Order Code IB10054
CRS Issue Brief for Congress
Received through the CRS Web
Energy Tax Policy
Updated June 17, 2005
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 to 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 Incentives in Comprehensive Energy Legislation
Brief History of Comprehensive Energy Policy Proposals
Energy Tax Action in the 107th Congress
Energy Tax Action in the 108th Congress
Energy Tax Provisions in the Working Families Tax Relief Act of 2004
Energy Tax Provisions of the “Jobs” Bill
Current Posture of Energy Tax Policy
Energy Tax Policy Outlook
H.R. 6 (The Energy Policy Act of 2005)
LEGISLATION
FOR ADDITIONAL READING


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Energy Tax Policy
SUMMARY
Historically, U.S. federal energy tax
in motor fuels taxes by 4.3¢/gallon. The
policy promoted the supply of oil and gas.
George W. Bush Administration has proposed
However, the 1970s witnessed (1) a signifi-
a limited number of energy tax measures, but
cant cutback in the oil and gas industry’s tax
the 106th-108th Congresses have considered
preferences, (2) the imposition of new excise
comprehensive energy legislation, which
taxes on oil, and (3) the introduction of nu-
included numerous energy tax incentives to
merous tax preferences for energy conserva-
increase the supply of, and reduce the demand
tion, the development of alternative fuels, and
for, fossil fuels and electricity, and for energy
the commercialization of the technologies for
efficiency in residential and commercial
producing these fuels (renewables such as
buildings as well as for more energy efficient
solar, wind, and biomass, and non-conven-
vehicles. They also included tax incentives for
tional fossil fuels such as shale oil and coalbed
several types of alternative and renewable
methane).
resources such as solar and geothermal. Be-
cause of controversy over either corporate
The Reagan Administration, using a free-
average fuel economy standards, the Alaskan
market approach, advocated repeal of the
national wildlife refuge, or methyl-tertiary
windfall profit tax on oil and the repeal or
butyl ether, each of these attempts failed.
phase-out of most energy tax preferences —
for oil and gas, as well as alternative fuels.
The Working Families Tax Relief Act of
Due to the combined effects of the Economic
2004 (P.L. 108-311), which was signed into
Recovery Tax Act and the energy tax subsi-
law by the President on October 4, 2004,
dies that had not been repealed, which to-
retroactively extended four energy tax subsi-
gether created negative effective tax rates in
dies. The American Jobs Creation Act of 2004
some cases, the actual energy tax policy dif-
(P.L. 108-357), signed on October 22, 2004,
fered from the stated policy.
contains several energy-related tax breaks that
were in the comprehensive energy bills. The
The George H. W. Bush and Bill Clinton
current energy tax structure is dominated by
years witnessed a return to a much more
revenues from a long-standing gasoline tax,
activist energy tax policy, with an emphasis on
and tax incentives for alternative and renew-
energy conservation and alternative fuels.
able fuels supply relative to energy from
While the original aim was to reduce demand
conventional fossil fuels.
for imported oil, energy tax policy was also
increasingly viewed as a tool for achieving
An $8.1 billion, 11-year energy tax cut
environmental and fiscal objectives.
was approved by the House as part of compre-
hensive energy legislation (H.R. 6); the Senate
The Clinton Administration’s energy tax
Finance Committee is marking up a $16.1
policy emphasized the environmental benefits
billion 11-year energy tax package tilted less
of reducing greenhouse gases and global
toward traditional fossil fuels and more to-
climate change, but it will be remembered for
ward energy efficiency and renewable fuels
its failed proposal to enact a broadly based
than the House bill. The FY2006 budget
energy tax based on Btu’s (British Thermal
includes about $6.7 billion in energy tax
Units) and its 1993 across-the-board increase
incentives (over 10 years).
Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
On June 16, 2005, the Senate Finance Committee marked up an $18.4 billion, 11-year
energy tax incentives package that includes $14.0 billion in energy tax cuts, and $4.4 billion
in tax increases (both energy and non-energy). On April 13, 2005, the House approved a
comprehensive energy bill (H.R. 6) with $8.1 billion of energy tax cuts over 11 years. On
February 7, 2005, President Bush unveiled his FY2006 budget proposal, which included $6.7
billion in energy tax incentives (over 10 years). On October 4, 2004, the President signed into
law the Working Families Tax Relief Act of 2004 (P.L. 108-311), a $146 billion package of
tax breaks that retroactively extended four energy tax subsidies. On October 6, 2004, the
President signed into law the American Jobs Creation Act of 2004 (P.L. 108-357), containing
some of the energy tax breaks that the Congress had been attempting to pass as part of
comprehensive energy legislation.
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. In theory, energy taxes and subsidies are, like tax policy
instruments in general, 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. In practice, however, energy tax policy in the United
States is made in a political setting, being determined by the views and interests of the key
players in this setting: politicians, special interest groups, bureaucrats, and academic
scholars. This implies that it does not generally, if ever, adhere to the principles of
economic, or public finance, theory alone; that more often than not, energy tax policy may
compound existing distortions, rather than correct them.

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, except for the oil and gas industry.
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 outlook for federal energy tax
policy. It also discusses recent energy tax proposals, focusing on the major energy tax
provisions that were debated as part of omnibus energy legislation in the 108th Congress (e.g.,
H.R. 6), which may be reintroduced in the 109th Congress. (For a general economic analysis
of energy tax policy, see CRS Report RL30406, Energy Tax Policy: An Economic Analysis.)
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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 to 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).
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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 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 federal energy tax policy to shift from oil and gas supply
toward energy conservation (reduced energy demand) 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
penalizing the use of conventional fossil fuels, particularly oil and gas (and later coal). The
Energy Tax Act of 1978 (ETA, P.L. 95-618) created a federal “gas guzzler” excise tax on the
sale of automobiles with relatively low fuel economy ratings. This tax, which is still in
effect, 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. Chief among the taxes
on oil was the windfall profit tax (WPT) 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”). (For more detail on the windfall profit tax on crude oil that was
imposed from 1980 until its repeal in 1988, see archived CRS Report 90-442, The Windfall
Profit Tax on Crude Oil: Overview of the Issues
, available from the author.)
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, 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
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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.
The third broad action taken during the 1970s to implement the new and refocused
energy tax policy was the introduction of numerous tax incentives or subsidies — special tax
credits, deductions, exclusions, etc. — 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 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, recently at 5.2¢ per gallon out of a gasoline tax of
18.4¢/gal. Subsequent legislation extended the exemption and converted it
into an immediate tax credit (currently at 51¢/gallon of ethanol).
! 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. In current dollars
this credit, which is still in effect, was $6.40 per barrel of liquid fuels and
about $1.13 per thousand cubic feet (mcf) of gas in 2003.
! 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
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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.
Some of these incentives — for example, the residential energy tax credits — have since
expired, but others remain and still new ones have been introduced, such as the §45
renewable electricity tax credit, which was introduced in 1992 and expanded under the
American Jobs Creation Act of 2004 (P.L. 108-357). The important point is that this
approach toward energy tax policy — subsidizing a plethora of different forms of energy
(both conventional and renewable) and providing incentives for diverse energy conservation
(efficiency) technologies in as many sectors as possible has been the paradigm followed by
policymakers since the 1970s. (A significant increase in nontax interventions in the energy
markets — 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 — has also been a significant feature of energy policy since the 1970s.
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 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.
President Reagan’s free-market views were well known prior to his election. During
the 1980 presidential campaign, he proposed repeal of the WPT, deregulating oil and natural
gas prices, and minimizing government intervention in the energy markets. 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. 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.
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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. 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.
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 H. W. 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. For new facilities, this tax credit expired at the end of 2001 and
again in 2003 but has been retroactively extended by recent tax legislation
(as discussed below.) 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.
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! Tax Relief and Extension Act. Enacted as Title V of the Ticket to Work and
Work Incentives Improvement Act of 1999 (P.L. 106-170), it 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 Clinton years. 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).
Energy Tax Incentives in
Comprehensive Energy Legislation
Several negative energy market developments since about 1998, which some had
characterized as an “energy crisis,” had led to congressional action on comprehensive energy
proposals, which included numerous energy tax incentives. And with the exception of two
recent tax bills enacted in October 2004, which included a limited number of sundry energy
tax incentives, each of these bills has failed.
Brief History of Comprehensive Energy Policy Proposals
Although the primary rationale for comprehensive energy legislation has been spiking
petroleum prices, and to a lesser extent spiking natural gas and electricity prices, the origin
of these bills was the very low crude oil prices of the late 1990s. Domestic crude oil prices
reached a low of just over $10 per barrel in the winter of 1998-1999, among the lowest crude
oil prices in history after correcting for inflation. From 1986-1999 oil prices averaged about
$17 per barrel, fluctuating from between $12 and $20 per barrel. These low oil prices hurt
oil producers, benefitted oil refiners, and encouraged consumption. They also served as a
disincentive to conservation and investment in energy efficiency technologies and
discouraged production of alternative fuels and renewable technologies. To address the low
oil prices, there were many tax bills in the first session of the 106th Congress (1999) focused
on production tax credits for marginal or stripper wells, but they also included carryback
provisions for net operating losses, and other fossil fuels supply provisions.
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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.
Despite numerous bills to address these issues, no major energy tax bill was enacted in
the 106th Congress. However, some minor amendments to energy tax provisions were
enacted as part of non-energy tax bills. This includes Title V of the Ticket to Work and
Work Incentives Improvement Act of 1999 (P.L. 106-170), enacted on December 1999.
Also, the 106th Congress did enact a package of $500 million in loan guarantees for small
independent oil and gas producers, which became law (P.L. 106-51) in August 1999.
Energy Tax Action in the 107th Congress
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,” which 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.
In 2002, the House and Senate approved two distinct versions of an omnibus energy bill,
H.R. 4. While there were substantial differences in the non-tax provisions of the bill, the
energy tax measures also differed significantly. 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 bill, which cut about $18.3 billion over 10
years, including about $5.1 billion in tax credits over 10 years for two mandates: a renewable
energy portfolio standard ($0.3 billion) and a renewable fuel standard ($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 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
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alternative and renewable fuels. The conference committee on H.R. 4 could not resolve
differences, so the bills were dropped on November 13, 2002.
Energy Tax Action in the 108th Congress
On the House side, on April 3, 2003, the Ways and Means Committee (WMC) voted
24-12 for an energy tax incentives bill (H.R. 1531) that was incorporated into H.R. 6 and
approved by the House on April 11, 2003, by a vote of 247-175. The House version of H.R.
6 provided about $17.1 billion of energy tax incentives and included just under $0.1 billion
($83 million) of non-energy tax increases, or offsets. This bill was a substantially scaled-
down version of the House energy tax bill H.R. 2511 (107th Congress), which was
incorporated into H.R. 4, the House energy bill of the 107th Congress that never became law.
After returning from the August 2003 recess, a House and Senate conference committee
negotiated differences among provisions in three energy policy bills: the House and Senate
versions of H.R. 6, and a substitute to the Senate Finance Committee (SFC) bill — a
modified (or amended) version of S. 1149 substituted for Senate H.R. 6 in conference as
S.Amdt. 1424 and S.Amdt. 1431.
On November 14, 2003, House and Senate conferees reconciled the few remaining
differences over the two conference versions of H.R. 6, which primarily centered on several
energy tax issues — ethanol tax subsidies, the §29 unconventional fuels tax credit, tax
incentives for nuclear power, and clean coal. On November 18, 2003, the House approved,
by a fairly wide margin (246-180), the conference report containing about $23.5 billion of
energy tax incentives. However, with the proposed ethanol mandate, which would further
reduce energy tax receipts — the 10-year revenue loss was projected to be around $26
billion. On November 24, Senate Republicans put aside attempts to enact H.R. 6. A number
of uneasy alliances pieced together to bridge contentious divides over regional issues as
varied as electricity, fuel additives (MTBE), and natural gas subsidies, failed to secure the
necessary 60 votes to overcome a Democratic filibuster before Congress’s adjournment for
the holiday season. This represented the third attempt to pass comprehensive energy
legislation, a top priority for Republicans and for President Bush.
Republicans introduced a smaller energy bill as S. 2095 on February 12, 2004. S. 2095
included a slightly modified version of the amended energy tax bill S. 1149; the tax
provisions of S. 2095 were added to the export tax repeal bill S. 1637, on April 5, 2004. The
Senate approved S. 1637, with the energy tax measures, on May 11. H.R. 4520, the House
version of the export tax repeal legislation, did not contain energy tax measures; they were
still incorporated into H.R. 6.
Energy Tax Provisions in the Working Families Tax Relief Act of 2004.
After some existing energy tax incentives expired, the 108th Congress enacted retroactive
extension of several of the provisions as part of the Working Families Tax Relief Act of 2004
(P.L. 108-311), a $146 billion package of middle class and business tax breaks. This
legislation, which was signed into law by the President on October 4, 2004, retroactively
extended four energy tax subsidies: the §45 renewable tax credit, suspension of the 100% net
income limitation for the oil and gas percentage depletion allowance, the $4,000 tax credit
for electric vehicles, and the deduction for clean fuel vehicles (which ranges from $2,000 to
$50,000). The §45 tax credit and the suspension of the 100% net income limitation had each
expired on January 1, 2004; they were retroactively extended through December 31, 2005.
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The electric vehicle credit and the clean-vehicle income tax deduction were being phased out
gradually beginning on January 1, 2004. P.L. 108-311 arrests the phase-down — provides
100% of the tax breaks — through 2005, but resumes it beginning on January 1, 2006, when
only 25% of the tax break will be available. (For more information, see CRS Report
RL32265, Expired and Expiring Energy Tax Incentives.)
Energy Tax Provisions of the “Jobs” Bill. After the Congress repeatedly chose
not to enact a more extensive list of energy tax incentives for energy efficiency, renewable
fuels, and for oil, gas, and coal, it agreed to a scaled down package of energy tax incentives
from the Senate-passed version of the FSC-ETI “jobs” bill (H.R. 4520). This bill, enacted
as the American Jobs Creation Act of 2004 (P.L. 108-357) on October 22, 2004, contains
several energy-related tax breaks:
! Expansion of the renewable electricity credit to open-loop biomass,
geothermal, solar, small irrigation power, and municipal solid waste
facilities, and creating the production tax credit for refined coal. The latter
provides a new tax credit of $4.375/ton for refined coal — not for the
electricity produced from the coal. (The refined coal tax credit was
originally part of the proposed expansion of the §29 tax credit, which
already benefits “synfuels” from coal and was inserted into the renewable
electricity section of the tax code). Expansion of the §45 tax credit also
includes minimum tax relief.
! Liberalization of the tax treatment of electric cooperatives under a
restructured electricity market.
! Treatment of certain Alaska pipeline property as seven-year depreciation
property (rather than 15 years under prior law) and extension of the 15%
enhanced oil recovery credit to Alaska gas processing facilities.
! Reform of the tax subsidies for fuel ethanol — basically replacement of the
excise tax exemption with an equivalent immediate tax credit — and
expansion of the credit to include biodiesel (at a higher rate for biodiesel
made from virgin oils). Liberalization includes allowance of the credits
against the alternative minimum tax.
! Creation of a new tax credit for oil and gas from marginal (small) wells; this
credit is triggered when oil prices are below $18/barrel ($2/mcf for natural
gas), which means that currently, with oil prices above $40/barrel, it would
provide no benefits.
! Repeal of the general fund component (4.3¢/gal.) excise tax on diesel fuel
used in trains and barges.
! A $2.10/barrel tax credit for production of low-sulfur diesel fuel and
“expensing” of (basically, faster depreciation deductions for) the capital
costs to produce such fuels. Both tax subsidies are subject to limits.
! A host of provisions to prevent fuel tax fraud, including one changing the
collection point of the tax on aviation fuels.
Current Posture of Energy Tax Policy
The above background discussion of energy tax policy may be conveniently summarized
in Table 1, which shows current energy tax provisions — both taxes and tax subsidies —
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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 demand for, the taxed activity (either conventional fuel supply, energy
demand, or the demand for energy-using technologies, such as cars).
Energy Tax Policy Outlook
Expanded tax subsidies (incentives) for energy supply and conservation have been an
integral, if not the dominant, part of comprehensive energy policy proposals over the last five
years. Congress has tried unsuccessfully for the past four years to pass a comprehensive
energy bill — three of the last four bills have stalled in the Senate — one of the top
legislative priorities of Republicans and the Bush Administration.
Some energy tax incentives were enacted as part of the Working Families Tax Relief
Act of 2004 (P.L. 108-311), enacted on October 4, 2004; about $5 billion in energy tax
incentives were part of the American Jobs Creation Act of 2004 (P.L. 108-357) enacted on
October 22, 2004. About $8.1 billion in energy tax cuts have been incorporated in H.R. 6,
(109th Congress), which was approved by the House on April 21, 2005, by a vote of 249 to
183. However, that leaves roughly $10.4 billion in tax breaks embodied in the failed
comprehensive legislation H.R. 6 (108th Congress) that have been dropped.
H.R. 6 (The Energy Policy Act of 2005)
The energy tax cuts of H.R. 6 (109th Congress) were approved by the House Ways and
Means Committee as H.R. 1541, Enhanced Energy Infrastructure and Technology Act of
2005, on April 13, 2005. This bill proposes an $8.1 billion, 11-year tax cut of energy taxes,
weighed almost entirely toward fossil fuels and electricity. The Senate Finance Committee
has marked up the Energy Policy Tax Incentives Act of 2005, an $18.4 billion, 11-year
energy tax cut tilted less toward fossil fuel production and more toward energy conservation
and alternative fuels than the House measure. The SFC bill includes $4.4 billion of tax
increases (mostly non-energy but also some energy tax increases) and $0.2 billion of non-
energy tax cuts. The distribution of the cuts by type of fuel for each of the two bills is shown
in Table 2.
One way to briefly compare the two measures is to compare revenue losses from the
energy tax incentives alone and the percentage distribution by type of incentive as a percent
of the net energy tax cuts, in row 11. The net revenue losses over an 11-year time frame
from FY2005 to FY2015 were estimated by the Joint Committee on Taxation. The total
revenue losses are reported in two ways. First, the absolute dollar value of tax cuts over 11
years are in the odd-numbered columns. Second, the even-numbered columns show the
percentage distribution of total revenue losses by type of incentive for each measure.
Table 2 illustrates the major differences between the two energy tax measures,
measured in terms of projected aggregate revenue losses. First, the SFC bill is more than
twice the size, in terms of net energy tax cuts, as the House bill. Second, most of this
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difference is accounted for by tax cuts for the electricity industry, energy efficiency and
renewable and alternative fuels. The SFC bill provides absolutely and relatively more tax
cuts for energy efficiency and alternative fuels. The differences in tax cuts for alternative
fuels are particularly striking: $11.6 billion in the SFC bill vs. $0.6 billion in the House bill.
The SFC bill also provides more tax incentives for energy efficiency investments than the
House bill. The House bill provides much larger tax cuts for the electricity industry,
particularly for electricity infrastructure. Thus, in a relative sense, the House bill is tilted
more toward fossil fuel production, while the SFC bill’s tax cuts are tilted more to the
production of alternative and renewable fuels and energy conservation. However, the abolute
dollar tax cuts for oil, gas, and coal are also somewhat larger in the SFC bill than in the
House bill ($5.8 billion vs. $4.7 billion).
Finally, the FY2006 budget, unveiled February 7 by the Bush Administration, calls for
a 10-year energy tax cut of about $6.7 billion, as follows:

! a 15% tax credit for residential solar energy systems to generate electricity
or to heat water in homes,
! a deduction for contributions to nuclear decommissioning funds made by
unregulated taxpayers,
! a $4,000 tax credit for the purchase of certain hybrid vehicles and a credit
of up to $8,000 for fuel cell vehicles,
! a 10% investment tax credit for combined heat and power systems that meet
certain specifications for electrical capacity,
! an extension for two years of an existing credit for electricity produced from
wind, biomass other than agricultural livestock waste nutrients, and landfill
gas. That credit would apply to electricity produced at facilities placed in
service before January 1, 2008, Treasury said in the blue book.
LEGISLATION
H.R. 6 (Barton)
Among other provisions, the Energy Policy Act of 2005 would open up the Arctic
National Wildlife Refuge (ANWR) to exploration and development, includes a “safe harbor”
provision to protect methyl tertiary-butyl ether (MTBE) refiners from product liability suits,
would establish a “refinery revitalization” program, and would permit the Federal Energy
Regulatory Commission (FERC) to decide on the siting of liquified natural gas (LNG)
terminals. Introduced on April 18, 2005. Approved by the House on April 21, 2005 by a
vote of 249 to 183.
H.R. 17 (Hayworth)
To amend the Internal Revenue Code of 1986 to allow a credit for residential solar
energy property. Introduced January 4, 2005. Referred to House Committee on Ways and
Means.
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H.R. 36 (King)
To amend the Internal Revenue Code of 1986 to provide for a small agri-biodiesel
producer credit and to improve the small ethanol producer credit. Introduced January 4,
2005. Referred to House Committee on Ways and Means.
H.R. 1541 (Thomas)
To amend the Internal Revenue Code of 1986 to enhance energy infrastructure
properties in the United States and to encourage the use of certain energy technologies,
shorten the depreciation period for natural gas lines and pollution control facilities and
modify various exemptions, deductions, and credits, and for other purposes. Introduced on
April 11, and approved (with slight modifications) on April 13 by the House Committee on
Ways and Means by a vote of 26 to 11.
H.R. 6, 108th Congress (Tauzin)
To promote energy conservation, and research and development, to provide for energy
security and diversity in energy supply for the American people and for other purposes.
Incorporates H.R. 39, H.R. 238, H.R. 1531 (the tax provisions), and H.R. 1644. The tax title
amends the Internal Revenue Code of 1986 to provide incentives for fossil fuel supply
(including coal output incentives), facilitate electricity industry restructuring (which is also
an energy supply incentive), and reduce fossil fuel demand through enhanced energy
efficiency and alternative and renewable fuels supply. Also provides for revenue offsets.
Introduced April 7, 2003; referred to several committees. Passed by the House on April 11,
2003. The Senate version was approved July 31, 2003.
FOR ADDITIONAL READING
U.S. Congress. Senate Budget Committee. Tax Expenditures: Compendium of
Background Material on Individual Provisions. Committee Print. December 2004. 108th
Congress, 2nd Sess.
Joint Tax Committee Description of Energy Tax Policy Tax Incentives Act of 2005,
Scheduled for Senate Finance Committee Markup June 16, 2005 (JCX-44-05). June 14,
2005.
CRS Report RS21935. The Black Lung Excise Tax on Coal, by Salvatore Lazzari.
CRS Report RL30406. Energy Tax Policy: An Economic Analysis, by Salvatore Lazzari.
CRS Report RL32042. Energy Tax Incentives in H.R. 6: The Conference Agreement
as Compared with the House Bill and Senate Amendment. December 23, 2003, by Salvatore
Lazzari.
CRS Report RL32936. Omnibus Energy Legislation, 109th Congress: Assessment of
H.R. 6 As Passed by the House, by Mark Holt and Carol Glover.
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Table 1. Current Energy Tax Incentives and Taxes:
Estimated Revenue Effects FY2005 and FY2005-FY2009
($ millions)
Category
Provision
Major Limitations
Revenue
Revenue
Effects
Effects
FY2005
FY2005-
FY2009
CONVENTIONAL FOSSIL FUELS SUPPLY (bpd = barrels per day; < indicates less than)
% depletion — oil, -
15% of sales (higher for
for indep.,up to 1,000 or
- $500
-2,700
gas, and coal
marginal wells); 10% for
equiv. bpd
coal
expensing of IDC’s —
100% deductible in first
corporations expense only
- 500
-2,300
oil/gas & other fuels
year
70% of IDC’s
enhanced oil recovery
15% of the costs
only for specific tertiary
- 300
-2,000
credit
methods
incentives for small
$2.10 credit per barrel of
credit limited to 25% of
< - 50
< - 50
refiners to comply
low-sulfur diesel, +
capital costs; expensing
with EPA sulfur
expensing of 75% of
phases out for refining
regulations
capital costs
capacity of 155,000-
205,000 barrels per day.
black-lung coal excise
$1.25/ton for underground
coal tax not to exceed 4.4%
789 NA
taxes and AML fees
coal ($0.90 for surface
of sales price (2.2% for the
(2003)
coal)
AML fee)
disposition of elec.
capital gain recognized
proceeds must be
- 2,700
-2,600
trans. property to
evenly over 8 years
reinvested in other elec.
implement FERC
assets
policy
ALTERNATIVE, UNCONVENTIONAL, AND RENEWABLE FUELS
§29, production tax
$6.40/bar. of oil or
biogas, coal synfuels,
- 1,200
- 4,900
credit
($1.13/mcf of gas)
coalbed methane, etc.
credits for fuel ethanol
$0.51 blender’s credit, +
for biomass ethanol only
- 1,490
- 7,900
$0.10/gal small producer
(e.g., from corn)
credit
tax credits for
$0.50/gal. of recycled
sold at retail or used in a
< - 50
< - 50
biodiesel
biodiesel; $1.00/gal. for
trade or business; applies to
virgin biodiesel
oils from vegetables or
animal fats
§45 credit for
1.8¢/kWh. (0.9¢ in some
wind, closed-loop biomass,
- 300
- 2,000
renewable electricity
cases; $4.375/ton of refined
poultry waste, solar,
coal
geothermal, et. al.
exclusion of interest
interest income exempt
for hydroelectric or
-200 -
1,000
on S&L bonds
from tax
biomass facilities used to
produce electricity
deduction for clean-
$2,000 for cars; $50,000
CNG, LNG, LPG,
- 120
- 70
fuel and hybrid
for trucks; $100,000
hydrogen, neat alcohols,
vehicles
deduction for refueling
and electricity; phases out
facilities
over 2006
tax credit for electric
10%, up to $4,000
phase-out in 2006
< - 50
< - 50
vehicles
credit for solar &
10% investment tax credit
utilities excluded
< - 50
< - 50
geothermal tech.
for businesses
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Category
Provision
Major Limitations
Revenue
Revenue
Effects
Effects
FY2005
FY2005-
FY2009
ENERGY CONSERVATION
fuels taxes (FY2003)*
18.4¢/gal of gas
4.4¢-24.4¢ for other fuels
39,078
204,869
mass trans. subsidies
exclusion of $105/month
up to $190/month for
- 4,000
- 21,400
parking benefits
gas-guzzler tax
$1,000-$7,700/ vehicle
trucks and SUV’s are
127
NA
(FY2003)
weighing 6,000 lbs. or less
exempt
exclusion for utility
subsidies not taxable as
any energy conservation
< - 50
< - 50
conservation subsidies
income
measure
Source: Joint Tax Committee estimates and Internal Revenue Service data.
Note: A negative sign indicates a tax subsidy or incentive; no negative sign indicates an energy tax. NA denotes
not available.
* This category includes revenue from excise taxes on tires, a heavy vehicle use tax, and retail sales tax on
trucks and tractors, which also go into the Highway Trust Fund (HTF). No separate breakdown of revenue
losses for fuels is available for FY2005-FY2009, but revenues from motor fuel taxes generally represent about
90% of the total HTF taxes.

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Table 2. Energy Tax Provisions in the House and SFC Bill (109th
Congress): Comparison of 11-Year Estimated Revenue Loss
by Type of Incentive
($ millions; % of total revenue losses)
House H.R. 6
SFC Bill a
INCENTIVES FOR FOSSIL FUELS SUPPLY
(1)
(2)
(3)
(4)
(1) Oil & Gas Production
-$1,525
18.9%
-$1,416
7.8%
(2) Oil & Gas Refining and
-1,663
20.6%
-1,408
7.7%
Distribution
(3) Coal
-1,490
18.4%
-2,996
15.5%
(4) Subtotal
-4,678
57.8%
-5,820
29.9%
ELECTRICITY RESTRUCTURING PROVISIONS
(5) Nuclear
-1,313
16.2%
-278
1.5%
(6) Other
-1,529
18.9%
-475
2.6%
(7) Subtotal
-2,842
35.1%
-753
4.1%
INCENTIVES FOR EFFICIENCY, RENEWABLES, AND ALTERNATIVE FUELS
(8) Energy Efficiency
-570
7.0%
-3,733
20.5%
(9) Renewable Energy & Alternative
0
0%
-7,912
43.4%
Fuels
(10) Subtotal
-570
7.0%
-11,645
63.9%
(11) Net Energy Tax Cuts
-8,010
100%
-18,218
100%
(12) Non Energy Tax Cuts
0
-202
(13) Total Energy and Non-Energy
0
-18,421
Tax Cuts
(14) Tax Increases
0
+ 4,366
(15) NET TAX CUTS
-8,010
-14,055
Source: CRS estimates based on Joint Tax Committee reports.
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