Order Code IB10054
CRS Issue Brief for Congress
Received through the CRS Web
Energy Tax Policy
Updated May 25, 2006
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 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
H.R. 6 (The Energy Policy Act of 2005)
Current Posture of Energy Tax Policy
Energy Tax Policy Outlook
LEGISLATION
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Energy Tax Policy
SUMMARY
Historically, U.S. federal energy tax
George W. Bush Administration has proposed
policy promoted the supply of oil and gas.
a limited number of energy tax measures, but
However, the 1970s witnessed (1) a signifi-
the 106th-108th Congresses have considered
cant cutback in the oil and gas industry’s tax
comprehensive energy legislation, which
preferences, (2) the imposition of new excise
included numerous energy tax incentives to
taxes on oil, and (3) the introduction of nu-
increase the supply of, and reduce the demand
merous tax preferences for energy conserva-
for, fossil fuels and electricity, and for energy
tion, the development of alternative fuels, and
efficiency in residential and commercial
the commercialization of the technologies for
buildings as well as for more energy efficient
producing these fuels (renewables such as
vehicles. They also included tax incentives for
s o l a r , w i n d , a n d b i o m a s s , a n d
several types of alternative and renewable
nonconventional fossil fuels such as shale oil
resources such as solar and geothermal. Be-
and coalbed methane).
cause of controversy over either corporate
average fuel economy standards, the Alaskan
The Reagan Administration, using a free-
national wildlife refuge, or methyl-tertiary
market approach, advocated repeal of the
butyl ether, each of these attempts failed.
windfall profit tax on oil and the repeal or
phase-out of most energy tax preferences —
The Working Families Tax Relief Act of
for oil and gas, as well as alternative fuels.
2004 (P.L. 108-311), which was signed into
Due to the combined effects of the Economic
law by the President on October 4, 2004,
Recovery Tax Act and the energy tax subsi-
retroactively extended four energy tax subsi-
dies that had not been repealed, which to-
dies. The American Jobs Creation Act of
gether created negative effective tax rates in
2004 (P.L. 108-357), signed on October 22,
some cases, the actual energy tax policy dif-
2004, contains several energy-related tax
fered from the stated policy.
breaks that were in the comprehensive energy
bills. The current energy tax structure is
The George H. W. Bush and Bill Clinton
dominated by revenues from a long-standing
years witnessed a return to a much more
gasoline tax, and tax incentives for alternative
activist energy tax policy, with an emphasis on
and renewable fuels supply relative to energy
energy conservation and alternative fuels.
from conventional fossil fuels.
While the original aim was to reduce demand
for imported oil, energy tax policy was also
The House and Senate have approved the
increasingly viewed as a tool for achieving
conference report on H.R. 6, which provides
environmental and fiscal objectives.
for a net energy tax cut of $11.5 billion ($14.5
billion gross energy tax cuts, less $3 billion of
The Clinton Administration’s energy tax
energy taxes). This bill was signed by Presi-
policy emphasized the environmental benefits
dent Bush on August 8, 2005 (P.L. 109-58).
of reducing greenhouse gases and global
The tax reconciliation bill recently signed by
climate change, but it will be remembered for
the President includes relatively minor tax
its failed proposal to enact a broadly based
increases on major integrated oil companies
energy tax based on Btu’s (British Thermal
through a slowing down of the amortization of
Units) and its 1993 across-the-board increase
some oil and gas exploration costs.
in motor fuels taxes by 4.3¢/gallon. The
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MOST RECENT DEVELOPMENTS
On May 17, the President signed a $70 billion tax reconciliation bill (H.R. 4297) that
increases taxes on major integrated oil companies by extending the depreciation recovery
period for geological and geophysical costs from two to five years. On August 8, 2005, the
President signed the comprehensive energy bill (H.R. 6) into law (P.L. 109-58). The bill
contains about $15 billion in energy tax incentives over 11 years.
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.)
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 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).
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 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
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.
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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 nonconventional 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
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.
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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 nontax
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 nonrenewable
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.
Although 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) —
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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 nonenergy 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 nonconventional 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. 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
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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.
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
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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 nonenergy 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 nontax 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
alternative and renewable fuels. The conference committee on H.R. 4 could not resolve
differences, so the bills were dropped on November 13, 2002.
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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 nonenergy 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.
Some energy tax incentives were enacted on October 4, 2004, 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. 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.
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(For more information, see CRS Report RL32265, Expired and Expiring Energy Tax
Incentives.)
The American Jobs Creation Act of 2004 (P.L. 108-357) enacted on October 22, 2005,
included about $5 billion in energy tax incentives. This bill, commonly referred to as the
“FSC-ETI” or “jobs” bill, contained 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 introduction of a $4.375/ton production tax credit 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).
! Creation of a new tax credit for oil and gas from marginal (small) wells,
triggered when oil prices are below $18/barrel ($2/mcf for natural gas).
! Liberalization of the tax treatment of electric cooperatives under a
restructured electricity market.
! Reduction of the depreciation recovery period for certain Alaska pipelines
to 7 years (15 years under prior law).
! Extension of the 15% enhanced oil recovery credit to Alaska gas processing
facilities.
! Reform of the tax subsidies for fuel ethanol — basically replacing 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).
! Repeal of the general fund component (4.3¢/gal.) excise tax on diesel fuel
used in trains and barges.
! A new $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.
H.R. 6 (The Energy Policy Act of 2005)
On June 28, 2005, the Senate approved by an 85-12 vote a broadly based energy bill
(H.R. 6) with an 11-year, $18.6 billion package of energy tax breaks tilted toward renewable
energy resources and conservation. Joint Committee on Taxation figures released on June
28 show that the bill included about $0.213 million in nonenergy tax cuts and more than $4.7
billion in revenue offsets, meaning the bill had a total tax cut of $18.8 billion over 11 years,
offset by the $4.7 billion in tax increases. The House energy bill, which included energy tax
incentives totaling about $8.1 billion over 11 years, and no tax increases, was approved in
April. This bill was weighted almost entirely toward fossil fuels and electricity supply. On
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July 27, 2005, the conference committee on the comprehensive energy bill (H.R. 6) reached
agreement on $11.1 billion of energy tax incentives, including $3 billion in tax increases
(both energy and nonenergy). The distribution of the cuts by type of fuel for each of the three
versions of H.R. 6 is shown in Table 1.
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 1 illustrates the major differences between the three energy tax measures,
measured in terms of projected aggregate revenue losses. First, the Senate bill was more than
twice the size, in terms of net energy tax cuts, as the House bill. Second, most of this
difference is accounted for by tax cuts for the electricity industry, energy efficiency and
renewable and alternative fuels. The Senate bill provided absolutely and relatively more tax
cuts for energy efficiency and alternative fuels. The differences in tax cuts for alternative
fuels are particularly striking: $12 billion in the Senate bill vs. $0.6 billion in the House bill.
The Senate bill also provided more tax incentives for energy efficiency investments than the
House bill. The House bill provided much larger tax cuts for the electricity industry,
particularly for electricity infrastructure. Thus, in a relative sense, the House bill was tilted
more toward fossil fuel production, while the Senate bill’s tax cuts were tilted more to the
production of alternative and renewable fuels and energy conservation. However, the
absolute dollar tax cuts for oil, gas, and coal were also somewhat larger in the Senate bill
than in the House bill ($5.8 billion vs. $4.7 billion).
Table 1 also shows that the conference report provided about $1.3 billion for energy
efficiency and conservation, including a deduction for energy-efficient commercial property,
fuel cells, and micro-turbines, and $4.5 billion in renewables incentives including a two-year
extension of the tax code §45 credit, renewable energy bonds, and business credits for solar.
A $2.6 billion package of oil and gas incentives included seven-year depreciation for natural
gas gathering lines, a refinery expensing provision, and a small refiner definition for refiner
depletion, according to sources. A nearly $3 billion coal package provided for an 84-month
amortization for pollution control facilities and treatment of §29 as a general business credit.
More than $3 billion in electricity incentives leaned more toward the House version,
including provisions providing 15-year depreciation for transmission property, nuclear
decommissioning provisions, and a nuclear electricity production tax credit. It also provided
for the five-year carry-back of net operating losses of certain electric utility companies. A
Senate-passed tax credit to encourage the recycling of a variety of items, including paper,
glass, plastics, and electronic products, was dropped from the final version of the energy bill
(H.R. 6) that cleared Congress July 29. Instead, conferees included a provision requiring the
Treasury and Energy departments to conduct a study on recycling. On July 29, 2005, the
Senate approved the conference report to the energy bill (H.R. 6), clearing it for the
President’s signature on August 8 (P.L. 109-58).
Details of the tax title show that four revenue offsets were retained in the conference
report: reinstatement of the Oil Spill Liability Trust Fund; extension of the Leaking
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Underground Storage Tank (LUST) trust fund rate, which would be expanded to all fuels;
modification of the §197 amortization, and a small increase in the excise taxes on tires. The
offsets total roughly $3 billion compared to nearly $5 billion in the Senate-approved H.R.
6. Because the oil spill liability tax and the Leaking Underground Storage Tank financing
taxes are imposed on oil refineries, the oil and gas refinery and distribution sector (row 2 of
Table 1) suffered a net tax increase of $1,769 ($2,857-$1,088).
Current Posture of Energy Tax Policy
The above background discussion of energy tax policy may be conveniently summarized
in Table 2, which shows current energy tax provisions — both special (or targeted) energy
tax subsidies and targeted energy taxes — 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
After expanding energy tax incentives in the Energy Policy Act of 2005 (P.L. 109-58),
the 109th Congress moved to rescind the incentives, and even to raise energy taxes on oil and
gas, in response to the high energy prices and resulting record oil and gas industry profits.
The Senate-passed reconciliation bill (S. 2020) would have raised taxes on major U.S.
integrated oil companies by (1) denying amortization treatment of geological and geophysical
expenditures (such expenditures would have to be depleted), (2) disallowing a portion of the
tax benefits from LIFO (Last-in-first-out) inventory accounting, (3) denying such companies
the tax credit for taxes paid to foreign countries, and (4) restricting the use of the §29 tax
credit for unconventional fuels. Ultimately, only a negligible tax increase on major
integrated oil companies was enacted when, on May 17, the President signed a $70 billion
tax reconciliation bill (H.R. 4297). Under that bill, geological and geophysical (G&G)costs
undertaken in exploring for oil and gas by major integrated oil companies is amortized over
five years rather than two years. The two-year period was enacted under the Energy Policy
Act of 2005. Prior to that, G&G costs were capitalized, which is consistent with economic
and accounting theory. The 2006 change would increases taxes on major integrated oil
companies by an estimated $189 million over 10 years, effectively rescinding about 20% of
the nearly $1 billion 10-year tax cut under the EPA05.
LEGISLATION
H.R. 4297 (Thomas)
A bill to provide for reconciliation pursuant to section 201(b) of the concurrent
resolution on the budget for FY2006. Allows nonrefundable personal credits to be claimed
against the AMT; extends and enhances the R&D tax credit; extends and enhances the Work
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Opportunity Tax Credit; extends the 2003 reduction in capital gains taxes; extends the
increased limitation for small business expensing under §179; curbs the manufacturing
deduction; and includes miscellaneous other tax provisions. Introduced on November 10,
2005. Approved by the House on December 8 by a 234-197 vote (Roll no. 621). Signed by
the President on May 17, 2006
H.R. 4040 (McCrery)
To amend the Internal Revenue Code of 1986 to provide tax benefits for the Gulf
Opportunity Zone and certain areas affected by Hurricanes Rita and Wilma, and for other
purposes. Includes tax relief for public utilities adversely affected by the recent hurricanes.
Introduced December 6, 2005. Referred to House Committee on Ways and Means. Passed
by the House on December 7, 2005, by a vote of 41-4 (roll no. 618; two-thirds required).

S. 2020 (Grassley)
A bill to provide for reconciliation pursuant to section 201(b) of the concurrent
resolution on the budget for FY2006. Amends the Internal Revenue Code to (1) provide tax
incentives (including incentives to public utilities) in areas affected by Hurricanes Katrina,
Rita, and Wilma; (2) extend various expiring tax provisions; (3) revise provisions relating
to charitable contributions and charitable organizations; (4) restrict tax shelter activity and
increase penalties for underpayment of tax; and (5) revise provisions relating to taxation of
foreign income, tax reporting, and accounting methods. Raises taxes on major U.S.
integrated oil companies by denying amortization treatment of geological and geophysical
expenditures (such expenditures would have to be depleted), disallowing a portion of the tax
benefits from LIFO (Last-in-first-out) inventory accounting, and denying such companies the
tax credit for taxes paid to foreign countries. Eliminates the 75% phase-out of the tax credit
for electric vehicles and constrains the use of the §29 tax credit for unconventional fuels.
Introduced November 16, 2005. Passed/agreed to in Senate on November 18, 2005, by a vote
of 64-33 (record vote number 347).
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 RS22322. Taxes and Fiscal Year 2006 Reconciliation: A Brief Summary, David
L. Brumbaugh, November 14, 2005.
CRS Report RS22344. The Gulf Opportunity Zone Act of 2005, by Erika Lunder, February
14, 2006.
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Table 1. Comparison of Energy Tax Provisions the House, Senate,
and Conference Versions of H.R. 6 (109th Congress):
11-Year Estimated Revenue Loss by Type of Incentive
(in millions of dollars; percentage of total revenue losses)
Conference
House H.R. 6
Senate H.R. 6
Report
INCENTIVES FOR FOSSIL FUELS SUPPLY
(1)
(2)
(3)
(4)
(1) Oil & Gas Production
-1,525
18.9%
-1,416
7.6%
-1,545
10.6%
(2) Oil & Gas Refining and
-1,663
20.6%
-1,399
7.5%
-1,088
7.5%
Distribution
(3) Coal
-1,490
18.4%
-3,003
16.2%
-2,948
20.3%
(4) Subtotal
-4,678
57.8%
-5,818
31.3%
-5,581
38.6%
ELECTRICITY RESTRUCTURING PROVISIONS
(5) Nuclear
-1,313
16.2%
-278
1.5%
-1,571
10.9%
(6) Other
-1,529
18.9%
-475
2.6%
-1,549
10.7%
(7) Subtotal
-2,842
35.1%
-753
4.1%
-3,120
21.6%
INCENTIVES FOR EFFICIENCY, RENEWABLES, AND ALTERNATIVE
FUELS
(8) Energy Efficiency
-570
7.0%
-3,987
21.4%
-1,260
8.7%
(9) Renewable Energy &
0
0%
-8,031
43.2%
-4,500
31.1%
Alternative Fuels
(10) Subtotal
-570
7.0%
-12,018
64.6%
-5,760
39.8%
(11) Net Energy Tax Cuts
-8,010
100%
-18,589
100%
-14,461
100.0%
(12) Non Energy Tax Cutsa
0
-213
-92
(13) Total Energy and Non-
0
-18,802
-14,553
Energy Tax Cuts
(14) Energy Tax Increasesb
0
0
+2,857
(15) Other Tax Increases
+ 4,705
171
(15) NET TAX CUTS
-8,010
-14,055
-11,525
Source: CRS estimates based on Joint Tax Committee reports.
a. The conference report includes a provision to expand R&D for all energy activities. This provision is listed
as a nonenergy tax cut to simplify the table.
b. Energy tax increases comprise the oil spill liability tax and the Leaking Underground Storage Tank financing
rate, both of which are imposed on oil refineries. If these taxes are subtracted from the tax subsidies (row
2), the oil and gas refinery and distribution sector suffered a net tax increase of $1,769 ($2,857-$1,088).
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Table 2. Current Energy Tax Incentives and Taxes:
Estimated Revenue Effects FY2005 and FY2005-FY2009
(in millions of dollars)
Revenue
Category
Provision
Major Limitations
Effects
FY2006
CONVENTIONAL FOSSIL FUELS SUPPLY (bpd = barrels per day; < indicates less than)
Targeted Tax Subsidies
disposition of elec. trans.
capital gain recognized evenly
proceeds must be reinvested in
- 600
property to implement
over 8 years
other elec. assets
FERC policy
% depletion — oil, -gas,
15% of sales (higher for
only for independents, up to
- 1,100
and coal
marginal wells); 10% for coal
1,000 or equiv. bpd
expensing and amortization
100% deductible IDCs in first
corporations expense only 70%
- 1,100
of exploration and
year/ 2 year amortization of
of IDCs
development costs —
geological and geophysical
oil/gas & other fuels
costs
nuclear decommissioning
liberalizes tax deductible
in general, the IRS sets limits
- 120
contributions to a fund in
on the annual amounts made to
advance of actual
a nuclear decommissioning
decommissioning
fund
electric utilities
allows net-operating losses
only 20% of the NOLs in
-72
(NOLs) to be carried back 5
2003-2005 qualify
years, as compared with 2
years
incentives for small refiners
$2.10 credit per barrel of low-
credit limited to 25% of capital
- < 50
to comply with EPA sulfur
sulfur diesel, + expensing of
costs; expensing phases out for
regulations
75% of capital costs
refining capacity of 155,000-
205,000 barrels per day.
credit for clean-coal
20% for IGCC systems; 15%
each system has maximum
- 26
technologies
for other advanced coal tech.
aggregate dollar limits
Targeted Taxes
black-lung coal excise
$1.25/ton for underground
coal tax not to exceed 4.4% of
789
taxes and AML fees (2003)
coal ($0.90 for surface coal)
sales price (2.2% for the AML
fee)
oil spill liability trust fund
$0.05/barrel tax on every
moneys are allocated into a
150
excise tax
barrel of crude oil refined
fund for cleaning up oil spills
ALTERNATIVE, UNCONVENTIONAL, AND RENEWABLE FUELS
Targeted Tax Subsidies
§29, production tax credit
$6.40/bar. of oil or
biogas, coal synfuels, coalbed
- 2,700
($1.13/mcf of gas)
methane, etc.
credits for fuel ethanol
$0.51 blender’s credit, +
for biomass ethanol only (e.g.,
- 1,890
$0.10/gal small producer
from corn)
credit
tax credit for clean-fuel
$30,000 tax credit for
per location, per taxpayer
- < 50
refueling property
alternative fuel equipment
(replaces the deduction)
§45 credit for renewable
1.8¢/kWh. (0.9¢ in some
wind, closed-loop biomass,
- 2,000
electricity
cases; $4.375/ton of refined
poultry waste, solar,
coal
geothermal, etc.
alternative motor vehicle
$400-$40,000 credit for each
tax credit is function of vehicle
- 283
tax credits
fuel cell, hybrid, lean burn and
weight, fuel economy, and
other AFVs
lifetime fuel savings
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Revenue
Category
Provision
Major Limitations
Effects
FY2006
exclusion of interest on
interest income exempt from
for hydroelectric or biomass
- 100
S&L bonds
tax
facilities used to produce
electricity
credits for biodiesel
$0.50/gal. of recycled
sold at retail or used in a trade
- 122
biodiesel; $1.00/gal. for virgin
or business; applies to oils from
biodiesel
vegetables or animal fats
credit for solar &
10% investment tax credit for
utilities excluded
- < 50
geothermal tech.
businesses
ENERGY CONSERVATION
Targeted Subsidies
mass trans. subsidies
exclusion of $105/month
- 192
manufacturer’s credit for
max credit is $50 for
amount of credit depends on
- 117
energy efficient appliances
dishwashers, $175 for
energy efficiency, energy
refrigerators, and $200 for
savings, and varies by year;
clothes washers
total annual credit is also
limited
deduction for the cost of
tax deduction of cost of
total deductions cannot exceed
- 81
energy efficient property in
envelope components, heating
$1.80/sq.ft.
commercial buildings
cooling systems, and lighting
credit for energy efficiency
10% tax credit ($500/home)
max credit on windows is $200
- 55
improvements to existing
on up to $5,000 of costs; $50-
homes
$300 credit for other items
Targeted Taxes
fuels taxes (FY2003)a
18.4¢/gal. on gasoline
4.4¢-24.4¢ for other fuels
39,078
gas-guzzler tax (FY2003)
$1,000-$7,700/ vehicle
trucks and SUVs are exempt
127
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 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.
a. 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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