Order Code RL33578
Energy Tax Policy:
History and Current Issues
Updated August 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been repealed, which together created negative effective tax rates in some cases, the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 109th Congress enacted the Energy Policy Act of 2005 (P.L. 109-58),
signed by President Bush on August 8, 2005, provided a net energy tax cut of $11.5
billion ($14.5 billion gross energy tax cuts, less $3 billion of energy tax increases)
for fossil fuels and electricity, as well as for energy efficiency, and 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.
At this writing, congressional action is focusing on extension and liberalization
of energy tax subsidies. The House bill is H.R. 6049, which was approved by the
House on May 21. In the Senate, there are three different versions of tax extenders
and energy tax provisions: S. 3125, a Republican bill reintroduced as S. 3335, S.
3089, and the Ensign Amendment. Also Senate Democrats have introduced S. 3044,
the Consumer-First Energy Act, which would repeal tax code provisions that are
advantageous to the oil and gas industry and impose a windfall profits tax on that
industry. Twice in June, and once in July, Senate action on the energy tax bills has
been blocked by a failure to invoke cloture and proceed to H.R. 6049. Finally, the
recently enacted farm bill (P.L. 110-234) also expands and reforms several energy tax
provisions — all tax subsidies for renewable and alternative fuels from crops — but
also includes a 6¢ reduction in the excise tax credit for fuel ethanol.

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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
Energy Tax Proposals Under Congressional Consideration . . . . . . . . . . . . 15
H.R. 6049 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
S. 3335 and S. 3089 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
S. 3044 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
The Ensign Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Likely Effects on Oil and Gas Prices and Oil Import Dependence . . . . . . . 25
Neutrality of the Corporate Income Tax . . . . . . . . . . . . . . . . . . . . . . . 25
Energy Tax Provisions in the Farm Bill (P.L. 110-234) . . . . . . . . . . . . . . . 27
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Table 2. Current Energy Tax Incentives and Taxes: Estimated Revenue
Effects FY2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

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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. 2776.5 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
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.
5 Note: on April 10, 2008 the Senate substituted, and approved, its housing/mortgage relief
amendment as H.R. 3221. (See below for more detail).

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CRS-15
legislation. The Senate passed H.R. 6 without the tax title on June 21 by a vote of
65-27.
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.
Energy Tax Proposals Under Congressional Consideration
Frustrated with the lack of action on energy tax subsidies over the past year, on
February 27, 2008, House Democrats introduced another bill (H.R. 5351) that
contained $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

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CRS-16
and gas companies. H.R. 5351, the Renewable Energy and Energy Conservation Tax
Act of 2008, is a package of 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%.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. 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 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.”
In the Senate, action appeared at one point to focus on S. 2642; some also
speculated 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 had cleared the measure, however, President Bush had
threatened to veto it.)
At this writing, Congressional action on energy tax proposals is being taken
along several fronts: First, there is the broad and relatively significant expansion and
liberalizations of energy tax subsidies for alternative energy and energy efficiency as
embodied in H.R. 6049, the House tax extenders bill. This bill, which was approved
by the House on May 21, 2008, combines many of the energy tax incentives in prior
bills with bills to extend expiring tax provisions, including expired or about to expire
energy tax incentives. Second, there is the Senate’s main tax extenders bill, S. 3125,
formally introduced by Senator Baucus on June 13. The Democratic leadership has
also introduced S. 3044, to impose a windfall profits tax and repeal certain tax
benefits for the oil and gas industry. Third, Senate Republicans introduced their own
energy tax extender’s legislation (S. 3098). Finally, Senator Ensign has resuscitated
his amendment of April 2008 and has attempted to attach this to recent housing
legislation.
6 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).

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CRS-17
H.R. 6049. H.R. 6049, The Energy and Tax Extenders Act of 2008, is a $54
billion bill that would extend more than three dozen tax provisions, including nearly
a dozen energy tax incentives, at a cost of nearly $17 billion in lost federal tax
revenue over 10 years. It also contains $10 billion to cover the expansion of the
refundable child tax credit, a new standard for deduction of property taxes, and
alternative minimum tax relief and an extension of already expired provisions, such
as the research and development tax credit. It does not include tax increases on the
oil and gas industry.
The House approved version of H.R. 6049 is a scaled-back version of the bill
approved on May 15 by the House Ways and Means Committee. The five provisions
removed from the bill were the creation of a cellulosic biofuels tax credit, a reduction
in the ethanol credit, a change in the determination of the ethanol credit, a one-year
extension of a provision to encourage contributions of property interests made for
conservation purposes, and a comprehensive study of biofuels. These energy tax
provisions were stripped from the bill because they are included in the farm bill,
which is discussed at the end of this report. The energy tax provisions of H.R. 6049,
as approved by the House, are
! Extension and Modification of §45 Renewable Energy
Production Tax Credit. The bill extends the placed-in-service date
for wind facilities for one year (through December 31, 2009). The
bill would also extend the placed-in-service date for three years
(through December 31, 2011) for certain other qualifying facilities:
closed-loop biomass; open-loop biomass; geothermal; small
irrigation; hydropower; landfill gas; and trash combustion facilities.
The bill also includes a new category of qualifying facilities that will
benefit from the longer December 31, 2011 placed-in-service date —
facilities that generate electricity from marine renewables (e.g.,
waves and tides). The bill would cap the aggregate amount of tax
credits that can be earned for these qualifying facilities placed in
service after December 31, 2009, to an amount that has a present
value equal to 35% of the facility’s cost. The bill clarifies the
availability of the production tax credit with respect to certain sales
of electricity to regulated public utilities and updates the definition
of an open-loop biomass facility, the definition of a trash
combustion facility, and the definition of a nonhydroelectric dam.
This proposal is estimated to cost $7.046 billion over ten years;
! Long-Term Extension and Modification of the Business Tax
Credit for Solar, Fuel Cell, Geothermal and Microturbine
Investments. The bill extends the 30% investment tax credit for
solar energy property and qualified fuel cell property and the 10%
investment tax credit for microturbines for six years (through the end
of 2014). It also increases the $500 per half kilowatt of capacity cap
for qualified fuel cells to $1,500 per half kilowatt of capacity. The
bill removes an existing limitation that prevents public utilities from
claiming the investment tax credit. The bill would also provide a
new 10% investment tax credit for combined heat and power
systems. The bill also allows these credits to be used to offset

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CRS-18
alternative minimum tax (AMT). This proposal is estimated to cost
$1.376 billion over 10 years;
! Long-term Extension and Modification of the Residential Solar
Property Credit (IRC§25D). 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 also allows the credit to be used to offset alternative
minimum tax (AMT). This proposal is estimated to cost
approximately $666 million over ten years;
! Sales of Electric Transmission Property. The bill extends the
present-law deferral of capital gain on sales of transmission property
by vertically integrated electric utilities to FERC-approved
independent transmission companies. Rather than recognizing the
full amount of gain in the year of sale, this provision allows gain on
such sales to be recognized ratably over an eight-year period. The
rule applies to sales before January 1, 2010. This proposal is revenue
neutral over 10 years;
! New Clean Renewable Energy Bonds (“CREBs”). The bill
authorizes $2 billion of new clean renewable energy bonds to
finance facilities that generate electricity from the following
resources: wind; closed-loop biomass; open-loop biomass;
geothermal; small irrigation; hydropower; landfill gas; marine
renewable; and trash combustion facilities. This $2 billion
authorization will be subdivided into thirds: 1/3 will be available for
qualifying projects of State/local/tribal governments; 1/3 for
qualifying projects of public power providers; and 1/3 for qualifying
projects of electric cooperatives. This proposal is estimated to cost
$548 million over 10 years;
! Carbon Mitigation (Capture and Sequestration) Provisions. The
bill would provide $1.5 billion of tax credits for the creation of
advanced coal electricity projects and certain coal gasification
projects that demonstrate the greatest potential for carbon capture
and sequestration (CCS) technology. Of these $1.5 billion of
incentives, $1.25 billion would be awarded to advanced coal
electricity projects and $250 million would be awarded to certain
coal gasification projects. These tax credits would be awarded by
Treasury through an application process, with the applicants that
demonstrate the greatest carbon capture and sequestration percentage
of total CO emissions receiving the highest priority. Applications
2
will not be considered unless applicants can demonstrate that either
their advanced coal electricity project would capture and sequester
at least 65% of the facility’s carbon dioxide emissions or that their
coal gasification project would capture and sequester at least 75% of
the facility’s carbon dioxide emissions. Once these credits are

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CRS-19
awarded, recipients that fail to meet these minimum levels of carbon
capture and sequestration would forfeit these tax credits. This
proposal is estimated to cost $1.422 billion over 10 years;
! Carbon Audit of the Tax Code. The bill directs the Secretary of the
Treasury to request that the National Academy of Sciences undertake
a comprehensive review of the tax code to identify the types of
specific tax provisions that have the largest effects on carbon and
other greenhouse gas emissions and to estimate the magnitude of
those effects. This proposal has no revenue effect;
! Expansion of Allowance for Property to Produce Cellulosic
Alcohol. Under current law, taxpayers are allowed to immediately
write off 50% of the cost of facilities that produce cellulosic ethanol
if such facilities are placed in service before January 1, 2013.
Consistent with other provisions in the bill that seek to be
technology neutral, the bill would allow this write off to be available
for the production of other cellulosic biofuels in addition to
cellulosic ethanol. This proposal is estimated to be revenue neutral
over 10 years;
! Extension of Biodiesel Production Tax Credit, and Extension
and Modification of Renewable Diesel Tax Credit. The bill
extends for one year (through December 31, 2009) the $1.00 per
gallon production tax credits for biodiesel and the small biodiesel
producer credit of 10 cents per gallon. The bill also extends for one
year (through December 31, 2009) the $1.00 per gallon production
tax credit for diesel fuel created from biomass. The bill eliminates
the current-law disparity in credit for biodiesel and agri-biodiesel
and eliminates the requirement that renewable diesel fuel must be
produced using a thermal depolymerization process. As a result, the
credit will be available for any diesel fuel created from biomass
without regard to the process used so long as the fuel is usable as
home heating oil, as a fuel in vehicles, or as aviation jet fuel. The
bill also clarifies that the $1 per gallon production credit for
renewable diesel is limited to diesel fuel that is produced solely from
biomass. Diesel fuel that is created by co-processing biomass with
other feedstocks (e.g., petroleum) will be eligible for the 50 cent per
gallon tax credit for alternative fuels. This proposal is estimated to
cost $456 million over 10 years;
! Plug-in Hybrid/Electric Drive Vehicle Credit. The bill establishes
a new credit for each qualified plug-in electric drive vehicle placed
in service during each taxable year by a taxpayer. The base amount
of the credit is $3,000. If the qualified vehicle draws propulsion
from a battery with at least 5 kilowatt hours of capacity, the credit
amount is increased by $200, plus another $200 for each kilowatt
hour of battery capacity in excess of 5 kilowatt hours up to 15
kilowatt hours. Taxpayers may claim the full amount of the
allowable credit up to the end of the first calendar quarter after the

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CRS-20
quarter in which the manufacturer records 60,000 sales. The credit
is reduced in following calendar quarters. The credit is available
against the alternative minimum tax (AMT). This proposal is
estimated to cost $1.056 billion over 10 years;
! Incentives for Idling Reduction Units and Advanced Insulation
for Heavy Trucks. The bill provides an exemption from the heavy
vehicle excise tax for the cost of idling reduction units, such as
auxiliary power units (APUs), which are designed to eliminate the
need for truck engine idling (e.g., to provide heating, air
conditioning, or electricity) at vehicle rest stops or other temporary
parking locations. The bill would also exempt the installation of
advanced insulation, which can reduce the need for energy
consumption by transportation vehicles carrying refrigerated cargo.
Both of these exemptions are intended to reduce carbon emissions
in the transportation sector. This proposal is estimated to cost $96
million over 10 years;
! Fringe Benefit for Bicycle Commuters. The bill allows employers
to provide employees that commute to work using a bicycle limited
fringe benefits to offset the costs of such commuting (e.g., bicycle
storage). This proposal is estimated to cost $10 million over 10
years;
! Extension and Increase of Alternative Refueling Stations Tax
Credit. The bill 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 also extends this credit through the end of 2010. This
proposal is estimated to cost $156 million over ten years;
! Qualified Energy Conservation Bonds. The bill creates a new
category of tax credit bonds to finance State and local government
programs and initiatives designed to reduce greenhouse gas
emissions. There is a national limitation of $3 billion which is
allocated to States, municipalities, and tribal governments. This
proposal is estimated to cost $1.027 billion over 10 years;
! Extension and Modification of Credit for Energy-Efficiency
Improvements to Existing Homes (IRC§25C). The bill extends the
tax credits for energy-efficient existing homes for one year (through
December 31, 2008) and includes energy-efficient biomass fuel
stoves as a new class of energy-efficient property eligible for a
consumer tax credit of $300. This proposal is estimated to cost
$1.061 billion over 10 years;
! Extension of Energy-Efficient Commercial Buildings Deduction.
The bill extends the energy-efficient commercial buildings deduction

---

CRS-21
for five years (through December 31, 2013). This proposal is
estimated to cost $891 million over 10 years;
! Modification and Extension of Energy-Efficient Appliance
Credit. The bill would modify the existing energy-efficient
appliance credit and extend this credit for three years (through the
end of 2010). This proposal is estimated to cost $323 million over
10 years;
! Accelerated Depreciation for Smart Meters and Smart Grid
Systems. The bill would provide accelerated depreciation for smart
electric meters and smart electric grid systems. Under current law,
taxpayers are generally able to recover the cost of this property over
the course of 20 years. The bill would cut the cost recovery time in
half by allowing taxpayers to recover the cost of this property over
a 10-year period. This proposal is estimated to cost $921 million
over 10 years;
! Extension and Modification of Qualified Green Building and
Sustainable Design Project Bond. The bill would extend the
authority to issue qualified green building and sustainable design
project bonds through the end of 2012. Authority to issues these
bonds is currently set to expire on September 30, 2009. The bill
would also clarify the application of the reserve account rules to
multiple bond issuances. This proposal is estimated to cost $45
million over 10 years;
! Refund of Certain Coal Excise Taxes Unconstitutionally
Collected from Exporters. The Courts have determined that the
Export Clause of the U.S. Constitution prevents the imposition of
the coal excise tax on exported coal and, therefore, taxes collected
on such exported coal are subject to a claim for refund. The bill
would create a new procedure under which certain coal producers
and exporters may claim a refund of these excise taxes that were
imposed on coal exported from the United States. Under this
procedure, coal producers or exporters that exported coal during the
period beginning on or after October 1, 1990, and ending on or
before the date of enactment of the bill, may obtain a refund (plus
interest) from the Treasury of excise taxes paid on such exported
coal and any interest accrued from the date of overpayment. This
proposal is estimated to cost $199 million over 10 years;
! Solvency for the Black Lung Disability Trust Fund. The bill
would enact the President’s proposal to bring the Black Lung
Disability Trust Fund out of debt. Under current law, an excise tax
is imposed on coal at a rate of $1.10 per ton for coal from
underground mines and $0.55 per ton for coal from surface mines
(aggregate tax per ton capped at 4.4% of the amount sold by the
producer). Receipts from this tax are deposited in the Black Lung
Disability Trust Fund, which is used to pay compensation, medical

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CRS-22
and survivor benefits to eligible miners and their survivors and to
cover costs of program administration. The Trust Fund is permitted
to borrow from the general fund any amounts necessary to make
authorized expenditures if excise tax receipts do not provide
sufficient funding. Reduced rates of excise tax apply after the earlier
of December 31, 2013, or the date on which the Black Lung
Disability Trust Fund has repaid, with interest, all amounts borrowed
from the general fund of the Treasury. The President’s Budget
proposes that the current excise tax rate should continue to apply
beyond 2013 until all amounts borrowed from the general fund of
the Treasury have been repaid with interest. After repayment, the
reduced excise tax rates of $0.50 per ton for coal from underground
mines and $0.25 per ton for coal from surface mines would apply
(aggregate tax per ton capped at 2% of the amount sold by the
producer). The bill would enact the President’s proposal. This
proposal is estimated to raise $1.287 billion over 10 years.
S. 3335 and S. 3089. In the Senate, there are essentially two different
versions of tax extenders and energy tax provisions. The Senate’s main tax extenders
bill, S. 3335, formally introduced by Senator Baucus on July 24, is a slightly
expanded version of S. 3125 which was introduced on June 13. S. 3125, in turn, is
an amended version of S. 2886, also introduced by Senator Baucus. S. 3355 is very
similar to H.R. 6049. However, the Senate has been prevented from taking action on
S. 3335 when on three occasions the Senate failed to invoke cloture on the motion
to proceed to the House tax extenders bill. The first was June 10, when the motion
failed by a vote of 50-44; the second was on June 17, when the motion failed by a
vote of 52-44; the third was July 30, when the cloture motion failed by a vote of 51
to 43.
S. 3345 is generally the same as S. 3125 (and also similar to H.R. 6049) but
includes some new provisions (including a new energy tax provision and a recycling
provision) intended to increase support in the Senate and thus garner the 60 votes
needed to invoke cloture.7 S. 3335 also differs from S. 3125 in several ways: (1) it
includes a disaster relief package and money for the Highway Trust Fund, (2) it
includes provisions to require insurance companies to offer mental health coverage
that is on a par with their coverage for other medical conditions; (3) it does not
include a provision permitting certain deductions for lawyers that Republicans had
opposed; and (4) it adds a new revenue offset that would require brokers to report
their customers’ cost basis in securities transactions (but it retains previously
proposed offsets that would curtail an offshore deferred-compensation technique and
delay a tax benefit for multinational corporations. Senate Republicans also objected
to having the energy tax extenders and other extenders, which they consider to be an
extension of current tax policy, offset by new tax increases. On the other side, House
Democratic leaders, who approved H.R. 6049 with offsets, will not accept an
extenders bill that is not paid for.
7 The energy tax provision would liberalize the tax treatment of publicly traded partnerships
involved in the supply and finance of alternative fuels; the recycling provision would allow
accelerated depreciation for recycling equipment.

---

CRS-23
Finally, on June 6 Senate Republicans introduced their own legislation (S. 3098)
that would patch the AMT and extend individual, business, and energy tax provisions
but without paying for them i.e., without offsets. This bill could be offered as an
amendment during floor debate. The AMT patch would cover tax year 2008, while
most of the remaining provisions would be extended for two years through the end
of 2009, including the deduction for state and local taxes and the research and
development tax credit. The legislation also includes incentives designed to improve
energy efficiency and clean energy production, an extension of alternative fuels and
marginal production incentives, and tax administration provisions. The legislation
has not yet been scored, but the AMT patch has previously been estimated at
approximately $62 billion, while the extensions have been estimated to cost near $50
billion.
S. 3044. S. 3044 would roll back $17 billion in existing tax breaks over 10
years for the largest oil companies and impose a 25% windfall profit tax on major
oil companies; revenues would be earmarked to expanding renewable energy
development. Regarding the tax breaks, S. 3044 targets two tax code provisions that
are not strictly speaking targeted subsidies or tax expenditures, but that provide tax
advantages — some believe unfair advantages — or reduce tax liabilities for the
industry. First, S. 3044 would rescind the ability of major integrated oil companies
from claiming the IRC§199 deduction. Enacted in 2004 as an export tax incentive,
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
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.8 Secondly, S. 3044 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.
These two provisions are identical to ones in previous bills (such as H.R. 3221) as
discussed above.
As to the windfall profits tax, this provision of S. 3044 also follows earlier bills
in that it attempts to recoup for the federal taxpayer some of the windfall or “excess”
profits — oil and gas industry profits have reached record levels in recent years —
earned by the oil and gas industry as a result of unprecedented high petroleum prices.
Whereas earlier bills took various approaches in defining a windfall in the case of the
petroleum industry, S. 3044 would assess a 25% tax on the difference between profits
8 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-24
in any one year and 110% of the average of profits over the 2002-2006 period. Also,
any increased investment in renewable energy over the same base period would be
credited toward the tax hence reduce the windfall profit tax liability.
In addition to the tax provisions, S. 3044 would prohibit, and provide penalties
for, price gouging by the oil and gas industry, tighten regulation of speculators in off-
shore oil, and suspend filling of the Strategic Petroleum Reserve. Senate Minority
Leader Mitch McConnell offered May 1, on behalf of Senate Republicans, an
energy-supply bill (S. 2958), the American Energy Production Act, that would
authorize drilling in the Arctic National Wildlife Refuge and lift offshore drilling
bans.
The Ensign Amendment. On June 20, Senator Ensign introduced an
amendment (S.Amdt. 5420) that provides extension of expiring energy tax provisions
and liberalization of those provisions, at a ten-year cost os $8.3 billion. This is a
slightly larger version of a bill introduced by Senator Ensign and adopted by the
Senate in April as an amendment to a housing bill. Early in April, Senate action
focused on the Clean Energy Tax Stimulus Act of 2008 (S. 2821), a $6 billion tax bill
introduced by Senators Cantwell and Ensign on April 3. On April 10, this bill was
added as amendment (S.Amdt. 4419) to H.R. 3221, which in the Senate became the
housing/mortgage relief bill.9 H.R. 3221, as amended (i.e., with the energy tax
incentives) was approved by the Senate on April 10. However, the House version of
H.R. 3221 does not contain Senator Ensign’s energy tax provision, and it is unlikely
that the House would approve such provisions primarily because the revenue losses
are not offset by tax increases to keep the bill revenue neutral. In addition, many
legislators object to having energy tax provisions as part of housing legislation, and
want to keep such legislation “clean.”
The Senate leadership has opposed allowing a vote on the Ensign amendment,
objecting that (1) the Ensign amendment is not paid for — the Senate leadership want
the provisions to be paid for, and the House is on record that it would not approve
such amendments unless they are paid for, and (2) it is extraneous to the purpose of
housing legislation (although it was approved by the Senate as part of such legislation
in April) — Senate leaders want to keep H.R. 3221 “clean.” At this writing, media
reports suggest that the Republican leadership has agreed to accept certain types of
tax increases or discretionary spending cuts related to new tax policy proposals, if the
Democratic leadership accepts discretionary spending cuts, rather than offsetting tax
increases, as a way to finance both energy tax extenders and the AMT patch.
9 S.Amdt. 4419, i.e., S. 2821, was added to S.Amdt. 4387, which was itself a substitute to
H.R. 3221. As discussed in the text of this report, in the House, H.R. 3221 was originally
the House’s comprehensive energy policy act, which incorporated the energy tax provisions
of H.R. 2776. In December 2007, H.R. 3221 failed but was replaced by H.R. 6 which was
enacted without energy tax provisions as P.L. 110-140. In the House, the housing/mortgage
relief bill is H.R. 5720, which was approved by the House Ways and Means committee on
April 9, 2008.

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CRS-25
Likely Effects on Oil and Gas Prices
and Oil Import Dependence
S. 3044, and many of the other energy tax bills to significantly expand and
liberalize energy conservation tax subsidies, rely on revenue offsets that primarily
increased taxes on the domestic oil and gas industry. In the case of these other energy
tax bills, opposition was partly grounded on adverse energy price effects, or price
increases: it was argued that eliminating tax subsidies for the oil and gas industry
would raise industry tax burdens, which would then induce the industry to raise oil
and gas prices. In the case of S. 3044, proponents argue just the opposite: that raising
taxes on oil and gas by rescinding the §199 deduction, constraining the use of the
foreign tax credit, and imposing a windfall profit tax would help to provide price
relief. In general, for reasons explained more fully below, none of the oil and gas tax
increase provisions proposed in the bills mentioned 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. This is particularly true of the §199 deduction,
and restrictions to the foreign tax credit, as explained below. The market price of
crude oil and natural gas, or even of refined petroleum products, such as gasoline,
would not be expected to decrease 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. The two provisions in S. 3044
and other 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 — the §199 deduction — would rescind an income
tax cut enacted nearly three years ago. 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%.10 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
10 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.

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CRS-26
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
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 2006.11 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).
11 Energy Information Administration. Oil and Natural Gas Market Supply and Renewable
Portfolio Standard Impacts of Selected Provisions of H.R. 3221. December 2007.

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CRS-27
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.
Similarly, the type of windfall profit tax on oil proposed in S. 3044 is also of the
income tax type, which, again is not likely to have price or output effects in the short
run. This, however, is not likely to be the case with all windfall profit tax proposals:
the excise tax type of proposal likewise would not have price effects on petroleum,
but it runs the risk of reducing domestic petroleum output and thus increasing import
dependence.12
Energy Tax Provisions in the Farm Bill (P.L. 110-234)
It should also be mentioned that there are several, relatively small, energy tax
provisions in the farm bill (H.R. 2419), which was just recently enacted (P.L. 110-
234). These provisions, all intended to promote alternative and renewable fuels from
agricultural resources, are
! Cellulosic Biofuels Credit. Cellulosic biofuels can be produced
from agricultural waste, wood chips, switch grass, and other
non-food feedstocks. The bill includes a new, temporary cellulosic
biofuels production tax credit for up to $1.01 per gallon, available
through December 31, 2012. This provision is estimated to cost
$348 million over five years and $403 million over ten years;
! Comprehensive Biofuels Study. The bill directs the Secretary of
the Treasury, in consultation with the Secretary of Agriculture, the
Secretary of Energy, and the Administrator of the Environmental
Protection Agency, to request that the National Academy of Sciences
produce an analysis of current scientific findings relating to the
future production of biofuels and the domestic effects of an increase
in the production of biofuels. This provision is estimated to have no
revenue effect;
! Modification of the Incentives Relating to Alcohol Fuels
(Volumetric Ethanol Excise Tax Credit). The bill reduces the 51¢
per-gallon incentive for ethanol to 45¢ per gallon for calendar year
2009 and thereafter. If Treasury makes a determination — in
consultation with EPA — that 7.5 billion gallons of ethanol
(including cellulosic ethanol) were not produced in or imported into
12 For more information see CRS Report RL33305, The Crude Oil Windfall Profits Tax of
the 1980s: Implications for Current Energy Policy, by Salvatore Lazzari.

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CRS-28
the United States in 2008, the reduction in the credit amount will be
delayed. If a determination is made that the threshold was not
reached in 2008, the reduction for 2010 also will be delayed if the
Secretary determines 7.5 billion gallons were not produced or
imported in 2009. In the absence of a determination, the reduction
remains in effect. In the event the determination is made subsequent
to the start of a calendar year, those persons claiming the reduced
amount prior to the Secretary’s determination will be entitled to the
difference between the correct credit amount for that year and the
credit amount claimed, e.g. between 51¢ per gallon and 45¢ per
gallon. This provision is estimated to raise $1.203 billion over five
years and $1.203 billion over ten years;
! Calculations of Volume of Alcohol for Fuel Credits. The Internal
Revenue Code provides a per-gallon credit for the volume of alcohol
used as a fuel or in a qualified mixture. For purposes of determining
the number of gallons of alcohol with respect to which the credit is
allowable, the volume of alcohol includes any denaturant, including
gasoline. The denaturant must be added under a formula approved
by the Secretary, and the denaturant cannot exceed 5% of the volume
of such alcohol (including denaturants). This provision reduces the
amount of allowable denaturants to 2% of the volume of the alcohol
as regulated by the Alcohol and Tobacco Tax and Trade Bureau.
This provision is estimated to raise $124 million over five years and
$124 million over ten years;
! Extension of Tariff on Ethanol. The bill extends the tariff on
imported ethanol for two years (through December 31, 2010). This
provision is effective on the date of enactment. This provision is
estimated to raise $70 million over five years and $70 million over
ten years;
! Duty Drawback on Imported Ethanol. This provision clarifies the
eligibility for a drawback for jet fuel products. A drawback is a
rebate on duties, fees, or taxes paid on imported goods when a U.S.
business subsequently exports a “commercially interchangeable”
good. Current law permits drawback claims for exported jet fuel on
the basis of ethanol imports, even though such jet fuel exports are
not blended with the ethanol imports. The Conference Report
discontinues this practice for ethanol imports beginning on October
1, 2008, allowing for a phase-out of the current practice. Drawback
claims for such imports must be filed by October 1, 2010. This
provision is estimated to raise $12 million over five years and $17
million over ten years.

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CRS-29
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.
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.
CRS Report RL33305, The Crude Oil Windfall Profits Tax of the 1980s:
Implications for Current Energy Policy, by Salvatore Lazzari.

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CRS-30
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-31
Table 2. Current Energy Tax Incentives and Taxes:
Estimated Revenue Effects FY2007
(in millions of dollars)
Revenue
Category
Provision
Major Limitations
Effects
FY2007
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 7 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-32
Revenue
Category
Provision
Major Limitations
Effects
FY2007
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-33
Revenue
Category
Provision
Major Limitations
Effects
FY2007
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)

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CRS-34
Revenue
Category
Provision
Major Limitations
Effects
FY2007
§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

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CRS-35
Revenue
Category
Provision
Major Limitations
Effects
FY2007
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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