Order Code RL33578
Energy Tax Policy:
History and Current Issues
Updated April 1, 2008
Salvatore Lazzari
Specialist in Energy and Environmental Economics
Resources, Science, and Industry Division

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Energy Tax Policy: History and Current Issues
Summary
Historically, U.S. federal energy tax policy promoted the supply of oil and gas.
However, the 1970s witnessed (1) a significant cutback in the oil and gas industry’s
tax preferences, (2) the imposition of new excise taxes on oil, and (3) the
introduction of numerous tax preferences for energy conservation, the development
of alternative fuels, and the commercialization of the technologies for producing
these fuels (renewables such as solar, wind, and biomass, and nonconventional fossil
fuels such as shale oil and coalbed methane).
The Reagan Administration, using a free-market approach, advocated repeal of
the windfall profit tax on oil and the repeal or phase-out of most energy tax
preferences — for oil and gas, as well as alternative fuels. Due to the combined
effects of the Economic Recovery Tax Act and the energy tax subsidies that had not
been repealed, which together created negative effective tax rates in some cases, the
actual energy tax policy differed from the stated policy. The George H. W. Bush and
Bill Clinton years witnessed a return to a much more activist energy tax policy, with
an emphasis on energy conservation and alternative fuels. While the original aim was
to reduce demand for imported oil, energy tax policy was also increasingly viewed
as a tool for achieving environmental and fiscal objectives. The Clinton
Administration’s energy tax policy emphasized the environmental benefits of
reducing greenhouse gases and global climate change, but it will also be remembered
for its failed proposal to enact a broadly based energy tax on Btus (British thermal
units) and its 1993 across-the-board increase in motor fuels taxes of 4.3¢/gallon.
The George W. Bush Administration has proposed a limited number of energy
tax measures, but the 109th Congress enacted the Energy Policy Act of 2005 (P.L.
109-58) — comprehensive energy legislation that included numerous energy tax
incentives to increase the supply of, and reduce the demand for, fossil fuels and
electricity. Signed by President Bush on August 8, 2005, it provided a net energy tax
cut of $11.5 billion ($14.5 billion gross energy tax cuts, less $3 billion of energy tax
increases). The act included tax incentives for energy efficiency in residential and
commercial buildings and for more energy efficient vehicles, and tax incentives for
several types of alternative and renewable resources, such as solar and geothermal.
The Tax Relief and Health Care Act of 2006 (P.L. 109-432), enacted in December
2006, provided for one-year extensions of these provisions.
The current energy tax structure favors tax incentives for alternative and
renewable fuels supply relative to energy from conventional fossil fuels, and this
posture was accentuated under the Energy Policy Act of 2005. The comprehensive
energy policy legislation (H.R. 3221) enacted into law on December 19, 2007 (P.L.
110-140) originally included a package of energy tax provisions, but these were
dropped when the Senate defeated a procedural motion that would have invoked
cloture on the tax title. On February 27, 2008, the House approved H.R. 5351, the
Renewable Energy and Energy Conservation Tax Act of 2008, a slightly smaller
version of the energy tax title that was dropped from H.R. 3221 in December 2007
— the Senate has so far taken no action. Several energy tax incentives are in the
Senate version of the farm bill (H.R. 2419), which is currently in conference.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Energy Tax Policy from 1918 to 1970: Promoting Oil and Gas . . . . . . . . . . 2
Energy Tax Policy During the 1970s: Conservation and Alternative
Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Energy Tax Policy in the 1980s: The “Free-Market Approach” . . . . . . . . . . 6
Energy Tax Policy After 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Energy Tax Incentives in Comprehensive Energy Legislation Since 1998 . . . . . . 8
Brief History of Comprehensive Energy Policy Proposals . . . . . . . . . . . . . . 8
Energy Tax Action in the 107th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Energy Tax Action in the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Energy Action in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
The Energy Policy Act of 2005 (P.L. 109-58) . . . . . . . . . . . . . . . . . . . . . . . 11
The Tax Increase Prevention and Reconciliation Act (P.L. 109-222) . . . . . 12
The Tax Relief and Health Care Act of 2006 (P.L. 109-432) . . . . . . . . . . . 13
Current Posture of Energy Tax Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Energy Tax Policy in the 110th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
The (Failed) Compromise Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
The 2008 Economic Stimulus Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Resuscitation of the Energy Tax Provisions of H.R. 3221, the
House’s Comprehensive Energy Policy Bill . . . . . . . . . . . . . . . . . . . . 15
Renewable Production Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Conservation Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Tax Increases on the Oil and Gas Industry . . . . . . . . . . . . . . . . . . . . . 18
Likely Effects on Oil and Gas Prices and Oil Import Dependence . . . . . . . 19
Neutrality of the Corporate Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Energy Tax Incentives in the Farm Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
List of Tables
Table 1. Comparison of Energy Tax Provisions the House, Senate, and
Enacted Versions of H.R. 6 (P.L.109-58): 11-Year Estimated Revenue
Loss by Type of Incentive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Table 2. Current Energy Tax Incentives and Taxes: Estimated Revenue
Effects FY2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

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Energy Tax Policy: History and
Current Issues
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,
like tax policy instruments in general, are intended either to 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 the
policy 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.1
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, and rising oil import
dependence, as well as increased concern for the environment — have caused
policymakers to look toward energy taxes and subsidies with greater frequency.
Comprehensive energy policy legislation containing numerous tax incentives,
and some tax increases on the oil industry, was signed on August 8, 2005 (P.L. 109-
58). The law, the Energy Policy Act of 2005, contained about $15 billion in energy
tax incentives over 11 years, including numerous tax incentives for the supply of
conventional fuels. However, record oil industry profits, due primarily to high crude
oil and refined oil product prices, and the 2006 mid-term elections, which gave the
control of the Congress to the Democratic Party, has changed the mood of
policymakers. Instead of stimulating the traditional fuels industry — oil, gas, and
electricity from coal — in addition to incentivizing alternative fuels and energy
conservation, the mood now is to take away, or rescind, the 2005 tax incentives and
use the money to further stimulate alternative fuels and energy conservation. A minor
step in this direction was made, on May 17, 2006, when President Bush signed a $70
billion tax reconciliation bill (P.L. 109-222). This bill included a provision that
1 The theory underlying these distortions, and the nature of the distortions, is discussed in
detail in a companion report: CRS Report RL30406, Energy Tax Policy: An Economic
Analysis, by Salvatore Lazzari.

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further increased taxes on major integrated oil companies by extending the
depreciation recovery period for geological and geophysical costs from two to five
years (thus taking back some of the benefits enacted under the 2005 law). And
currently, the major tax writing committees in both Houses are considering further,
but more significant, tax increases on the oil and gas industry to fund additional tax
cuts for the alternative fuels and energy conservation industries. These bills are being
considered as part of the debate over new versions of comprehensive energy policy
legislation in the 110th Congress (H.R. 6).
This report discusses the history, current posture, and outlook for federal energy
tax policy. It also discusses current energy tax proposals and major energy tax
provisions enacted in the 109th Congress. (For a general economic analysis of energy
tax policy, see CRS Report RL30406, Energy Tax Policy: An Economic Analysis, by
Salvatore Lazzari.)
Background
The history of federal energy tax policy can 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).2
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
2 Tax preferences are special tax provisions — such as tax credits, exemptions, exclusions,
deductions, deferrals, or favorable tax rates — that reduce tax rates for the preferred
economic activity and favored taxpayers. Such preferences, also known as tax expenditures
or tax subsidies, generally deviate from a neutral tax system and from generally accepted
economic and accounting principles unless they are targeted to the correction of preexisting
market distortions.

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taxpayers. Expensing accelerates tax deductions, defers tax liability, and encourages
oil and gas prospecting, drilling, and the development of reserves.
The oil and gas percentage depletion allowance 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 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, as noted in the above paragraph.
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 1978-1979, 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.

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Three broad actions were taken through the tax code 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 (e.g., 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 CRS Report
RL33305, The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current
Energy Policy, by Salvatore Lazzari.)
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 9.70¢ 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 (e.g., special tax credits, deductions, exclusions) 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

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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. 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 geo-pressurized brine, Devonian shale, tight
formations, or coalbed methane, gas from biomass, and synthetic
fuels from coal. In current dollars this credit, which is still in effect
for certain types of fuels, was $6.56 per barrel of liquid fuels and
about $1.16 per thousand cubic feet (mcf) of gas in 2004.
! 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.
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). 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

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been a significant feature of energy policy since the 1970s. This included some of
the most extensive energy legislation ever enacted.
Energy Tax Policy in the 1980s: The “Free-Market Approach”
The Reagan Administration opposed using the tax law to promote 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 economic
theory predicts 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 repealing 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. 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 Reagan’s second 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) — 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.

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Energy Tax Policy After 1988
After the Reagan Administration, 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 nonconventional energy resources; and (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 included 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 renewed the suspension of the net income
limit on the percentage depletion allowance for marginal oil and gas
wells.

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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 Since 1998
Several negative energy market developments since about 1998, characterized
by some as an “energy crisis,” have led to congressional action on comprehensive
energy proposals, which included numerous energy tax incentives.
Brief History of Comprehensive Energy Policy Proposals
Although the primary rationale for comprehensive energy legislation has
historically been spiking petroleum prices, and to a lesser extent spiking natural gas
and electricity prices, the origin of bills introduced in the late 1990s was the very low
crude oil prices of that period. 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 to 1999, oil prices averaged about
$17 per barrel, fluctuating 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 higher gasoline, diesel, and
heating oil prices. To address the effects of rising 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.

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In addition to higher 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 refined
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. 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).
Also, the 106th Congress did enact a package of $500 million in loan guarantees for
small independent oil and gas producers (P.L. 106-51).
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 — that 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 $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,
the proposed ethanol mandate 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 many Republicans in Congress and for President Bush.
Senator Domenici 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 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 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 arrested the phase-down
— providing 100% of the tax breaks — through 2005, but resumed it beginning on

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January 1, 2006, when only 25% of the tax break was available. (For more
information, see CRS Report RL32265, Expired and Expiring Energy Tax Incentives,
by Salvatore Lazzari.)
The American Jobs Creation Act of 2004 (P.L. 108-357), commonly referred
to as the “FSC-ETI” or “jobs” bill, was enacted on October 22, 2004. It included
about $5 billion in energy tax incentives.
Energy Action in the 109th Congress
The 109th Congress enacted the Energy Policy Act of 2005 (P.L. 109-58), which
included the most extensive amendments to U.S. energy tax laws since 1992, and the
Tax Relief and Health Care Act of 2006, which extended the energy tax subsidies
enacted under the 2005 Energy Policy Act (EPACT05).
The Energy Policy Act of 2005 (P.L. 109-58)
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 $0.2 billion in non-energy 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 July 27, 2005, the conference
committee on H.R. 6 reached agreement on $11.1 billion of energy tax incentives,
including $3 billion in tax increases (both energy and non-energy). 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 (i.e., the columns marked “%” divided by the
dollar figures 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. The absolute dollar value of tax cuts over
11 years and the percentage distribution of total revenue losses by type of incentive
for each measure.
Table 1 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. A nearly $3 billion
coal package provided for an 84-month amortization for pollution control facilities

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CRS-12
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
carryback 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). Instead, conferees included a provision requiring the
Treasury and Energy departments to conduct a study on recycling. The House
approved the conference report on July 28, 2005; the Senate on June 28, 2005, one
month later on July 28, 2005, clearing it for the President’s signature on August 8
(P.L. 109-58).
Four revenue offsets were retained in the conference report: reinstatement of the
Oil Spill Liability Trust Fund; extension of the Leaking 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 with 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) received a net tax increase of $1,769 ($2,857-$1,088).
The Tax Increase Prevention and Reconciliation Act
(P.L. 109-222)
After expanding energy tax incentives in the EPACT05, the 109th Congress
moved to rescind oil and gas 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.
Many bills were introduced in the 109th Congress to pare back or repeal the oil and
gas industry tax subsidies and other loopholes, both those enacted under EPACT05
as well as those that preexisted EPACT05. Many of the bills focused on the oil and
gas exploration and development (E&D) subsidy — expensing of intangible drilling
costs (IDCs). This subsidy, which has been in existence since the early days of the
income tax, is available to integrated and independent oil and gas companies, both
large and small alike.3 It is an exploration and development incentive, which allows
the immediate tax write-off of what economically are capital costs, that is, the costs
of creating a capital asset (the oil and gas well).
Public and congressional outcry over high crude oil and product prices, and the
oil and gas industry’s record profits, did lead to a paring back of one of EPACT05’s
tax subsidies: two-year amortization, rather than capitalization, of geological and
geophysical (G&G) costs, including those associated with abandoned wells (dry
holes). Prior to the EPACT05, G&G costs for dry holes were expensed in the first
year and for successful wells they were capitalized, which is consistent with
economic theory and accounting principles. The Tax Increase Prevention and
Reconciliation Act, (P.L. 109-222), signed into law May 2006, reduced the value of
3 As is discussed later in the report, many of the other remaining tax subsidies are only
available to independent oil and gas producers, which, however, may be very large.

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CRS-13
the subsidy by raising the amortization period from two years to five years, still
faster than the capitalization treatment before the 2005 act, but slower than the
treatment under that act. The higher amortization period applies only to the major
integrated oil companies — independent (unintegrated) oil companies may continue
to amortize all G&G costs over two years — and it applies to abandoned as well as
successful properties. This change increased taxes on major integrated oil companies
by an estimated $189 million over 10 years, effectively rescinding about 20% of the
nearly $1.1 billion 11-year tax for oil and gas production under EPACT05.
The Tax Relief and Health Care Act of 2006 (P.L. 109-432)
At the end of 2006, the 109th Congress enacted a tax extenders package that
included extension of numerous renewable energy and excise tax provisions. Many
of the renewable energy provision in this bill had already been extended under the
Energy Policy Act of 2005 and were not set to expire until the end of 2007 or later.
The Tax Relief and Health Care Act of 2006 provided for one-year extensions of
these provisions.
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).
Note that the table defines those special or targeted tax subsidies or incentives
as those that are due to provisions in the tax law that apply only to that particular
industry and not to others. Thus, for example, in the case of the oil and gas industry,
the table excludes tax subsidies and incentives of current law that may apply
generally to all businesses but that may also confer tax benefits to it. There are
numerous such provisions in the tax code; a complete listing of them is beyond the
scope of this report. However, the following example illustrates the point: The
current system of depreciation allows the writeoff of equipment and structures
somewhat faster than would be the case under both general accounting principles and
economic theory; the Joint Committee on Taxation treats the excess of depreciation
deductions over the alternative depreciation system as a tax subsidy (or “tax
expenditure”). In FY2006, the JCT estimates that the aggregate revenue loss from
this accelerated depreciation deduction (including the expensing under IRC §179) is
$6.7 billion. A certain, but unknown, fraction of this revenue loss or tax benefits
accrues to the domestic oil and gas industry, but separate estimates are unavailable.
This point applies to all the industries reflected in Table 2.

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CRS-14
Energy Tax Policy in the 110th Congress
Continued high crude oil and petroleum product prices and oil and gas industry
profits, and the political realignment of the Congress resulting from the 2006
Congressional elections continued the energy policy shift toward increased taxes on
the oil and gas industry, and the emphasis on energy conservation and alternative and
renewable fuels rather than conventional hydrocarbons.4 In the 110th Congress, the
shift became reflected in proposals to reduce oil and gas production incentives or
subsidies, which were initially incorporated into, but ultimately dropped from
comprehensive energy policy legislation. In the debate over these two comprehensive
energy bills, raising taxes on the oil and gas industry, by either repealing tax
incentives enacted under EPACT05, by introducing new taxes on the industry, or by
other means was a key objective, motivated by the feeling that additional tax
incentives were unnecessary — record crude oil and gasoline prices and industry
profits provides sufficient (if not excessive) incentives.
The (Failed) Compromise Bill
In the House, action in 2007 focused on the Speaker’s announced “Energy
Independence Day” initiative (H.R. 3221), which combined bills approved by several
House committees, including the energy tax provisions approved by the Ways and
Means Committee H.R. 2776. H.R. 2776 provided $16 billion in tax incentives,
including a four-year extension in renewable energy tax credits under IRC § 45(d) for
facilities placed in service after December 31, 2008. It also would have added a tax
credit for businesses constructing facilities to produce energy from waves, tides, and
other marine sources. The bill would largely have been paid for by rescinding the
IRC §199 manufacturing tax deduction for oil and gas producers and by streamlining
the tax treatment of foreign oil-related income so it is treated the same as foreign oil
and gas extraction income. The House passed H.R. 2776 August 4, by a vote of
221-189. Upon passage, the tax provisions were folded into H.R. 3221.
On the Senate side, the Senate Finance Committee’s (SFC) on June 19, 2007,
approved a package of tax provisions to be added to the comprehensive energy bill
(H.R. 6) by a vote of 15-5. The energy tax bill (the Energy Advancement and
Investment Act) proposed a $32.2 billion tax cut for alternative fuels and energy
conservation, more than double the size of the W/M bill, to be offset by $32.2 billion
of tax increases primarily on the domestic oil and gas industry, but including $4
billion of taxes from disallowing losses on abusive SILO (sale-in, lease out)
transactions, and by several other relatively minor tax increases. The proposed tax
increases on the domestic oil and gas industry total nearly $27 billion over ten years
and account for about 83% of the proposed tax increases. The Senate failed June 21,
2007, to limit debate on the tax title when it was pending as an amendment to the
legislation. The Senate passed H.R. 6 without the tax title on June 21 by a vote of
65-27.
4 There is an important economic distinction between a subsidy and a tax benefit. As is
discussed elsewhere in this report, firms receive a variety of tax benefits that are not
necessarily targeted subsidies (or tax expenditures) because they are available generally.

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CRS-15
In early December 2007, it appeared that the conferees had reached agreement
on a comprehensive energy bill, the Energy Independence and Security Act, and
particularly on the controversial energy tax provisions. The compromise on the
energy tax title proposed to raise taxes by about $21 billion to fund extensions and
liberalization of existing energy tax incentives. The Senate December 13 stripped the
controversial tax title from its version of the comprehensive energy bill (H.R. 6) and
then succeeded in passing the bill, 86-8, leading to the President’s signing of the
Energy Independence and Security Act of 2007 (P.L. 110-140), on December 19,
2007. The only tax-related provisions that survived were (1) an extension of the
Federal Unemployment Tax Act surtax for one year, raising about $1.5 billion, (2)
higher penalties for failure to file partnership returns, increasing revenues by $655
million, and (3) an extension of the amortization period for geological and
geophysical expenditures to seven years from five years, raising $103 million in
revenues. The latter provision was the only tax increase on the oil and gas industry
that survived. Those three provisions would offset the $2.1 billion in lost excise tax
revenues going into the federal Highway Trust Fund as a result of the implementation
of the revised Corporate Average Fuel Economy standards. The decision to strip the
much larger $21 billion tax title stemmed from a White House veto threat and the
Senate’s inability to get the votes required to end debate on the bill earlier in the day.
Senate Majority Leader Harry Reid’s (D-Nev.) effort to invoke cloture fell short by
one vote, in a 59-40 tally.
The 2008 Economic Stimulus Bill
On February 7 the House and Senate approved a $152 billion bill (H.R. 5140)
to stimulate the economy by cutting taxes and increasing spending. The version
approved by the SFC on January 30 was a $157 billion economic stimulus package
that was similar to the House-passed bill, but which also included $5.6 billion in
energy tax incentives, primarily an extension of many of the energy tax provisions
for renewable energy and energy efficiency that were dropped from the
comprehensive energy bill, the Energy Independence and Security Act of 2007 (P.L.
110-140). Senate Democrats sought this more comprehensive stimulus package that
also included an extension of unemployment insurance benefits, and an increase in
funding for the low-income home energy assistance program (LIHEAP). However,
a cloture vote to limit debate and move this broader bill forward fell one vote short
of the 60 votes needed. The Bush administration also voiced its opposition to the
Senate’s inclusion of the unemployment insurance extension. Thus, the approved
H.R. 5140, which President Bush is expected to sign, did not include extension of
energy tax provisions that either have expired or will expire in 2008.
Resuscitation of the Energy Tax Provisions of H.R. 3221, the
House’s Comprehensive Energy Policy Bill
Frustrated with the lack of action, on February 27, 2008, House Democrats
introduced another bill (H.R. 5351) that contains $18.1 billion in renewable energy
and energy efficiency incentives, with many provisions the same as in prior bills,
including increased taxes on the major oil and gas companies. In response, the
administration threatened to also veto this bill, in part because of its increased taxes
on the oil and gas industry. House Speaker Pelosi and other Democrats sent Bush a

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CRS-16
letter February 28, 2008, urging him to reconsider his opposition to the Democratic
renewable energy plan, arguing that their energy tax plan would “correct an
imbalance in the tax code.”
H.R. 5351, the Renewable Energy and Energy Conservation Tax Act of 2008,
is a package of approximately $18 billion in energy tax incentives aimed at
encouraging the production and use of alternative fuels and renewable forms of
energy and for energy conservation. It is a slightly smaller version of the energy tax
title that was dropped from H.R. 3221 in December 2007, but slightly larger than the
$16 billion bill approved by the W/MC in 2007 (H.R. 2776). The tax cuts would be
financed largely by repealing the IRC §199 manufacturing tax deduction for major
oil and gas producers, and freezing the deduction for all other oil and gas producers
at the current rate of 6%. Additional revenue would come from a provision to
streamline the tax treatment of foreign oil-related income so it is treated the same as
foreign oil and gas extraction income. This provision is identical to that which was
in H.R. 3221 except that the estimated revenue gain has increased from $3.2 billion
last August to $4.08 billion in the new bill.
The major highlights of the House energy tax bill are as follows:
Renewable Production Incentives.
! The bill expands the Internal Revenue Code (IRC) §45 tax credits
for electricity produced from renewable energy such as wind
turbines, solar, biomass, geothermal, river currents, ocean tides,
landfill gas, and trash combustion resources. It also extends the
placed in service date by three years to December 31, 2011.
! It liberalizes the 30% investment tax credit for business solar and
fuel cells, and extends the credit by eight years.
! The bill would extend the credit for residential solar property for six
years (through the end of 2014). The bill would also increase the
annual credit cap (currently capped at $2,000) to $4,000. The bill
would include residential small wind equipment and geothermal heat
pumps as property qualifying for this credit. The bill would also
allow the credit to be used to offset alternative minimum tax (AMT).
! It provides additional authority to raise the limits on a category of
“Clean Renewable Energy Bonds” eligible as tax-exempt bond
financing. The bill encourages the deployment of renewable energy
by providing electric cooperatives and public power providers with
new clean renewable energy bonds that will allow these entities to
install facilities that generate electricity from renewable resources.
! It extends the biodiesel tax credits by two years and restricts the tax
credits for renewable diesel. It creates a new tax credit for cellulosic
ethanol and increases the number of E-85 pumps for consumers with
flex-fuel vehicles.

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CRS-17
! The bill creates a new production tax credit of 50¢ per gallon for
cellulosic alcohol produced for use as a fuel in the United States.
This credit is in addition to the current 51¢ per gallon ethanol credit
and the 10¢ per gallon small producer credit. The credit would be
available through the end of 2010.
! Increases the 30% alternative refueling property credit (capped at
$30,000) to 50% (capped at $50,000). The credit provides a tax
credit to businesses (e.g., gas stations) that install alternative fuel
pumps, such as fuel pumps that dispense E85 fuel. The bill would
also extend this credit through the end of 2010.

Conservation Incentives.
! The bill adds employer-funded bicycle purchase and repair costs
toward commuting expenses to the list of tax-exempt transportation
fringe benefits, which are exempt from gross income.
! It creates a new tax credit for plug-in hybrids to complement the
existing hybrid vehicle tax credits.
! It also helps States leverage tax credit bonds to implement
low-interest loan programs and grant programs to help working
families purchase energy-efficient appliances, make energy-efficient
home improvements, or install solar panels, small wind turbines, and
geothermal heat pumps.
! The bill creates a new category of tax credit bonds for green
community programs and initiatives designed to reduce greenhouse
gas emissions. There is a national limitation of $3.6 billion which is
allocated to States, municipalities and tribal governments. This
proposal is estimated to cost $1.9 billion over ten years.
! Extends the tax credits for energy-efficient existing homes for two
years (through December 31, 2009). This credit expired at the end
of 2007. It also expands the credit to include energy-efficient
biomass fuel stoves as a new class of energy-efficient property
eligible for a consumer tax credit of $300.
! Extends the energy-efficient commercial buildings deduction for five
years (through December 31, 2013).
! Modify the existing energy-efficient appliance credit and extend this
credit for three years (through the end of 2010).
! The bill would allow electric utilities to depreciate smart electric
meters over a five-year period.
! The bill would implement a proposal included in the President’s
FY2009 Budget to provide the City of New York and the State of

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CRS-18
New York with tax credits for expenditures made for transportation
infrastructure projects connecting with the New York Liberty Zone.
This proposal is estimated to cost $1.83 billion over ten years.
Tax Increases on the Oil and Gas Industry. To pay for these renewable
energy and conservation incentives, the bill would amend or repeal approximately
$18 billion in tax breaks for oil and gas companies. More specifically, the House
proposal would:
! denies the IRC §199 manufacturing deduction to major oil and gas
producers, and freeze the deduction at the current rate of 6% for all
other producers. It was originally estimated to raise $6.5 billion over
10 years but was revised in June 2007 by the Joint Committee on
Taxation to $11.4 billion over ten years. Under the current House
plan it is estimated to raise $13.57 billion over 10 years. First
enacted in 2004, this provision allows a deduction, as a business
expense, for a specified percentage of the qualified production
activity’s income subject to a limit of 50% of the wages paid that are
allocable to the domestic production during the taxable year. The
deduction was 3% of income for 2006, is currently 6%, and is
scheduled to increase to 9% when fully phased in by 2010. For the
domestic oil and gas industry, the deduction applies to oil and gas or
any primary product thereof, provided that such product was
“manufactured, produced, or extracted in whole or in significant part
in the United States.” Note that extraction is considered to be
manufacturing for purposes of this deduction, which means that
domestic firms in the business of extracting oil and gas qualify for
the deduction. This deduction was enacted under the American Jobs
Creation Act of 2004 (P.L. 108-357, also known as the “JOBS”
bill). It was originally a substitute for repeal of the export tax
benefits under the extra-territorial income tax exclusion, which was
ruled to be in violation of trade laws;5
! restricts the ability of major oil and gas companies to claim tax
credits for taxes and other payments to foreign governments against
the U.S. tax on foreign source income. This provision is identical to
the one that was in H.R. 3221, except the amount it would raise
jumped from $3.2 billion last August to $4.08 billion in the new bill.
H.R. 5351 also proposes to scale back or modify the depreciation and expensing
rules for large sport utility vehicles — the so called “Hummer” tax loophole closes
that provides an extra depreciation tax incentive for businesses buying luxury SUVs.
House Democrats are targeting the so-called SUV loophole by eliminating the current
tax incentives for large SUVs but maintaining them for vehicles used for legitimate
business purposes. Thus, vans that are designed for strictly business use, trucks, farm
vehicles, ambulances, and other types of vehicles used for transporting people or
5 CRS Report RL32652, The 2004 Corporate Tax and FSC/ETI Bill: The American Jobs
Creation Act of 2004, by David L. Brumbaugh.

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CRS-19
large products for business purposes would be exempted. The provision would raise
$393 million over 10 years, compared with the $786 million provision the House
passed in 2007. Small amounts of revenue would also come from (1) disallowing the
alternative fuels tax credit to renewable diesel co-produced with petroleum products,
and (2) excluding non-domestically produced and consumed ethanol and biodiesel
from qualifying from any tax credits.
In the Senate, action appears to be focused on S. 2642, but any bill must garner
60 votes for floor consideration — an obstacle that proved insurmountable in 2007.
Some speculate that energy tax legislation in the Senate could be part of a $35 billion
budget reconciliation effort, which would allow the tax package to pass with only a
simple majority of senators, rather than the typical 60 votes needed to avoid
filibuster. Even if the Senate clears the measure, however, President Bush has
threatened to veto it.

Likely Effects on Oil and Gas Prices and
Oil Import Dependence
In general, for reasons explained more fully below, none of the oil and gas tax
provisions listed above are expected to have significant price effects, either on crude
oil or natural gas prices, or refined petroleum product prices, such as pump prices.
The market price of crude oil and natural gas, or even of refined petroleum products,
such as gasoline, would not be expected to increase very much, if at all. In general,
also, the income tax increases are not expected to have real output effects in the short
run, although they will cause resources to flow to other industries in the long run as
long as these other industries are allowed the manufacturing deduction, which is
equivalent to a lower marginal tax rate.
Neutrality of the Corporate Income Tax
Two of the provisions in both the W&MC and SFC energy tax bills constitute
increases in the corporate income tax and would raise a substantial fraction of the
revenues from increased taxation of the oil and gas industry. The larger of the two
would rescind an income tax cut enacted nearly three years ago; the second would
raise U.S. tax on foreign-source oil and gas income by limiting the foreign tax credit.
One of the biggest revenue raisers in both bills is the provision that cuts back
the §199 manufacturing deduction to domestic oil and gas producers. First enacted
in 2004, this provision in IRC §199 allows a deduction, as a business expense, for a
specified percentage of the qualified production activity’s income subject to a limit
of 50% of the wages paid that are allocable to the domestic production during the
taxable year. The deduction was 3% of income for 2006, is currently 6%, and is
scheduled to increase to 9% when fully phased in by 2010. For the domestic oil and
gas industry, the deduction applies to oil and gas or any primary product thereof,
provided that such product was “manufactured, produced, or extracted in whole or
in significant part in the United States.” Note that extraction is considered to be
manufacturing for purposes of this deduction, which means that domestic firms in the
business of extracting oil and gas from underground reservoirs or deposits qualify for
the deduction. This deduction was enacted under the American Jobs Creation Act of

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2004 (P.L. 108-357, also known as the “JOBS” bill). It was originally a substitute for
repeal of the export tax benefits under the extra-territorial income tax exclusion,
which was ruled to be in violation of trade laws.6
To understand why repealing this deduction, whether for oil and gas or any other
industry, would not likely have price effects, note that the deduction is effectively
equivalent to a reduction in the marginal income tax rate. For example, at the
marginal corporate tax rate of 35%, which typically applies to large corporations such
as oil and gas producers and refiners, the current deduction of 6% is equivalent to a
marginal corporate income tax rate of 32.9% (35% x 0.94) rather than 35%.7 The
proposed elimination of this deduction is, thus, equivalent to an increase in the
marginal tax rate from 32.9% to 35% for those major oil companies to which this
would apply. All other large corporations would continue to face a top marginal tax
rate of 32.9%, with the exception of non-manufacturing enterprises (services, for
example), which do not qualify for the §199 deduction.
From an economic perspective, that is to say, in theory, increasing marginal tax
rates on corporate income would be relatively neutral in the short run — it would
have no (or few) price effects and other economic effects. The reason for this is that
a firm maximizes profit at the point at which market prices are equal to marginal
production costs, and neither are affected by an increase in marginal tax rates — the
profit maximizing level of output and price are unaffected by the tax. Thus, while
eliminating the deduction — that is to say, raising the corporate tax rate — would
increase total (or average) business costs and therefore reduce profitability among the
major oil and gas producers, as long as marginal production costs are unaffected,
there would be no price effects in the short run. Note also that while the current
corporate income tax is not a pure corporate profits (or cash-flow) tax, a surtax for
oil companies would arguably be an administratively simple and economically
effective way to capture any oil windfalls in the short run.
In the long run, however, all taxes distort resource allocation, and even a
corporate profit tax (either of the pure type or the surtax on the existing rates) would
reduce the rate of return and reduce the flow of capital into the industry. In the long
run, eliminating the deduction for the domestic oil and gas industry will raise average
production costs, adversely affecting the economics of domestic oil and gas projects
as compared to domestic non-oil and gas projects. Generally, rates of return to
investments in oil and gas would decline, causing a decline in capital flows to this
industry, and an increase in capital flowing to other industries, including foreign
industries. This would tend to adversely affect domestic production and increase
imports: Domestic oil and gas output would be lower, and imports would be higher
than they otherwise would be without the tax increase. However, because of the
structure of the world oil market, market oil prices are exogenous to U.S. producers
(and gas prices tend to follow market oil prices), even these longer term effects are
6 CRS Report RL32652, The 2004 Corporate Tax and FSC/ETI Bill: The American Jobs
Creation Act of 2004, by David L. Brumbaugh.
7 Corporations are currently taxed at 15% of the first $50,000 of taxable income, 25% of the
taxable income from $50,001 to $75,000, 34% of the taxable income from $75,001 to $10
million, and 35% of taxable income above $10 million.

---

CRS-21
not likely to affect oil and gas prices. Also, the retail price of refined petroleum
products, such as gasoline, to consumers is determined by a complex interplay of
world supply and demand market variables rather than a domestic corporate tax
increase.
Even in the long run, however, it is important to keep the proposed tax increase
in perspective. According to the JCT, repealing the §199 deduction for all oil and gas
producers would increase revenues, i.e., the industry tax burden, by over $300
million in FY2008, with an average annual increase of $1.1 billion from FY2008-
FY2017. By virtually any standard of comparison these increases are small. For
example, the Energy Information Administration estimates that the industry earned
over $123 billion in profits in 2006.8 A proposed tax increase of $300 million is
negligible in relation to this profit level. Even the estimated $1.1 billion average
annual tax increase represents only 1.4% of the industry’s average profit from 2001
to 2006.
Of course business profits are highly variable in the long run, and a reduction
in petroleum prices would commensurately reduce industry profits — it could also
result in losses — which implies that the relative burden of §199 repeal might grow.
But also keep in mind that EPACT05 reduced taxes on the industry by an average of
about $250 million per year (see Table 1), and that the industry benefits from
numerous tax subsidies (see Table 2).
As to the proposed restrictions to the foreign tax credits, this proposal would
also be effectively an increase in the corporate income tax on domestic oil and gas
producers operating abroad. Again, owing to the structure of the world oil market and
how crude prices are determined in this market, there are likely to be few price
effects either in the short or long run. However, raising domestic income taxes by
restricting the industry’s ability to claim credits against the income taxes imposed by
foreign countries might negatively affect the competitiveness of the domestic U.S.
oil producers operating abroad and competing with foreign firms that would not have
such restrictions.
Energy Tax Incentives in the Farm Bills
It should also be mentioned that there are several, relatively small, energy tax
provisions in the farm bill, which is currently in conference. The House approved its
version of the farm bill H.R. 2419 on July 27, 2007 without energy tax provisions.
The following energy tax incentives are incorporated into the Senate version of the
farm bill, the Senate’s substitute to H.R. 2419, which was approved by the Senate’s
on December 14, 2007. (The Senate’s original version of the farm bill, S. 2302, was
approved by the Senate Agriculture Committee on October 25, 2007).
! Small Wind Power Credit: The proposal creates a new 30% credit
for small (100 kilowatts or less) residential and commercial wind
8 Energy Information Administration. Oil and Natural Gas Market Supply and Renewable
Portfolio Standard Impacts of Selected Provisions of H.R. 3221. December 2007.

---

CRS-22
property, capped at $4,000 per year. The cost is $5 million over 10
years;
! Transmission Pole Payment Exemption: Easement payments
generally must be included in a taxpayer’s income for federal
income tax purposes. The proposal allows taxpayers who locate an
electricity transmission pole on a line of 230 kilovolts or more to
exempt easement payments received from the electric utility or
electric transmission company from gross income. The cost is $91
million over 10 years;
! Small Producer Credit for Cellulosic Alcohol: The proposal creates
a new production tax credit for cellulosic alcohol of 50¢ per gallon
(in addition to the current 51¢/gallon credit and 10¢/gallon credit)
for up to 60 million gallons of cellulosic fuel production in a taxable
year. The cost is $1,079 million over 10 years;
! Expand Expensing for Cellulosic Ethanol Facilities: The proposal
expands the eligible property qualifying for the 50% expensing to
include alcohol produced from any lignocellulosic or hemicellulosic
matter that is available on a renewable or recurring basis. Cost is $1
million over 10 years;
! Small Ethanol Producer Credit: The proposal extends for two years
(through December 31, 2012) the 10¢ per gallon tax credit on the
first 15 million gallons of ethanol production for producers with
annual capacity of not more than 60 million gallons. Cost is $172
million over 10 years;
! Fossil-Free Alcohol Production Credit: The proposal creates a new
small producer alcohol credit of 25¢ per gallon for facilities that
produce ethanol through a process that does not use a fossil-based
resource available through December 31, 2012. Cost is $211 million
over 10 years;
! Biodiesel Tax Credits: Extends for two years (through December 31,
2010) the $1.00 and 50¢ production tax credits for biodiesel.
Extends for four years (through December 31, 2012) the 10¢
per-gallon tax credit on the first 15 million gallons of biodiesel
production for producers with annual capacity of not more than 60
million gallons. Cost is $267 million over 10 years;
! Renewable Diesel Incentives: Extends for two years (through
December 31, 2010) the $1 tax credit for diesel created through a
thermal depolymerization process and caps, on a per facility basis,
the $1 credit at 60 million gallons per year. Cost is $211 million over
10 years;
! Alternative Fuels Excise Tax Credit: The proposal modifies the
credit to include biomass-gas-based versions of liquefied petroleum

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CRS-23
gas and liquefied or compressed natural gas. Cost is $332 over 10
years;
! IRC §45 Production Tax Credit Exception: Present law requires a
reduction in the IRC §45 production tax credit for renewable
electricity for grants, tax-exempt bonds, subsidized energy financing,
and other credits. The proposal provides an exception to this general
rule for any financing to farmers, ranchers, or rural small businesses
issued by the Secretary of Agriculture under authority granted by
Section 9006 of the Farm Security and Rural Investment Act of
2002. The cost is $14 million over 10 years;
! Alternative Refueling Station Tax Credit: The proposal extends the
30% alternative refueling property credit (capped at $30,000) for
non-hydrogen property for one year (through December 31, 2010).
Cost is $119 million over 10 years.
! Volumetric Ethanol Excise Tax Credit. The proposal reduces the
51¢/per-gallon tax credit for ethanol by 5¢ beginning with the first
calendar year after the year in which 7.5 billion gallons of ethanol
(including cellulosic ethanol) have been produced. The proposal is
effective on the date of enactment. The proposal is estimated to raise
$854 million over ten years;
! Exclusion of Denaturant from Alcohol Fuels Credit. The proposal
excludes all but two percent of the volume of denaturant (a
substance used to render alcohol toxic or undrinkable) in the fuel for
purposes of calculating the volume of alcohol eligible for the alcohol
fuels credit. The proposal is effective January 1, 2008. The proposal
is estimated to raise $284 million over ten years;
! Extension of Tariff on Ethanol. The proposal extends the tariff on
imported ethanol for two years (through December 31, 2010). The
proposal is effective on the date of enactment. The proposal is
estimated to raise $25 million over ten years;
! Duty Drawback on Imported Ethanol. Present law allows duties paid
upon import to be reclaimed at a later date if the same or similar
product is exported. Current law treats ethanol blended with gasoline
the same as jet fuel. The proposal terminates that treatment. Any
drawback for ethanol or ethanol blended with gasoline is still
allowed. The proposal is estimated to raise $10 million over ten
years. (Estimate subject to change by the Congressional Budget
Office.);
! Treatment of Alcohol and Biodiesel Fuel Mixtures. The proposal
adds qualified alcohol fuel mixtures and qualified biodiesel fuel
mixtures to the definition of taxable fuel. In addition, the proposal
requires additional reporting by the registered blender and
documentation of the ASTM standard. The proposal is effective for

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CRS-24
fuels removed, entered, or sold after December 31, 2007. The
proposal is estimated to raise $2 million over ten years.
The House completed floor action on its version of the farm bill on July 27,
2007. The Senate Agriculture Committee approved its version on October 25, 2007.
On December 14, the Senate completed floor action on the farm bill, which was
offered as a substitute to H.R. 2419 (Farm, Nutrition, and Bioenergy Act of 2007).
The House approved farm bill includes a $7.5 billion tax increase, a provision that
would eliminate the tax benefits given to many foreign companies with U.S.
subsidiaries, but it includes no energy tax provisions. The Senate-passed farm bill
does not include that provision, but includes language codifying the economic
substance doctrine, which some opponents have said amounts to a tax increase. Bush
had threatened to veto the original House-passed bill because the spending level was
too high and because he opposed the tax increase. Conference negotiations between
the House and Senate are taking place. At this writing the House has approved the
conference report without the tax increase and the bill has to go to the Senate for
approval. President Bush has vowed to veto any farm bill that would raise taxes.
It should be noted that the farm bills are much smaller in terms of the dollars of
energy tax cuts than either the House energy tax provisions (H.R. 3221) or those
approved by the SFC ($2.5 billion of energy tax incentives, vs. $16 billion in the
House bill and $32 billion in the SFC bills). Also, the farm bills fund the $2.5 billion
in energy conservation and renewable tax cuts by a $1.3 billion cutback in existing
energy conservation and renewable tax incentives. Thus, as compared with either
H.R. 3221 and the SFC energy tax bill, the farm bills have numerous, small types of
alternative fuels incentives provisions, i.e., targeting only (or almost only) alternative
fuels. Finally, the Farm bills do not raise taxes on oil and gas by reducing present tax
subsidies although it does impose a “fee” (really, an excise tax) on oil and gas from
OCS production that did not pay royalties, but this is the same as in the House and
Senate energy bills.
For Additional Reading
U.S. Congress, Senate Budget Committee, Tax Expenditures: Compendium of
Background Material on Individual Provision, Committee Print, December
2006, 109th Cong., 2nd sess.
U.S. Congress, Joint Tax Committee, “Description of the Tax Provisions in H.R.
2776, The Renewable Energy and Energy Conservation Tax Act of 2007,” June
19, 2007 (JCX-35-07).
U.S. Congress, Joint Tax Committee, “Description of the Chairman’s Modification
to the Provisions of the Energy Advancement and Investment Act of 2007,”
June 19, 2007 (JCX-33-07).
U.S. Congress, Joint Tax Committee, Description And Technical Explanation of the
Conference Agreement of H.R. 6, Title XIII, “Energy Tax Policy Tax Incentives
Act of 2005,” July 27, 2005.

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CRS-25
CRS Report RS21935, The Black Lung Excise Tax on Coal, by Salvatore Lazzari.
CRS Report RL33302, Energy Policy Act of 2005: Summary and Analysis of Enacted
Provisions, by Mark Holt and Carol Glover.
CRS Report RL30406, Energy Tax Policy: An Economic Analysis, by Salvatore
Lazzari.
CRS Report RS22344, The Gulf Opportunity Zone Act of 2005, by Erika Lunder.
CRS Report RL33763, Oil and Gas Tax Subsidies: Current Status and Analysis, by
Salvatore Lazzari.
CRS Report RS22558, Tax Credits for Hybrid Vehicles, by Salvatore Lazzari.
CRS Report RS22322, Taxes and Fiscal Year 2006 Reconciliation: A Brief
Summary, by David L. Brumbaugh.

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CRS-26
Table 1. Comparison of Energy Tax Provisions the House,
Senate, and Enacted Versions of H.R. 6 (P.L.109-58):
11-Year Estimated Revenue Loss by Type of Incentive
(in millions of dollars; percentage of total revenue losses)
House H.R. 6
Senate H.R. 6
P.L. 109-58
$
%
$
%
$
%
INCENTIVES FOR FOSSIL FUELS SUPPLY
(1) Oil & Gas Production
-1,525
18.9%
-1,416
7.6%
-1,132
7.8%
(2) Oil & Gas Refining
-1,663
20.6%
-1,399
7.5%
-1,501
10.4%
and 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
0
-213
-92
Cutsa
(13) Total Energy and
0
-18,802
-14,553
Non-Energy Tax Cuts
(14) Energy Tax
0
0
+2,857
Increasesb
(15) Other Tax Increases
+ 4,705
171
(16) 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 $1,356 ($2,857-$1501); if the taxes are subtracted from all of the industry’s tax
subsidies (rows 1 and 2), the industry experienced a net tax increase of $224 million ($2,857-
$2,633). Also, the Tax Increase Prevention and Reconciliation Bill of 2006 (P.L. 109-222),
enacted on May 17, 2006, increased taxes on the oil industry by about $189 million.

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CRS-27
Table 2. Current Energy Tax Incentives and Taxes:
Estimated Revenue Effects FY2007
(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
% depletion — oil,
15% of sales (higher
only for independents,
- 1,200
gas, and coal
for marginal wells);
up to 1,000 or equiv.
10% for coal
bpd
expensing of
IDCs 100% deductible
corporations expense
- 1,100a
intangible drilling
in first year
only 70% of IDCs;
costs (IDCs) and
remaining 30% are
exploration and
amortized over 5 years
development costs
— oil/gas and other
fuels
amortization of
costs amortized over 2
major integrated oil
- 100
geological and
years for both dry
companies must
geophysical costs
holes and successful
amortize such costs
for oil and gas
wells
(for both abandoned
and successful
properties) over 5 years
expensing of
deduction of 50% of
must increase the
- 26
refinery investments
the cost of qualified
capacity of an existing
refinery property, in
refinery by 5%;
the taxable year in
remaining 50% is
which the refinery is
depreciated; must be
placed in service
placed in service before
January 1, 2012
incentives for small
$2.10 credit per barrel
credit limited to 25%
- < 50
refiners to comply
of low-sulfur diesel,
of capital costs;
with EPA sulfur
plus expensing of 75%
expensing phases out
regulations
of capital costs
for refining capacity of
155,000-205,000
barrels per day.

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CRS-28
Revenue
Category
Provision
Major Limitations
Effects
FY2006
Tax Credits for
IRC §43 provides for a
The EOR credit is non
- 200
Enhanced Oil
15% income tax credit
refundable, and is
Recovery Costs
for the costs of
allowable provided that
(EOR)
recovering domestic
the average wellhead
oil by qualified
price of crude oil
“enhanced-oil-
(using West Texas
recovery” (EOR)
Intermediate as the
methods, to extract oil
reference), in the year
that is too viscous to
before credit is
be extracted by
claimed, is below the
conventional primary
statutorily established
and secondary water-
threshold price of $28
flooding techniques.
(as adjusted for
inflation since 1990),
in the year the credit is
claimed. With average
wellhead oil prices for
2005 (about $65) well
above the reference
price (about $38) the
EOR credit was not
available.
Marginal
A $3 tax credit is
The credit phases out
0
Production Tax
provided per barrel of
as oil prices rise from
Credit
oil ($0.50 per
$15 to $18 per barrel
thousand cubic feet
(and as gas prices rise
(mcf)) of gas from
from $1.67 to
marginal wells, and
$2.00/thousand cubic
for heavy oil.
feet), adjusted for
inflation. The credit is
limited to 25 bpd or
equivalent amount of
gas and to 1,095 barrels
per year or equivalent.
Credit may be carried
back up to 5 years. At
2005 oil and gas prices,
the marginal
production tax credit
was not available.
nuclear
liberalizes tax
in general, the IRS sets
- 600
decommissioning
deductible
limits on the annual
contributions to a fund
amounts made to a
in advance of actual
nuclear
decommissioning
decommissioning fund

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CRS-29
Revenue
Category
Provision
Major Limitations
Effects
FY2006
electric utilities
allows net-operating
only 20% of the NOLs
- < 50
losses (NOLs) to be
in
carried back 5 years,
2003-2005 qualify
as compared with 2
years for all other
industries
disposition of
capital gain
proceeds must be
- < 50
electricity
recognized evenly
reinvested in other
transmission
over 8 years
electricity generating
property to
assets
implement FERC
policy
tax credit for
1.8¢/kWh tax credit
limited to 6,000
- < 50
advanced nuclear
megawatts of aggregate
power facilities
capacity; each
taxpayer’s credit also
has a per kWh or
power limitation and an
aggregate limitation
credit for clean-coal
20% for integrated
each system has
- 100
technologies
gasification combined
maximum aggregate
cycle (IGCC) systems;
dollar limits
15% for other
advanced coal
technologies
Targeted Taxes
black-lung coal
$1.25/ton for
coal tax not to exceed
900
excise taxes and
underground coal
4.4% of sales price
abandoned
($0.90 for surface
(2.2% for the AML
mineland
coal)
fee)
reclamation (AML)
fees
oil spill liability
$0.05/barrel tax on
moneys are allocated
150
trust fund excise tax
every barrel of crude
into a fund for cleaning
oil refined
up oil spills
ALTERNATIVE, UNCONVENTIONAL, AND RENEWABLE FUELS
Targeted Tax Subsidies
§29, production tax
$6.40/bar. of oil or
biogas, coal synfuels,
- 4,500
credit
($1.13/mcf of gas)
coalbed methane, etc.
credits for fuel
$0.51 blender’s credit
for biomass ethanol
- 3,000
ethanol and
plus $0.10/gal small
only (e.g., from corn)
biodiesel
producer credit
tax credit for clean-
$30,000 tax credit for
per location, per
- < 50
fuel refueling
alternative fuel
taxpayer (replaces a
property
equipment
deduction)

---

CRS-30
Revenue
Category
Provision
Major Limitations
Effects
FY2006
§45 credit for
1.8¢/kWh. (0.9¢ in
wind, closed-loop
- 1,100
renewable
some cases;
biomass, poultry
electricity
$4.375/ton of refined
waste, solar,
coal
geothermal, etc.
alternative fuel
$400-$40,000 credit
tax credit is function of
- 300
motor vehicle
for each fuel cell,
vehicle weight, fuel
(AFV) tax credits
hybrid, lean burn and
economy, and lifetime
other AFVs
fuel savings
exclusion of interest
interest income
for hydroelectric or
- 100
on state and local
exempt from tax
biomass facilities used
bonds
to produce electricity
credits for biodiesel
$0.50/gal. of recycled
sold at retail or used in
- 122
biodiesel; $1.00/gal.
a trade or business;
for virgin biodiesel
applies to oils from
vegetables or animal
fats
credit for business
10% investment tax
utilities excluded
- < 100
solar and
credit for businesses
geothermal
technologies
tax credit for
credit equals the credit
proceeds must be used
- < 50
renewable energy
rate times by the
for renewable
bonds
bond’s face amount
electricity projects.
national limit of $1.2
billion in bonds
ENERGY CONSERVATION
Targeted Subsidies
mass transit
exclusion of
- 192
subsidies
$105/month
manufacturer’s
max credit is $50 for
amount of credit
- 100
credit for energy
dishwashers, $175 for
depends on energy
efficient appliances
refrigerators, and $200
efficiency, energy
for clothes washers
savings, and varies by
year; total annual credit
is also limited
deduction for the
tax deduction of cost
total deductions cannot
- < 50
cost of energy
of envelope
exceed $1.80/sq.ft.
efficient property in
components, heating
commercial
cooling systems, and
buildings
lighting
credit for energy
10% tax credit
max credit on windows
- 300
efficiency
($500/home) on up to
is $200
improvements to
$5,000 of costs; $50-
existing homes
$300 credit for other
items

---

CRS-31
Revenue
Category
Provision
Major Limitations
Effects
FY2006
exclusion for utility
subsidies not taxable
any energy
- < 50
conservation
as income
conservation measure
subsidies
Targeted Taxes
fuels taxes
18.4¢/gal. on gasoline
4.4¢-24.4¢ for other
35,000
(FY2006)
fuels
gas-guzzler tax
$1,000-$7,700/
trucks and SUVs are
201
(FY2006)
vehicle weighing
exempt
6,000 lbs. or less
Source: Joint Tax Committee estimates and Internal Revenue Service data.
Notes: A negative sign indicates a tax subsidy or incentive; no negative sign indicates an energy tax.
NA denotes not available.
a. The revenue loss estimate excludes the benefit of expensing costs of dry tracts and dry holes, which
includes expensing some things that would otherwise be capitalized. This is a normal feature
of the tax code but confers special benefits on an industry where the cost of finding producing
wells includes spending money on a lot that turn out dry. This is probably more important than
IDCs or percentage depletion.

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