. 4, the
House bill proposed larger energy tax cuts, with some energy tax increases. It would have
reduced energy taxes by about $36.5 billion over 10 years, in contrast to the Senate version,
which cut about $15.5 billion over 10 years. However, the Joint Tax Committee estimates
that Senate bill would have encouraged use of an additional $5.1 billion in tax credits over
10 years for two mandates: a Renewable Energy Portfolio Standard (Sec. 264, $0.3 billion)
and Renewable Fuel Standard (Sec. 820, $4.8 billion).
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 would have provided a much smaller amount of tax
incentives for fossil fuels and nuclear power and somewhat fewer incentives for energy
efficiency, but provided more incentives for alternative and renewable fuels. Specifically, as
a relative share in dollar terms, about 51% of the tax cuts were for fossil fuels, 14% were for
energy efficiency, 23% were for renewable and alternative fuels, and 25% were for incentives
driven by the renewable energy mandates. (For more details, see CRS Report RL31427,
Omnibus Energy Legislation: H.R. 4 Side-by-side Comparison.) A comparison of the
revenue effects of these two bills is in table 1, at the end of the issue brief.
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
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January 1, 2002. Section 603 of the law extends this placed-in-service
deadline to December 31, 2003.
! Tax Credit for Electric Vehicles. The onset of the phase-out of the $4,000
tax credit for the purchase of electric vehicles began on January 1, 2002.
Section 602 of the law defers the onset of the phase-out date by two years.
! Deduction for Clean-Fuel Vehicles and Certain Refueling Property.
The deduction for clean fuel vehicles, which ranges from $2,000 to $50,000,
is to be phased out over 3 years beginning on January 1, 2002. Section 606
of the law defers the start-up of the phase-out to January 1, 2004.
! Dyed Fuels Mandate. Beginning on January 1, 2002, registered terminals
were required to store both dyed diesel fuel and dyed kerosene in order to be
allowed to sell undyed diesel and kerosene. Section 615 of the law repeals
this mandate, retroactive to January 1, 2002.
! Percentage Depletion Allowance. This measure allows a percentage of
gross income from marginal oil and natural gas wells to be deducted from
taxes. A limit on the allowance was set at 100% of net income, but it was
suspended from December 31, 1997, through January 1, 2002. Section 607
of the law extends this suspension through January 1, 2004.
Energy Tax Action in the 108th Congress
The Energy Tax Incentives Act of 2003 (S. 597)
With the exception of two deleted provisions, both relatively minor, S. 597 is
substantially similar to the energy tax incentives legislation (S. 1979) that was brought to the
floor in April, 2002 and incorporated into the Senate’s version of H.R. 4. (For more
information see CRS Report RL31828. The Energy Tax Incentives Act of 2003 (S. 597):
Summary of Provisions.) The House Ways and Means Committee may be marking up within
weeks a scaled-back version of the energy tax incentives bill (H.R.2511) it approved in the
last Congress.
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.)
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The President’s FY2004 budget, promulgated in February 2003, proposes a limited
number of energy tax incentives – both new incentives, and liberalization of existing energy
tax subsidies:
! Extend and Liberalize the §45 Tax Credit for Electricity Produced from
Wind, Biomass, and Poultry Waste. The FY2004 budget proposes to
extend the placed-in-service rule for wind and biomass facilities by an
additional two years through December 31, 2005. In addition, the definition
of biomass would be liberalized to include some types of timber and
agricultural waste. Other liberalizations are proposed.
! Tax Credit For Residential Solar Energy Systems. Homeowners
purchasing solar energy heating or cooling equipment (including water
heating equipment) would qualify for a 15% nonrefundable income tax
credit.
! Tax Credit for Hybrid and Fuel Cell Vehicles. An income tax credit, up
to $4,000 would be provided to taxpayers that purchase fuel efficient hybrid
vehicles; an income tax credit up to $8,000 would be provided to taxpayers
that purchase a qualified fuel cell vehicle.
! Provide Tax Credit for Production of Landfill Gas. Production and sales
of landfill gas from new facilities – those placed in service from January 1,
2003 through December 31, 2010 – would be permitted to qualify for the
existing income tax credit for fuels produced from an non-conventional
energy resource under §29 of the tax code.
! Tax Credit for Combined Heat and Power Systems. Combined heat and
power systems – cogeneration systems that are more energy efficient than
a conventional generation and heating technologies – would be defined as
energy property, thus qualifying for the 10% investment tax credit under
current law (which is allowed for business investment in solar energy
equipment). Qualifying systems would have to meet capacity, output, and
efficiency criteria.
! Extension of Excise Tax Exemption and Equivalent Income Tax Credit.
The current 5.2¢/gallon excise tax exemption for 10% alcohol-gasoline fuel
blends (which generally expires on September 30, 2007) and the equivalent
income tax credit of 52¢ per gallon of ethanol (which expires on December
31, 2007) are extended through December 31, 2010.
! Allocate 2.5¢ Portion of Gasohol Tax Rate to the Highway Trust Fund.
The 2.5¢ portion of the taxable part of the excise tax on ethanol-gasoline
blends would be allocated from the general fund into the Highway Trust
Fund.
! Extension of Abandoned Mine Land Reclamation Fees. The current fees
on the amount of coal mined – which range form 10¢/ ton to 35¢/ton,
depending on the type of mine and coal – would be extended from
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September 30, 2004, until most significant abandoned mine land problems
are fixed.
! Reform the Current Tax Treatment of Nuclear Decommissioning Costs.
The FY2004 budget proposes to repeal some of the current law restrictions
to the deductions for nuclear decommissioning costs. In addition, the budget
proposes more liberal treatment of such costs.
LEGISLATION
H.R. 109 (Hayworth)
Amends the Internal Revenue Code of 1986 to allow a credit for residential solar energy
property. Introduced January 7, 2003; referred to Committee on Ways and Means.
H.R. 465 (King)
Amends the Internal Revenue Code of 1986 to allow allocation of small ethanol
producer credit to patrons of cooperative, and for other purposes. Introduced January 29,
2003; referred to Committee on Ways and Means.
H.R. 497 (Sensenbrenner)
Amends the Internal Revenue Code of 1986 to suspend all motor fuel taxes for six
months, and permanently repeals the 4.3-cent per gallon increases in motor fuel taxes
enacted in 1993. Introduced January 29, 2003; referred to Committee on Ways and Means.
S. 154 (Dayton)
Provides emergency disaster assistance to agricultural producers, imposes tariff-rate
quotas on certain casein and milk protein concentrates, and amends the Internal Revenue
Code of 1986 to provide tax relief for farmers and the producers of biodiesel, and for other
purposes. Introduced January 14, 2003; referred to Committee on Finance.
S. 207 (Smith)
Amends the Internal Revenue Code of 1986 to provide a 10-year extension of the credit
for producing electricity from wind. Introduced January 23, 2003; referred to Committee on
Finance.
S. 240 (Fitzgerald)
Amends the Internal Revenue Code of 1986 to allow allocation of small ethanol
producer credit to patrons of cooperative, and for other purposes. Introduced January 29,
2003; referred to Committee on Finance.
S. 597 (Grassley)
Amends the Internal Revenue Code of 1986 to provide tax incentives for oil, gas, and
coal, and for energy efficiency and alternative and renewable fuels. Also, addresses several
tax issues of concern to the electric utility industry in a restructured environment. Introduced
on March 11, 2003; referred to Committee on Finance.
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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.
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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.
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Table 2. Energy Tax Provisions and Estimated Revenue Effects (FY2003, $ millions)
Category
Provision
Major Limitations
Revenue Effect
CONVENTIONAL FOSSIL FUELS SUPPLY (bpd = barrels per day; < indicates less than)
% depletion–oil/gas
15% of sales (higher
for indep.,up to 1,000 or
- $400
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 (FY2001)
$1.10/ton (0.55 for
not to exceed 4.4% of sales
550
surface mines)
price
ALTERNATIVE AND RENEWABLE FUELS
§29, production tax
$6.25/bar. (or
biogas, coal synfuels,
- 1,000
credit
$1.00/mcf)
coalbed methane, etc.
5.3¢ exemption for
exemption from motor
for biomass ethanol only
- 1,100
gasohol
fuels taxes
§45 credit for renewable
1.7¢/kWh.
wind, closed loop biomass,
- < 50
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
29,600
mass trans. subsidies
exclusion of
up to $190/month for
- 3,700
$100/month
parking benefits
gas-guzzler tax (FY2001)
$1,000-$7,700/car
to limos and vehicles
78
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.
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