Energy Tax Policy: Issues in the 113th Congress
Molly F. Sherlock
Specialist in Public Finance
September 4, 2013
Congressional Research Service
7-5700
www.crs.gov
R43206
Energy Tax Policy: Issues in the 113th Congress
Summary
The scheduled expiration of a number of energy tax incentives means energy tax policy will
likely be considered by the 113th Congress. Under current law, for example, renewable energy
projects that begin construction after the end of 2013 will not qualify for the renewable energy
production tax credit (PTC). A number of other energy tax incentives, including provisions to
support building energy efficiency and renewable fuels, are also scheduled to expire at the end of
2013. In the past, expired and expiring energy tax provisions have been extended as part of “tax
extender” legislation.
Energy tax policy may also be considered as part of comprehensive tax reform legislation in the
113th Congress. A base-broadening approach to tax reform might consider the elimination of
various energy tax expenditures in conjunction with a reduction in overall tax rates. Alternative
revenue sources, such as a carbon tax, may also be evaluated as part of the tax reform process.
The President’s FY2014 budget proposes a number of changes to energy tax policy. The Obama
Administration proposes to repeal a number of existing tax incentives for fossil fuels, while
providing new or expanded incentives for alternative and advanced technology vehicles,
renewable electricity, energy efficiency, and advanced energy manufacturing.
Energy tax policy involves the use of one of the government’s main fiscal instruments, taxes
(both as an incentive and as a disincentive) to alter the allocation or configuration of energy
resources and their use. 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 economic (efficiency, equity, or even macroeconomic) objective. The economic rationale
for government intervention in energy markets is commonly based on the government’s perceived
ability to correct for market failures. Market failures, such as externalities, principal-agent
problems, and informational asymmetries, result in an economically inefficient allocation of
resources—in which society does not maximize well-being. To correct for these market failures
governments can utilize several policy options, including taxes, subsidies, and regulation, in an
effort to achieve policy goals. In practice, energy tax policy in the United States is made in a
political setting, determined by fiscal dictates and the views and interests of the key players in
this setting, including policymakers, special interest groups, and academic scholars. As a result,
enacted tax policy embodies compromises between economic and political goals, which could
either mitigate or compound existing distortions.
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Energy Tax Policy: Issues in the 113th Congress
Contents
Introduction ...................................................................................................................................... 1
Policy Intervention in Energy Markets ............................................................................................ 2
Rationale for Intervention in Energy Markets ........................................................................... 2
Externalities ......................................................................................................................... 3
Principal-Agent and Informational Inefficiencies ............................................................... 3
National Security ................................................................................................................. 4
Potential Interventions in Energy Markets ................................................................................ 5
Taxes as a User Charge .............................................................................................................. 7
Current Status of U.S. Energy Tax Policy ........................................................................................ 7
Fossil Fuels .............................................................................................................................. 14
Renewables .............................................................................................................................. 14
Energy Efficiency .................................................................................................................... 16
Alternative Technology Vehicles ............................................................................................. 16
Other Provisions ...................................................................................................................... 17
Energy Tax Issues in the 113th Congress ........................................................................................ 17
The President’s FY2014 Budget Proposal ............................................................................... 17
Expiring Energy Tax Provisions .............................................................................................. 21
Tax Reform .............................................................................................................................. 22
Selected Energy Tax Legislation ............................................................................................. 23
Tables
Table 1. Energy Tax Provisions ....................................................................................................... 8
Table 2. Energy Tax Proposals in the President’s FY2014 Budget ................................................ 19
Table 3. Energy Tax Incentives Expiring in 2013 .......................................................................... 21
Appendixes
Appendix. Energy Tax Legislation in Past Congresses ................................................................. 25
Contacts
Author Contact Information........................................................................................................... 30
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Energy Tax Policy: Issues in the 113th Congress
Introduction
Energy tax policy involves the use of one of the government’s main fiscal instruments, taxes
(both as an incentive and as a disincentive) to alter the allocation or configuration of energy
resources and their use. 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 economic (efficiency, equity, or macroeconomic) objective. In practice, however, energy tax
policy in the United States is made in a political setting, determined by fiscal dictates and the
views and interests of the key players in this setting, including policymakers, special interest
groups, and academic scholars. As a result, enacted tax policy embodies compromises between
economic and political goals, which could either mitigate or compound existing distortions.
U.S energy tax policy as it presently stands aims to address concerns regarding the environment
as well as those surrounding national security. Incentives promoting renewable energy
production, energy efficiency and conservation, and alternative technology vehicles address both
environmental and national security concerns. Tax incentives for the domestic production of fossil
fuels also promote energy security by attempting to reduce the nation’s reliance on imported
energy sources.
The idea of applying tax policy instruments to energy markets is not new. Until the 1970s,
however, energy tax policy had been little used, except to promote domestic fossil fuel
production. 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. The direction of U.S. energy tax policy has changed several times since the
1970s.1
During the first session of the 113th Congress, energy tax policy appears to be designed to
encourage energy efficiency and renewable energy production while continuing to promote U.S.
energy security.2 However, in recent years, major tax-related incentives supporting renewable
energy production have expired, with many of the remaining renewable energy and energy
efficiency incentives set to expire at the end of 2013.3 In the past, many of these incentives have
regularly been extended by Congress, in some cases retroactively. Absent legislative action,
renewable electricity projects that begin construction after December 31, 2013, will not qualify
for the production tax credit (PTC). Also scheduled to expire at the end of 2013 are several
incentives designed to promote energy efficiency, as well as several incentives that promote
alternative fuels and biofuels. Many energy tax incentives that had expired at the end of 2011 or
2012 were temporarily extended as part of the American Taxpayer Relief Act (ATRA; P.L. 112-
240) in the 112th Congress.4
1 For more, see CRS Report R41227, Energy Tax Policy: Historical Perspectives on and Current Status of Energy Tax
Expenditures, by Molly F. Sherlock.
2 For an overview of non-tax energy policy issues in the 113th Congress, see CRS Report R42756, Energy Policy: 113th
Congress Issues, by Carl E. Behrens.
3 See CRS Report R43124, Tax Provisions Expiring in 2013 (“Tax Extenders”), by Molly F. Sherlock.
4 CRS Report R42894, An Overview of the Tax Provisions in the American Taxpayer Relief Act of 2012 , by Margot L.
Crandall-Hollick.
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Energy Tax Policy: Issues in the 113th Congress
The President’s FY2014 budget contains proposals that would scale back existing tax incentives
for fossil fuels, enhance tax incentives for energy efficiency in commercial buildings, extend
expired and expiring tax incentives for renewables, and use tax credits to promote advanced
energy manufacturing.5 Similar proposals appeared in the President’s FY2012 and FY2013
budgets.
The tax writing committees in both houses of Congress are actively engaged in tax reform
processes. The House Committee on Ways and Mean established 11 tax reform working groups,
of which one was specifically tasked with examining energy tax issues. The Joint Committee on
Taxation (JCT) published findings from these working groups in a May 2013 report.6 The Senate
Committee on Finance released a series of options papers for tax reform. The Infrastructure,
Energy, and Natural Resources options paper was released on April 25, 2013.7
The economic rationale for interventions in energy markets helps inform the debate surrounding
energy tax policy. This report begins by providing background on the economic rationale for
energy market interventions, highlighting various market failures. After identifying possible
market failures in the production and consumption of energy, possible interventions are discussed.
The report concludes with an analysis of the current status of energy tax policy.
The Appendix of this report provides a brief summary of energy tax legislation from the 108th
through 112th Congresses that has shaped current energy tax policy.
Policy Intervention in Energy Markets
The primary goal of taxes in the U.S. economy is to raise revenues. There are times, however,
when tax policy can be used to achieve other goals. These include the use of tax policy as an
economic stimulus or to achieve social objectives. Tax policy can also be used to correct for
market failures (for example, the under- or over-supply of a good), which without intervention
result in market inefficiencies. There are a number of market failures surrounding the production
and consumption of energy. Tax policy, as it relates to energy, can be used to address these market
failures.
Rationale for Intervention in Energy Markets
There are a variety of circumstances in which government intervention in energy markets may
improve market outcomes. Generally, government intervention has the potential to improve
market outcomes when there are likely to be market failures. Externalities represent one of the
most important market failures in energy’s production and consumption. Market failures in
energy markets also arise from principal-agent problems and information failures. Concerns
regarding national security are used as a rationale for intervention in energy markets as well.
5 Department of the Treasury, General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals,
Washington, DC, April 2013.
6 U.S. Congress, Joint Committee on Taxation, Report to the House Committee on Ways and Means on Present Law
and Suggestions for Reform Submitted to the Tax Reform Working Groups, committee print, 113th Cong., May 6, 2013,
JCS-3-13.
7 Senate Committee on Finance tax reform options papers can be found at http://www.finance.senate.gov/issue/?id=
6c61b1e9-7203-4af0-b356-357388612063.
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Externalities
An externality is a spillover from an economic transaction to a third party, one not directly
involved in the transaction itself. Externalities are often present in energy markets as both the
production and consumption of energy often involve external costs (or benefits) not taken into
account by those involved in the energy-related transaction. Instead, these externalities are
imposed on an unaffiliated third party. In the presence of externalities, the market outcome will
likely lead to an economically inefficient level of production or consumption.
When externalities are present, markets fail to establish energy prices equal to the full cost to
society of supplying the good. The result is a system where price signals are inaccurate, such that
the socially optimal level of output, or allocative efficiency, is not achieved. Economic theory
suggests that a tax be imposed on activities associated with external costs, while activities
associated with external benefits be subsidized—in order to equate the social and private
marginal costs. These taxes or subsidies are intended to provide a more efficient allocation of
resources.
Many energy production and consumption activities result in negative externalities, perhaps the
most recognized being environmental damage. Air pollution results from mining activities as well
as from the transportation, refining, and industrial and consumer use of oil, gas, and coal.
Industrial activity can also produce effluents that contaminate water supplies and lead to other
damages to the land. These environmental damages can lead to lung damage and a variety of
other health problems. The use of fossil fuels, both in the production of energy (e.g., coal-fired
power plants) and at the consumer level (e.g., using gasoline to power automobiles), and the
associated greenhouse gas emissions are widely claimed to have contributed to global climate
change.8
There may also be market failures associated with external benefits stemming from the process of
learning-by-doing. Learning-by-doing refers to the tendency for production costs to decline with
experience. As firms become more experienced in the manufacturing and use of energy-efficient
technologies their knowledge may spill over to other firms without compensation. In energy
markets, early adopters of energy-efficient technologies and practices may not be fully
compensated for the value of the knowledge they generate.9
Principal-Agent and Informational Inefficiencies
Market failures in energy use may also arise due to the principal-agent problem.10 Generally, the
principal-agent problem exists when one party, the agent, undertakes activities on the behalf of
another party, the principal. When the incentives of the agent differ from those of the principal,
the agent’s activities are not undertaken in a way that is consistent with the principal’s best
interest. The result is an inefficient outcome. In energy markets, the principal-agent problem
commonly arises when one party is responsible for making equipment purchasing choices while
8 See CRS Report RL34266, Climate Change: Science Highlights, by Jane A. Leggett.
9 Kenneth Gillingham, Richard G. Newell, and Karen Palmer, Energy Efficiency Economics and Policy, Resources for
the Future, RFF DP 09-13, Washington, DC, April 2009.
10 The extent of principal-agent problems in residential energy use is quantified in Scott Murtishaw and Jayant Sathaye,
Quantifying the Effect of the Principal-Agent Problem on U.S. Residential Energy Use, Lawrence Berkeley National
Labratory, August 12, 2006, http://www.escholarship.org/uc/item/6f14t11t.
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another party is responsible for paying the energy costs, which are related to the efficiency level
of the purchased equipment.
For residential rental properties, the incentives for the landlords and tenants surrounding the
adoption of energy-savings practices are often not aligned, demonstrating the principal-agent
problem. Landlords will tend to under-invest in energy-saving technologies for rental housing
when the benefits from such investments accrue to tenants (i.e., tenants are responsible for paying
their own utilities) and the landlord does not believe the costs of installing energy-saving devices
can be recouped via higher rents. Tenants do not have an incentive to invest in energy-savings
technologies in rental units when their expected tenure in a specific property is relatively short,
and they will not have enough time to reap the full benefits of the energy-conserving investments.
There is also evidence that when utilities are included in the rent, tenants do not engage in
energy-conserving behaviors. On the other hand, when tenants pay utilities on their own, energy-
saving practices are more frequently adopted.11 The implication is that inefficient energy use by
tenants in apartments where utilities are included as part of the rent would offset energy-saving
investments made by landlords; consequently, landlords under-invest in energy efficiency. In
general, the under-investment in energy conservation measures in rental housing provides
economic rationale for intervention.
In another example, the incentives of homebuilders and homebuyers may not be aligned.
Consequently, the principal-agent problem may result in an inefficient utilization of energy-
efficient products in newly constructed homes. Homebuilders may have an incentive to install
relatively low-efficiency products to keep the cost of construction down, if they do not believe
that the cost of installing energy-efficient products will be recovered upon sale of the property.
The value of installing energy-efficient devices may not be recoverable, if builders are not able to
effectively communicate the value of energy-efficient devices once installed. Further, since
homebuilders are not able to observe the energy use level of prospective buyers they may not be
able to choose the products that best match the use patterns of the ultimate energy consumer. The
result may be less energy efficiency in new homes.
There are also informational problems that may lead to underinvestment in energy-efficient
technologies. For example, homeowners may not know the precise payback or rate of return of a
specific energy-efficient device. This may explain the so-called “energy paradox”—the empirical
observation that consumers require an abnormally high rate of return to undertake energy-
efficiency investments.12
National Security
Preserving national security is another often-cited rationale for intervention in energy markets.
Roughly 40% of the petroleum consumed in the United States is derived from foreign sources.13
There are potentially a number of external costs associated with petroleum importation, especially
when imported from unstable countries and regions. First, a high level of reliance on imported oil
11 Arik Levinson and Scott Niemann, “Energy Use by Apartment Tenants when Landlords Pay for Utilities,” Resource
and Energy Economics, vol. 26 (2004), pp. 51-75.
12 Gilbert E. Metcalf, “Using Tax Expenditures to Achieve Energy Policy Goals,” American Economic Review, vol. 98,
no. 2 (2008), pp. 90-94.
13 While dependence on foreign oil has declined since 2005, about 40% of petroleum consumed in 2012 was imported.
See Energy Information Administration, How Dependent are we on Foreign Oil?, May 10, 2013, http://www.eia.gov/
energy_in_brief/article/foreign_oil_dependence.cfm.
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may contribute to a weakened system of national defense or contribute to military vulnerability in
the event of an oil embargo or other supply disruption. Second, there are costs to allocating more
resources to national defense than necessary when relying on high levels of imported oil.
Specifically, there is an opportunity cost associated with resources allocated to national defense,
as such resources are not available for other domestic policy initiatives and programs. To the
extent that petroleum importers fail to take these external costs into account, there is market
failure.
In addition, the economic well-being and economic security of the nation depends on having
stable energy sources. There are economic costs associated with unstable energy supplies.
Specifically, increasing unemployment and inflation may follow oil price spikes.14
Potential Interventions in Energy Markets
When there are negative externalities associated with an activity, correcting the economic
distortion with a tax, if done correctly, can improve economic efficiency.15 While such taxes are
theoretically desirable, historically, such taxes have been politically unpopular. Conversely, when
there are positive externalities associated with an activity, a subsidy can improve economic
efficiency. The tax (subsidy) should be set equal to the monetary value of the damages (benefits)
to third parties imposed by the activity.16 The tax serves to increase the price of the activity, and
reduce the equilibrium quantity of the activity, while a subsidy reduces the price, increasing the
equilibrium quantity of the activity.
The production and consumption of fossil fuel energy can have negative externalities via
detrimental environmental impacts. While multiple policy options to address this externality
exist, economists tend to favor an emissions tax to address this externality because of such a tax’s
efficiency advantage.17 In the late 2000s, proponents of greenhouse gas controls favored a cap and
trade policy, as proposed in House-passed American Clean Energy and Security Act of 2009
(H.R. 2454). The policy discussion in the 113th Congress, however, has shifted to focus on a
carbon tax approach.18
An alternative approach to reducing the use of fossil fuels has been to subsidize energy
production from alternative energy sources. There are concerns, however, that using subsidies to
stimulate demand for alternative fuels, as an alternative to fossil fuels, may not be economically
efficient. First, subsidies reduce the average cost of energy, and as the average cost of energy
falls, the quantity of energy demanded increases, countering energy conservation initiatives.19
14 See James D. Hamilton, Causes and Consequences of the Oil Shock of 2007-08, National Bureau of Economic
Research, Working Paper 15002, Cambridge, MA, May 2009. Hamilton evaluates the role of the oil shock of 2007-
2008 in the succeeding economic recession.
15 There are non-tax options for addressing energy market failures such as regulation and private sector solutions. These
options are beyond the scope of this report.
16 Taxes imposed to correct for negative externalities are also known as Pigovian taxes, named after the economist who
developed the concept, Arthur Cecil Pigou.
17 CRS Report R40242, Carbon Tax and Greenhouse Gas Control: Options and Considerations for Congress, by
Jonathan L. Ramseur and Larry Parker for a discussion of the relative merits and demerits of carbon taxes and cap-and-
trade systems.
18 See CRS Report R42731, Carbon Tax: Deficit Reduction and Other Considerations, by Jonathan L. Ramseur, Jane
A. Leggett, and Molly F. Sherlock.
19 Gilbert E. Metcalf, “Tax Policies for Low-Carbon Technologies," National Tax Journal, vol. 63, no. 3 (September
2009), pp. 519-533.
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Second, while the subsidy is intended to enhance economic efficiency, subsidies may be
inefficient to the extent they are funded with distortionary taxes.20 Hence, the more economically
efficient alternative may be to place a tax on the undesirable activity.
Other energy-related activities may have positive externalities. There is the potential for learning-
by-doing from early adopters of energy-efficient technologies, indicating that there may be
positive external effects associated with these activities. For this reason, subsidies given to early
adopters may enhance economic efficiency. Further, positive externalities are associated with
R&D activities that lead directly to technological innovations.21 In addition to budgeted spending
on R&D, the tax code provides incentives for firms to engage in energy R&D (for example, the
energy research credit (Internal Revenue Code (IRC) § 41)).22
When principal-agent problems lead to a market failure, economically efficient corrective
measures would be those that increase the equilibrium quantity of the underprovided good. The
market for energy efficient technologies is one example of this type of market failure. Currently, a
taxpayer’s gross income excludes any subsidy provided by a public utility to a consumer for the
purchase or installation of energy-saving devices (see IRC § 136). This exclusion subsidizes
energy-efficient devices. This exclusion does not specifically target the inefficiency in rental
housing created by the principal-agent problem, since the exclusion applies to both owner- and
non-owner-occupied property. Nonetheless, the exclusion may serve to ameliorate some of the
market failure in the provision of energy-efficiency for rental property.
There are also various options for market intervention to address the informational problem
associated with energy consumption and energy-efficient technologies. One option would be an
information-based solution, such as energy-efficiency labeling and education and awareness
campaigns. Alternatively, a tax-incentive-based approach—such as a credit or deduction for the
purchase of energy-efficient devices—could be used to address the market inefficiency. Given
that this market failure is an informational problem, it might be more efficient to pursue
information-based solutions (such as energy-efficiency labeling like the U.S. Environmental
Protection Agency and Department of Energy’s Energy Star program).
Finally, there are questions regarding the most efficient and effective mode of intervention to
address the negative external costs, specifically national and economic security concerns,
associated with the consumption of imported oil. One option would be to impose a tax to correct
the distortion. There are two problems with imposing such a tax. First, a tax on imported oil is
likely to violate trade agreements. This has led policymakers to pursue policies that subsidize
domestic petroleum production.23 The second problem is that oil is a commodity priced on world
markets. The United States producing oil for its own use does not necessarily insulate consumers
from global fluctuations in oil prices. Additionally, to the extent that oil price fluctuations impact
export prices in other parts of the world, such as Europe and China, the United States is still likely
to experience economic impacts from oil price fluctuations.24
20 Gilbert E. Metcalf, “Federal Tax Policy towards Energy,” Tax Policy and the Economy, vol. 21 (2007), pp. 145-184.
21 It should be noted that all R&D, not just R&D related to energy, is likely to have positive externalities. There is no
reason to believe that energy R&D has positive externalities that differ from R&D in general, and hence no reason to
believe that energy R&D deserves a differential subsidy.
22 See CRS Report RL31181, Research Tax Credit: Current Law and Policy Issues for the 113th Congress, by Gary
Guenther for an overview of the research tax credit, an umbrella credit under which the energy research credit falls.
23 Subsidizing domestic production is also problematic in that such policies conflict with environmental objectives.
24 Gilbert E. Metcalf, “Using Tax Expenditures to Achieve Energy Policy Goals,” American Economic Review, vol. 98,
(continued...)
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Taxes as a User Charge
Energy taxes may be employed as user charges for a public good or a quasi-public good.25 In the
United States, non-toll highways and highway infrastructure have the public good property of
non-excludability. Highways are not likely to be provided by the market because public goods
and quasi-public goods are susceptible to the free-rider problem.26 If the private market fails to
provide a public good, like highways, then government intervention via provision of highways
can enhance economic efficiency. The federal excise tax on gasoline is often viewed as a user fee
for the federal highway system.27 For the tax to be efficient and equitable, it would charge
individuals in proportion to their benefit from the public good (the highway system). In practice,
gas taxes do not reflect the cost to the user but instead depend on the fuel efficiency of a specific
vehicle.28 Furthermore, some of the revenues collected from the federal gas tax serve to subsidize
public transportation, undermining the view of the federal gas tax as a highway user fee.
Current Status of U.S. Energy Tax Policy
Current U.S. energy tax policy is a combination of long-standing provisions and relatively new
incentives. Provisions supporting the oil and gas sector reflect desires for domestic energy
production and energy security, long-standing cornerstones of U.S. energy policy. Incentives for
renewable energy reflect the desire to have a diverse energy supply, also consistent with a desire
for domestic energy security. Incentives for energy efficiency are designed to reduce use of
energy from all energy sources. Incentives for renewable energy, energy efficiency, and
alternative technology vehicles reflect environmental concerns. Table 1 contains a current list of
energy-related tax expenditures and other energy tax provisions.29
(...continued)
no. 2 (2008), pp. 90-94.
25 Public goods are those that are both non-rival (one person’s consumption of the good does not diminish another’s
ability to consume that same good) and non-excludable (it is either impossible or prohibitively expensive to prevent
consumption of the good once the good has been provided). Quasi-public goods are those that are either non-rival or
non-excludable.
26 The free-rider problem is the consequence of non-excludability. If all individuals are free to use a good once that
good has been provided, no single individual has an incentive to be the provider of that good. Instead, the individual
will wait for the good to be provided by another party. In the absence of government intervention, the market may fail
to provide goods that are subject to the free-rider problem.
27 For background information on the federal gas tax see CRS Report R40808, The Role of Federal Gasoline Excise
Taxes in Public Policy, by Robert Pirog.
28 Another argument is that the federal gas tax should be viewed as correcting the externalities associated with gasoline-
powered vehicles. Even if the gas tax were to be viewed as one correcting for emissions, it would make more economic
sense to tax emissions rather than just those coming from the burning of fossil fuels by motor vehicles.
29 Tax expenditures are government revenue losses attributable to tax provisions that allow for special exclusions,
exemptions, or deductions from income or provisions that provide special tax credits, preferential tax rates, of defer tax
liability. Technically, excise tax credits are not considered tax expenditures because they do not directly impact income
tax liability.
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Table 1. Energy Tax Provisions
(billions of dollars)
2013 – 2017
Expiration
I.R.C.
Tax Provision
Description
2013 Cost
Cost
Date
Section
Fossil Fuels
Expensing of percentage over cost
Firms that extract oil or gas are permitted to deduct 15% of gross
$1.3 $6.7
none
611,
612,
depletion
income (up to 25% for marginal wells depending on oil prices; 10%
613, 613A
for coal and lignite) to recover their capital investment in a
mineral reserve. The amount deducted may not exceed 100% of
net income in the case of oil and gas properties. Percentage
depletion al owances for oil and gas property cannot exceed 65%
of taxable income. The alternative to percentage depletion is cost
depletion, where deductions are based on a taxpayer’s adjusted
basis in the property. Integrated oil and gas companies must use
cost depletion.
Expensing of intangible drilling costs Firms engaged in the exploration and development of oil, gas, or
$0.9 $6.7
none
616,
617,
(IDCs) and development
geothermal properties have the option of expensing (deducting in
263(c),
expenditures for hard minerals
the year paid or incurred) rather than capitalizing (i.e., recovering
291
such costs through depletion or depreciation) certain intangible
dril ing and development costs (IDCs). Integrated oil and gas
companies can expense 70% of qualified IDCs, with the remaining
30% capitalized and amortized over a 60-month period. 70% of the
costs paid or incurred for the development of a mine or other
natural deposit (other than oil or gas) may be expensed.
Amortization of G&G expenditures
Under the Modified Accelerated Cost Recovery System (MACRS),
$0.1 $0.7
none
167(h)
associated with oil and gas
the cost of selected types of geological and geophysical (G&G)
exploration
expenditures is depreciated over 2 years for independent
producers and smaller integrated oil companies.
Election to expense 50% of
A taxpayer may elect to expense 50% of the cost of any qualified
$0.4 $3.4
12/31/2013
179C
qualified property used to refine
property used for processing liquid fuel from crude oil or qualified
(property must
liquid fuels
fuels. The remainder is recovered using a 10-year recovery period
be under
under the modified accelerated cost recovery system (MACRS).
contract for
construction by
1/1/10)
CRS-8
2013 – 2017
Expiration
I.R.C.
Tax Provision
Description
2013 Cost
Cost
Date
Section
Coal production credits
A $6.59-per-ton production credit for refined coal used to
(i) $0.2
12/31/2011
45
produce steam, or a $2.308 per-ton production credit for coal
(refined coal
reserves owned by an Indian tribe (all adjusted for inflation from
excluding steel
1992).
industry fuel)
Property must
be placed in
service by
12/31/2008 – no
credits paid
after 12/31/2013
(Indian coal)
Credits for investing in clean coal
Tax credit of 20% of investment for integrated gasification
$0.2 $1.2
volume
limited
48A, 48B
facilities
combined cycle (IGCC) systems and 15% for other advanced coal
(credits fully
technology credit allocations made under the Energy Policy Act of
allocated)
2005 (P.L. 109-58). 30% credit for IGCC and other advanced coal
technology credit al ocations under the Energy Improvement and
Extension Act of 2008 (P.L. 111-343).
Amortization of air and pollution
Al ows the pre-1976 5-year amortization period for investments in
$0.4 $1.7
none
169
and
control facilities
pol ution control equipment for coal-fired electric generation
291
plants available to those plants placed in service on or after
January 1, 1976. The 5-year amortization incentive for pre-1976
plants applies only to pol ution control equipment with a useful life
of 15 years or less. In that case 100% of the cost can be amortized
over five years. If the property or equipment has a useful life
greater than 15 years, then the proportion of the costs that can
be amortized over five years is less than 100%.
Renewables
Credits for electricity production
Tax credit of 2.3¢/kWh for electricity produced from wind,
$1.7 $9.7
12/31/2013
45
from renewable resources (“PTC”
closed-loop biomass, and geothermal energy. Tax credit of
(construction
or “production tax credit”)
1.1¢/kWh for electricity produced from open-loop biomass, solar,
start date)
small irrigation, landfil gas, trash combustion, qualified
hydropower, and marine and hydrokinetic sources. The tax credit
is available for 10 years after the date the facility is placed in
service. Taxpayers may also elect to receive a 30% ITC in lieu of
the PTC.
CRS-9
2013 – 2017
Expiration
I.R.C.
Tax Provision
Description
2013 Cost
Cost
Date
Section
Energy credit (“ITC” or
Tax credit equal to 10% of investment in energy production using
$0.5 $2.9
12/31/2016
48
“investment tax credit”)
geothermal, microturbine, or combined heat and power methods.
(other
The tax credit is equal to 30% of investment in energy production
technologies;
using solar electric, solar hot water, fuel cell or small wind
solar has
methods.
permanent 10%
credit after
2016)
none
(geothermal
excluding
geothermal heat
pumps)
Section 1603 grants in lieu of tax
Section 1603 allows taxpayers eligible for the PTC and ITC to
$8.1a $17.2a 12/31/2011 45, 48
credits
receive a one-time cash grant in lieu of tax credits. Eligible facilities
(construction
may qualify for a grant equal to 10% or 30%, depending on
start date)
technology type, of a qualifying project’s eligible cost basis.
Residential energy-efficient
Tax credit for 30% of the cost of the purchase of solar electric
$0.9 $4.9
12/31/2016
25D
property credit
property, solar water heating property, geothermal heat pump
property, or small wind energy property. Fuel cell power plants
receive 30% credit, limited to $500 for each 0.5 kilowatt of
capacity.
Five-year cost recovery of certain
Accelerated depreciation allowances are provided under the
$0.3 $1.5
12/31/2013
168
energy property
modified accelerated cost recovery system (MARCs) for
(placed in
investments in certain energy property. Specifically, certain solar,
service date for
wind, geothermal, fuel cell, and biomass property has a five year
second-
recovery period. Second-generation biofuel plant property is
generation
allowed an additional first-year depreciation deduction equal to
biofuel
50% of the property’s adjusted basis.
property)
None
(other
technologies)
CRS-10
2013 – 2017
Expiration
I.R.C.
Tax Provision
Description
2013 Cost
Cost
Date
Section
Credits for holders of clean
Provides a tax credit for the holder of the bond against its income
(i) $0.5
volume
limited
54, 54C
renewable energy bonds
tax. Clean Renewable Energy Bonds (“CREBs”) are subject to a
(fully allocated)
volume cap of $1.2 billion with a credit rate set to allow the bond
to be issued at par and without interest. New Clean Renewable
Energy Bonds (“New CREBs”) are subject to a volume cap of $2.4
billion with a credit rate set at 70% of what would permit the
bond to be issued at par and without interest.
Credit for biodiesel, renewable
$1 per gallon for biodiesel, agri-biodiesel, and renewable diesel
$2.2b $2.6b 12/31/2013 40, 40A,
diesel, second-generation
(extra 10¢ for small producers of agri-biodiesel). Alternative fuels
(second-
6426, 6427
(cellulosic) biofuels, and alternative
(liquefied petroleum gas, P Series Fuels, compressed of liquefied
generation
fuels
natural gas, liquefied hydrogen, liquid fuel derived from coal using
biofuel)
the Fischer-Tropsch process, compressed or liquefied gas or liquid
fuel from biomass) qualify for a credit of 50¢ per gal on. Second-
12/31/2013
generation biofuel qualify for a credit of $1.01 per gal on.
(biodiesel,
Depending on the specific incentive, tax credits go to fuel
renewable
producers and/or blenders. Credits are general y coordinated
diesel, and
income and excise tax credits.
alternative fuels)
9/30/2014 for
liquefied
hydrogen
Advanced energy manufacturing tax 30% tax credit for qualified investments in advanced energy
$0.3 $1.5
Allocation
limit
48C
credit
property. A total of $2.3 billion was allocated for advanced energy
property investment tax credits, which were competitively
awarded by the Department of Energy (DOE) and the Treasury.
Energy Efficiency
Credit for nonbusiness energy
Tax credit for 10% of the amount paid for qualified energy-
$3.0 $5.5
12/31/2013
25C
property
efficiency improvements and expenditures for residential energy
property including qualifying improvements to the building’s
envelope, the HVAC system, furnaces, or boilers. Credit limited
to $500 (limit applies to multiple tax years).
Deduction for expenditures on
Tax deduction for the cost of building envelope components,
$0.2 $1.1
12/31/2013
179D
energy-efficient commercial
heating and cooling systems, and lighting. The deduction is limited
property
to $1.80 per square foot for multiple improvements, or $0.60 per
square foot for deductions with respect to certain subsystems.
Exclusion of energy conservation
Subsidies are not taxable as income.
(i)
$0.1
none
136
subsidies provided by public utilities
CRS-11
2013 – 2017
Expiration
I.R.C.
Tax Provision
Description
2013 Cost
Cost
Date
Section
Energy-efficient new home credit
Manufacturers of manufactured homes may claim $1,000 credit for
(i) $0.1
12/31/2013
45L
building homes 30% more efficient than the standard; Contractors
may claim $2,000 credit for building homes 50% more efficient
than the standard.
Credit for producing energy-
Tax credit based on energy efficiency. Maximum credit is $75 for
$0.2 $0.6
12/31/2013
45M
efficient appliances
dishwashers, $200 for refrigerators, and $225 for clothes washers.
Qualified energy conservation
The Federal government has authorized the issue of $3.2 billion in
(i) $0.3
volume
limited
54D
bonds
Qualified Energy Conservation Bonds (“QECBs”). QECBs provide
(allocated to the
a tax credit worth 70% of the tax credit bond rate stipulated by
States)
the Secretary of the Treasury. QEC bonds issued by state and
local governments must fund an energy-savings project, such as
the green renovation of a public building, R&D in alternative fuels,
and public transportation projects.
Alternative Technology Vehicles
Plug-in electric vehicles and other
Credits available for plug-in electric vehicles are available up to
$0.4 $3.3
Plug-in
electric
30, 30B,
alternative fuel vehicles
$7,500 depending on kilowatt hour capacity of vehicle (prior to
vehicle credit
30D
2010 the credit limit was higher, up to $15,000 for qualifying heavy
volume capped
vehicles).
(200,000) per
manufacturer
Fuel cell vehicles receive a base credit of $4,000 for vehicles
weighing less than 8,500 pounds. Heavier vehicles qualify for up to
12/31/2014 for
a $40,000 credit. An additional credit of up to $4,000 is available
fuel cell vehicles
for cars and light trucks that exceed the 2002 base fuel economy.
12/31/2013 for
A 10% credit, up to $2,500, is available for the cost of electric-
electric drive
drive low-speed neighborhood vehicle, motorcycle and three-
low speed
wheeled vehicles.
vehicles
Credits for alternative fuel vehicle
Qualifying property dispenses alternative fuels, including ethanol,
(i) $0.3
12/31/2013
30C
refueling property
biodiesel, natural gas, hydrogen, and electricity. A 30% credit for
(12/31/14 for
qualifying property, capped at $30,000 for business property and
hydrogen
$1,000 for nonbusiness property.
refueling
property)
CRS-12
2013 – 2017
Expiration
I.R.C.
Tax Provision
Description
2013 Cost
Cost
Date
Section
Other
Exceptions for energy-related
Publicly traded partnerships are general y treated as corporations.
$1.2 $6.7
none
7704,
851
publicly traded partnerships
The exception from this rule occurs if at least 90 percent of its
gross income is derived from interest, dividends, real property
rents, or certain other types of qualifying income. Qualifying
income includes income derived from certain energy-related
activities, such as fossil fuel or geothermal exploration,
development, mining, production, refining, transportation, and
marketing.
Exclusion of interest on State and
Exclusion of interest from private activity bonds used to finance
(i) $0.3
none
141,
142
local government private activity
privately owned or operated sewage, water, solid waste disposal,
bonds for energy production
and heating and cooling facilities, certain private electric and gas
facilities
facilities, hydroelectric dam enhancements, qualified green building
and sustainable design projects from tax. General y subject to
private activity bond volume cap.
Depreciation recovery periods for
Smart electric distribution property is allowed 10-year
$0.4 $2.6
various
168
energy specific items
depreciation under the modified accelerated cost recovery system
(MARCs). Certain electric transmission property is allowed 15-
year depreciation. Natural gas distribution lines are also allowed
15-year depreciation.
Deferral of gains from the sale of
A taxpayer may elect to recognize the gain from the sale of
$-0.2 $-0.6
12/31/2013
451(i)
electric transmission property
certain electric transmission property over an eight year period.
Source: CRS compilation based on data from U.S. Congress, Joint Committee on Taxation, Estimates of Federal Expenditures for Fiscal Years 2012–2017, committee print,
113th Congress, February 1, 2013, JCS-1-13, U.S. Congress, Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 112th Congress, committee
print, February 2013, JCS-2-13, and the President’s FY2014 budget, Analytical Perspectives.
Notes: Provisions estimated as de minimis (i.e., estimated to have a revenue loss of less than $50 million over the 2013 through 2017 period) are not included in Table 1.
(i) = less than $50 million per year for both individuals and corporations; (ii) = This figure includes the reduction in excise tax receipts for alcohol fuels, biodiesel, and
alternative fuel mixtures.
a. These figures are estimated outlays under the Section 1603 grants in lieu of tax credits program.
b. These figures are the cost of extension as enacted as part of the American Taxpayer Relief Act (ATRA; P.L. 112-240).
CRS-13
Energy Tax Policy: Issues in the 113th Congress
Fossil Fuels
There are a number of tax incentives currently available for energy production using fossil fuels.
They can be broadly categorized as either enhancing capital cost recovery or subsidizing
extraction of high-cost fossil fuels. Certain incentives are designed to support coal, while others
tend to support the oil and gas sector. The fossil fuels related incentives listed in Table 1 are
estimated to reduce federal tax revenues by $20.6 billion between 2013 and 2017.
Among the capital cost subsidies, the allowance of the percentage depletion method is estimated
to cost $6.7 billion between 2013 and 2017.30 Under percentage depletion, a deduction equal to a
fixed percentage of the revenue from the sale of a mineral is allowed. Total lifetime deductions,
using this method, typically exceed the capital invested in the project. To the extent that
percentage depletion deductions exceed project investment, percentage depletion becomes a
production subsidy, instead of an investment subsidy. Other capital cost recovery provisions
include expensing of intangible drilling costs related to exploration and development and a
decrease in the amortization period for certain geological and geophysical (G&G) expenditures.31
The expensing of exploration and development costs is estimated to cost the federal government
$6.7 billion in revenue losses over the 2013 through 2017 budget window, while the reduced
amortization period for G&G expenditures is estimated to cost $0.7 billion over the same time
period.
Compared to capital cost recover provisions, tax expenditures intended to offset high extraction
costs are small. Credits for enhanced oil recovery and oil and gas production from marginal wells
are currently phased out due to high oil prices, and thus are not expected to reduce federal
revenues in the near term.32 The expensing allowance for tertiary injectants is also estimated to
cost less than $50 million over the 2013 through 2017 budget window.
There are coal-specific energy tax provisions. These include recently expired coal production
credits, as well as tax credits to support the development of clean coal facilities.33 The tax credits
for investing in clean coal facilities are estimated to cost $1.2 billion over the 2013 through 2017
budget window.
Renewables
Several tax incentives subsidize the production of energy from renewable sources. While the
specific incentives differ in design, they generally work to increase the after-tax return on an
investment in renewable energy production by providing tax incentives on the condition of
eligible investment or production. Between 2013 and 2017, the total cost of tax-related provisions
supporting the production of renewable energy (tax expenditures and grants designed to replace
tax expenditures) is estimated to be $39.6 billion. Of this total, $17.2 billion is for outlays under
30 The tax expenditure for percentage depletion is computed by subtracting the value of cost depletion, the standard
depletion method, from the value of percentage depletion. The resulting lifetime excess is the tax expenditure.
31 Expensing costs means to deduct the full cost of an investment in the current tax year, rather than depreciate the costs
over a period of time.
32 De minimis tax expenditures are not listed in Table 1.
33 For more information, see CRS Report R40662, Clean Coal Authorizations, Appropriations, and Incentives, by
Anthony Andrews and Molly F. Sherlock.
Congressional Research Service
14
Energy Tax Policy: Issues in the 113th Congress
the Section 1603 grants in lieu of tax credits program. Thus, the cost of tax expenditure and
excise tax incentives for renewables is estimated to be $22.4 billion between 2013 and 2017.
Historically, the primary tax incentive for renewable electricity has been the production tax credit
(PTC). The American Recovery and Reinvestment Act (ARRA; P.L. 111-5) substantially
modified this incentive, allowing projects eligible for the renewable PTC or investment tax credit
(ITC) to claim a one-time grant in lieu of the tax credits.34 This grant was available for projects
that were under construction before the end of 2011. Since grants will be paid out when facilities
are placed in service, outlays will continue through 2017. Between 2013 and 2017, this provision
is estimated to result in outlays of $17.2 billion. Since the grant is paid out at the start of a project,
the cost of the grant program will be partially offset by reduced PTC claims over time.35 Allowing
investors to take a one-time grant instead of future tax credits is intended to address uncertainty
renewable energy investors may have regarding their future tax positions. Since the grant
program was allowed to expire at the end of 2011, new renewable energy projects are not eligible.
Renewable energy projects, however, may still be eligible for the investment tax credit (ITC) or
PTC, depending on the credit expiration date for various technologies.
Several other tax expenditures related to renewable energy have budgetary effects. First, there is
the energy credit (sometimes called the investment tax credit (ITC)), which provides a credit
equal to either 10% or 30% of eligible investment in renewable energy production. Second, there
is the residential energy-efficient property credit, which provides a tax credit for the installation
of renewable electricity generating property for a residential dwelling. Third, the reduced
depreciable life for renewable energy investments provides an additional subsidy for businesses.
Finally, while allocations are not currently available, subsidies for clean renewable energy bonds
(CREBs) will continue to have a revenue cost over the 2013 through 2017 budget window.36
Taken together, these four provisions are expected to result in $9.8 billion in federal revenue
losses between 2013 and 2017.
Several income and excise tax credits are designed to support renewable and alternative fuels.
Currently, biodiesel and renewable diesel, second generation biofuels, including cellulosic and
algae-based biofuels, as well as a number of other alternative fuels qualify for tax credits. These
credits are projected to cost $2.6 billion over the 2013 through 2017 budget window. However,
under current law, tax credits for most biofuels and alternative fuels expire at the end of 2013.
Extending these incentives beyond 2013 will increase their cost. Through 2011, alcohol fuels
(including ethanol) were eligible for a $0.45 per gallon tax credit. Tax credits for alcohol fuels
were allowed to expire at the end of 2011.
ARRA also provided $2.3 billion in tax credits for advanced energy manufacturing. Most of these
tax credits were allocated to projects in 2009, although $150 million was available for a second
allocation round in 2013. The federal government is expected to realize revenue losses as
investors that were awarded these tax credits make qualifying investments over time. Between
34 See CRS Report R41635, ARRA Section 1603 Grants in Lieu of Tax Credits for Renewable Energy: Overview,
Analysis, and Policy Options, by Phillip Brown and Molly F. Sherlock.
35 Projects eligible for the PTC can claim the credit for 10 years. Thus, as projects that began construction before the
end of 2011 but are placed in service in 2013 elect to receive a grant rather than claim the PTC, PTC claims in the out
years will be less than what they would have been in absence of the grant program.
36 See CRS Report R41573, Tax-Favored Financing for Renewable Energy Resources and Energy Efficiency, by Molly
F. Sherlock and Steven Maguire.
Congressional Research Service
15
Energy Tax Policy: Issues in the 113th Congress
2013 through 2017 period, revenue losses associated with this provision are estimated to be $1.5
billion.
Energy Efficiency
Incentives for energy efficiency and conservation primarily operate by providing incentives to
owners of residential and commercial property that undertake energy-efficient upgrades. There
are also incentives for manufacturers of certain energy-efficient products and for the issuance of
qualified energy conservation bonds (QECBs). Between 2013 and 2017, the total cost of tax
expenditures related to energy conservation is estimated to be $7.7 billion.
The majority of revenue loss from tax expenditures related to energy conservation is attributable
to three incentives for property owners to undertake energy-efficiency improvements on existing
buildings. Certain residential energy-efficiency improvements made during 2013 may qualify for
a 10% tax credit of up to $500. Energy-efficient improvements for commercial property,
including upgrades to a building’s envelope, heating and cooling, or lighting system are eligible
for a tax deduction, limited to $1.80 per square foot. Incentives for both residential and
commercial energy efficiency are scheduled to expire in 2013. The exclusion from income of
subsidies provided by utility companies to energy consumers undertaking energy-efficiency
upgrades increases the value of such subsidies, encouraging individuals to undertake such
improvements. Taken together, these three incentives for building energy efficiency are projected
to cost $6.7 billion between 2013 and 2017. Extending tax incentives for residential and
commercial energy efficiency beyond their scheduled expiration will increase projected revenue
costs.
Manufacturers of energy-efficient new homes and energy-efficient appliances may also be
eligible for tax incentives. These incentives are also scheduled to expire at the end of 2013. The
cost of these incentives between 2013 and 2017 is estimated to be $0.7 billion. The projected cost
of manufacturer incentives for energy efficiency will increase if these provisions are extended
beyond their 2013 scheduled expiration.
Qualified energy conservation bonds (QECBs) also encourage energy conservation, by providing
subsidized financing to energy conservation projects and other renewable energy projects.37 All
available QECB funds have been allocated to the states, with states responsible for making sub-
allocations and selecting qualifying projects.38
Alternative Technology Vehicles
Currently, the primary tax incentive for alternative technology vehicles is the up to $7,500 tax
credit for plug-in electric vehicles. 39 The credit will begin to phase out for each manufacturer
37 QECBs can be used to finance a broad range of energy efficiency and renewable energy projects. Eligible projects
include energy efficiency upgrades for public buildings, renewable energy projects (including those eligible for
CREBs), energy research and development projects, mass commuting facilities, and energy efficiency education
campaigns.
38 Official data on QECB issuances is not publicly available. The Energy Programs Consortium tracks known issuances
of QECBs. See Energy Programs Consortium, Qualified Energy Conservation Bonds (QECBs), Washington, DC, June
28, 2013, http://www.energyprograms.org/2013/06/qecb-paper/.
39 More information on non-tax incentives can be found in CRS Report R42566, Alternative Fuel and Advanced
(continued...)
Congressional Research Service
16
Energy Tax Policy: Issues in the 113th Congress
once 200,000 qualifying vehicles have been sold.40 In addition, since 2006, the tax code has at
times provided incentives for other alternative technology vehicles. Vehicles eligible for tax
incentives have included qualified fuel cell vehicles, hybrid vehicles, advanced lean burn
technology vehicles, and alternative fuel vehicles, with credit amounts varying by the specific
technology and vehicle type. The tax credit for hybrid vehicles, advanced lean burn technology
vehicles, and other alternative fuel vehicles expired at the end of 2010. The tax credit for
qualified fuel cell vehicles is scheduled to expire at the end of 2014. Between 2011 and 2015,
total tax expenditures related to hybrid, alternative technology, and plug-in electric vehicles is
estimated to be $3.3 billion. Through the end of 2013 (2014 in the case of hydrogen property)
taxpayers installing alternative fuel refueling property may qualify for a tax credit. The estimated
cost of this incentive is $0.3 billion between 2013 and 2017.
Other Provisions
There are a number of other energy tax provisions that arguably do not fall under the fossil fuels,
renewable energy, energy efficiency, or alternative technology vehicles categories. The largest of
these incentives, in terms of revenue cost, is the special tax treatment for energy-related publicly
traded partnerships, costing an estimated $6.7 billion between 2013 and 2017.41 Special
depreciation periods for certain energy property, other than renewable energy property, are
estimated to cost $2.6 billion between 2013 and 2017. Excluding interest from private activity
bonds related to energy production is estimated to cost $0.3 billion between 2013 and 2017.
Energy Tax Issues in the 113th Congress
In the FY2014 budget, the Obama Administration proposes to eliminate certain tax incentives for
fossil fuels, while expanding various incentives for energy efficiency, renewable energy,
alternative energy manufacturing, and alternative technology vehicles. Similar proposals have
appeared in previous Obama Administration budget proposals. The 113th Congress may also
choose to consider extension of various energy tax incentives scheduled to expire at the end of
2013.
The President’s FY2014 Budget Proposal
The President’s FY2104 budget contains a number of energy-tax related proposals (see Table 2).
Specifically, the budget proposes to provide $33.6 billion in new energy tax incentives between
2014 and 2023.42 Most of this cost is attributable to a permanent extension of the renewable
energy PTC. The proposal would also make the PTC refundable and available to solar energy
(...continued)
Vehicle Technology Incentives: A Summary of Federal Programs, by Lynn J. Cunningham et al. and CRS Report
R40168, Alternative Fuels and Advanced Technology Vehicles: Issues in Congress, by Brent D. Yacobucci.
40 More information on qualifying vehicles and phase outs can be found at http://www.irs.gov/Businesses/Plug-In-
Electric-Vehicle-Credit-%28IRC-30-and-IRC-30D%29.
41 The majority of energy-related publicly traded partnerships are for activities in fossil fuels sectors. For more
information, see CRS Report R41893, Master Limited Partnerships: A Policy Option for the Renewable Energy
Industry, by Molly F. Sherlock and Mark P. Keightley.
42 The cost of these incentives is as scored by the Joint Committee on Taxation (JCT).
Congressional Research Service
17
Energy Tax Policy: Issues in the 113th Congress
technologies. The President’s FY2014 budget also proposes new tax credits for advanced
technology and alternative-fuel vehicles, an expanded deduction for energy-efficient commercial
building property, and additional allocations of tax credits for advanced energy manufacturing.
The President’s FY2014 budget also proposes to eliminate certain tax incentives that support
fossil fuels (see Table 2).43 Eliminating these incentives would raise an estimated $48.0 billion
between 2013 and 2023. Amongst these provisions, repealing the Section 199 production
activities deduction for fossil fuels would raise the most revenue, an estimated $19.9 billion
between 2013 and 2023.44 Under current law, this deduction is available for all domestic
manufacturing activities. The President’s FY2014 budget proposal would retain the Section 199
deduction for other manufacturing activities, but disallow the deduction for oil and gas as well as
coal and other hard mineral fossil fuels. The President’s FY2014 budget also proposes to repeal
expensing of intangible drilling costs (IDCs), percentage depletion, and several other tax
incentives for fossil fuels (as listed in Table 2).
Also included in the President’s FY2014 budget proposal are several provisions that would affect
the energy sector, but are not targeted specifically to energy. For example, the President’s FY2014
budget proposes to repeal last-in, first-out (LIFO) inventory accounting methods. Repealing LIFO
would increase tax liability for firms holding inventories that increase in value over time (e.g.,
oil). The President’s FY2014 budget would also modify the tax treatment of dual-capacity
taxpayers, a proposal that would affect oil and gas companies operating abroad.
The budget also proposes to modify several other environmental taxes. Specifically, the budget
proposes to (1) increase the Oil Spill Liability Trust Fund (OSLTF) excise tax by one cent and
expand the scope of the tax to include crudes produced from bituminous deposits and kerogen-
rich rock;45 (2) reinstate and extend the Superfund excise taxes, including a 9.7-cents-per-barrel
excise tax on domestic crude oil and imported petroleum products and a tax on hazardous
chemicals and imported materials used in the manufacture of hazardous chemicals, at a rate
ranging from 22 cents to $4.87 per ton; and (3) reinstate the corporate environmental income tax,
which would levy a 0.12% income tax on the amount by which corporate modified alternative
minimum taxable income exceeds $2 million.46 JCT estimates that the proposed modifications to
the OSLTF excise tax would raise $1.9 billion between 2013 and 2023, with the Superfund excise
tax proposals raising $8.2 billion and the Superfund environmental income tax raising $12.9
billion over the same budget window.47
43 Similar proposals have been included in past Obama Administration budget proposals. For additional background,
see CRS Report R42374, Oil and Natural Gas Industry Tax Issues in the FY2013 Budget Proposal, by Robert Pirog.
44 For additional background on the Section 199 production activities deduction, see CRS Report R41988, The Section
199 Production Activities Deduction: Background and Analysis, by Molly F. Sherlock. Since this provision is widely
available, and not specific to the energy industry, it is not listed in Table 1.
45 The purpose of this proposal is to ensure that oil from tar sands are subject to the OSLTF excise tax. See CRS Report
R43128, Oil Sands and the Oil Spill Liability Trust Fund: The Definition of "Oil" and Related Issues for Congress, by
Jonathan L. Ramseur.
46 Unlike the Superfund excise taxes, the corporate environmental income tax has no direct connection to past or
current pollution or polluting activities.
47 U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the
President's Fiscal Year 2014 Budget Proposal, committee print, 113th Cong., May 10, 2013, JCX-11-13.
Congressional Research Service
18
Table 2. Energy Tax Proposals in the President’s FY2014 Budget
(billions of dollars)
10-Year
Revenue
Change
Description
Estimate
New or Extended Incentives
Tax Credit for Production of Advanced Technology Replace the credit for plug-in electric vehicles with an expanded credit available to a wider
-1.7
Vehicles
range of advanced technology vehicles. Credit capped at $10,000. Credit would be available
through December 31, 2020, with a phase down beginning in 2018.
Tax Credit for Medium- and Heavy-Duty
Provide a tax credit for dedicated alternative-fuel vehicles weighing more than 14,000
-1.0
Alternative-Fuel Commercial Vehicles
pounds. Credit capped at $40,000. Credit would be available through December 31, 2019
with a 50% credit available in 2019.
Tax Credit for Renewable Electricity Production
Permanently extend the renewable energy PTC, make the credit refundable, and add solar
-24.7
(PTC)
facilities as qualifying property.
Tax Deduction for Energy-Efficiency Commercial
Permanently extend and increase the maximum value of the energy-efficient commercial
-4.6
Building Property
building property deduction to $3.00 per square foot, increase the partial deduction to
$1.00 per square foot, and provide a deduction for taxpayers achieving certain energy
savings targets. Provide a new deduction based on anticipated and realized energy efficiency
savings.
Tax Credit for Advanced Energy Manufacturing
Provide an additional $2.5 billion for advanced energy manufacturing tax credits.
-1.6
Incentives to be Repealed
Credit for Enhanced Oil Recovery (EOR)
Repeal the investment tax credit for EOR projects.
—
Credit for Oil and Gas Production from Marginal
Repeal the production tax credit for oil and gas from marginal wells.
—
Wells
Expensing of Intangible Drilling Costs (IDCs)
Repeal expensing and 60-month amortization for capitalized IDCs. IDCs would instead be
13.7
capitalized and costs recovered under generally applicable cost-recovery rules.
Deduction for Tertiary Injectants
Repeal the deduction for tertiary injectant expenses.
0.1
Exception to Passive Loss Limitation for Working
Repeal the exception from the passive loss rules for working interest in oil and gas.
0.2
Interest in Oil and Gas
CRS-19
10-Year
Revenue
Change
Description
Estimate
Percentage Depletion for Oil and Gas and Hard
Repeal percentage depletion for oil and gas and hard mineral fossil fuels. Taxpayers with
11.7
Mineral Fossil Fuels
adjusted basis in oil and gas or hard mineral fossil fuel property could claim cost depletion.
Domestic Manufacturing Deduction for Oil and
Modify the definition of manufacturing activities such that income from oil and gas, coal, and
19.9
Gas, Coal, and Other Hard Mineral Fossil Fuels
other hard mineral fossil fuel property does not qualify.
Reduced Amortization Period for Geological and
Increase the amortization period from two to seven years for independent producers’ oil
1.3
Geophysical (G&G) Expenditures
and gas exploration G&G expenditures.
Expensing of Exploration and Development Costs
Repeal expensing, 60-month amortization, and 10-year amortization of exploration and
0.6
for Coal
development costs for coal and other hard-mineral fossil fuels. Costs would instead be
capitalized and depreciated or depleted according to generally applicable rules.
Capital Gains Treatment for Coal Royalties
Tax coal and lignite royalties as ordinary income.
0.6
Source: Department of the Treasury, General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals, Washington , DC, April 2013 and U.S. Congress, Joint
Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President's Fiscal Year 2014 Budget Proposal, committee print, 113th Cong., May
10, 2013, JCX-11-13.
CRS-20
Energy Tax Policy: Issues in the 113th Congress
Expiring Energy Tax Provisions
The American Recovery and Reinvestment Act (ARRA; P.L. 111-5) contained a number of
provisions that increased tax incentives available for renewable energy and energy efficiency.
Support for renewable energy and residential energy efficiency has been reduced with the
subsequent expiration of the Section 1603 grants in lieu of tax credits, lack of additional
allocations in advanced energy manufacturing tax credits, and reduced limits on tax incentives for
residential energy efficiency under the nonbusiness energy property credits. Federal financial
support for renewables and energy efficiency will continue to decline if various energy tax
incentives are allowed to expire as scheduled at the end of 2013.
A list of energy tax incentives scheduled to expire at the end of 2013 can be found in Table 3.48
Absent Congressional action, the PTC will not be available for renewable energy projects that
begin construction after 2013. Also scheduled to expire are tax incentives for biodiesel, renewable
diesel, second generation biofuels (including cellulosic biofuels), and various alternative fuels.
Incentives for energy efficiency in both commercial and residential buildings, as well as
incentives for manufacturers of energy-efficient appliances, are also scheduled to expire at the
end of 2013. Most recently expiring tax incentives were extended as part of the American
Taxpayer Relief Act (ATRA; P.L. 112-240).
Table 3. Energy Tax Incentives Expiring in 2013
(billions of dollars)
10-Year Revenue
Change from
Temporary
Extension in P.L.
Provision
112-240
Credit for Nonbusiness Energy Property
-2.4
Alternative Fuel Vehicle Refueling Property (Non-Hydrogen)
*
Credit for Two- or Three-Wheeled Plug-In Vehicles
*a
Second Generation (Formerly Cellulosic) Biofuel Producer Credit
-0.1
Incentives for Biodiesel and Renewable Diesel
-2.2
Renewable Energy Production Tax Credit (Construction Start Date and ITC in Lieu of PTC
-12.2b
Option)
Credit for Production of Indian Coal
*
Credit for Construction for New Energy Efficient Homes
-0.2
Credit for Energy-Efficient Appliances
-0.7
Mine Rescue Team Training Credit
*
Special Depreciation Allowance for Second Generation Biofuel Plan Property
*
Placed-in-Service Date for Partial Expensing of Certain Refinery Propertyc —
48 More information on expiring tax incentives can be found in CRS Report R43124, Tax Provisions Expiring in 2013
(“Tax Extenders”), by Molly F. Sherlock.
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10-Year Revenue
Change from
Temporary
Extension in P.L.
Provision
112-240
Energy-Efficient Commercial Building Deductiond —
Election to Expense Advanced Mine Safety Equipment
**
Special Rule to Implement Electric Transmission Restructuring
**
Incentives for Alternative Fuel and Alternative Fuel Mixtures (Other than Liquefied
-0.4
Hydrogen)
Source: U.S. Congress, Joint Committee on Taxation, List of Expiring Federal Tax Provisions 2013 - 2023,
committee print, 113th Cong., January 11, 2013, JCX-3-13 and U.S. Congress, Joint Committee on Taxation,
General Explanation Of Tax Legislation Enacted In The 113th Congress, committee print, 112th Cong., February 25,
2013, JCS-2-13.
Notes: A “*” indicates an estimated cost of less than $50 million between 2013 and 2022. A “**” indicates that
the provision was extended at no revenue cost. A “—“ indicates that the provision was not extended in P.L.
112-240.
a. Credits for electric motorcycles and three-wheeled vehicles were modified and extended, but not the
credit for low-speed vehicles.
b. As part of ATRA, the expiration date for the renewable energy production tax credit (PTC) was modified
such that facilities that were under construction but not yet placed in service by the end of 2013 would
qualify. The option to claim the ITC in lieu of the PTC was not available prior to 2009.
c. To qualify for this incentive, a binding construction contract must have been in place by January 1, 2010.
d. This provision was extended for five years, through 2013, as part of the Emergency Economic Stabilization
Act (P.L. 110-343).
Tax Reform
Energy tax policy may be addressed as part of a larger tax reform effort in the 113th Congress.49
One of the 11 House Ways and Means committee tax reform working groups was tasked
specifically with reviewing energy tax issues. Comments received by the working groups on
energy tax policy were diverse in both scope and purpose.50 Some comments suggested
eliminating all or some energy tax expenditures. Other comments suggested a “technology
neutral” approach to energy tax policy. Others suggested a carbon tax. A number of the comments
were narrow in scope and specific to certain provisions.
The Senate Committee on Finance’s Infrastructure, Energy, and Natural Resources options paper
included a range of energy tax policies.51 Options ranged from eliminating all or some subset of
energy tax expenditures, enacting “technology neutral” incentives, expanding incentives for
49 For background information on tax reform broadly, see CRS Report R43060, Tax Reform in the 113th Congress: An
Overview of Proposals, by Molly F. Sherlock.
50 A summary of these comments can be found in U.S. Congress, Joint Committee on Taxation, Report to the House
Committee on Ways and Means on Present Law and Suggestions for Reform Submitted to the Tax Reform Working
Groups, committee print, 113th Cong., May 6, 2013, JCS-3-13.
51 Senate Committee on Finance tax reform options papers can be found at http://www.finance.senate.gov/issue/?id=
6c61b1e9-7203-4af0-b356-357388612063.
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renewables and efficiency, enacting a carbon tax, and changing tax rules for master limited
partnerships (MLPs) for the energy sector.
Selected Energy Tax Legislation52
Dozens of energy tax-related bills have been introduced as of the date of this report in the 113th
Congress. This section briefly reviews selected legislation.
Carbon Tax
A carbon tax as a policy option has received increased attention in the 113th Congress.53
Legislative initiatives to enact a carbon tax include the following:
• The Climate Protection Act of 2013 (S. 332) would establish a carbon pollution
fee starting at $20 per ton of CO2, increasing by 5.6% per year for 10 years.
• The Waxman / Whitehouse discussion draft would establish a carbon pollution
fee, starting in the range of $15 to $35 per ton of CO2 emissions, increasing at an
annual rate in the range of 2% - 8%.54
Initiatives opposing a carbon tax have also been put forward. These include the following:
• The No Carbon Tax Act of 2013 (H.R. 1486) prohibits the Secretary of the
Treasury or the Environmental Protection Agency from implementing a carbon
tax.
• H.Con.Res. 8 expresses the opposition of Congress to Federal efforts to establish
a carbon tax on fuels for electricity and transportation.
• H.Con.Res. 24 and S.Con.Res. 4 express the sense of Congress that a carbon tax
is not in the economic interest of the United States.
• S.Amdt. 261 to S.Con.Res. 8 would create a point of order against legislation that
would create a Federal tax or fee on carbon emissions.
Interest in the carbon tax approach represents as a shift away from the cap-and-trade option which
was more popular in past Congresses. During the 111th Congress the House passed the American
Clean Energy and Security Act of 2009 (H.R. 2454) (Waxman/Markey) which would have
established cap-and-trade programs.
52 A comprehensive list of all pending energy tax legislation in the 113th Congress is beyond the scope of this report.
The proposals included in this section represent prominent energy-tax initiatives. A number of other energy tax-related
bills introduced to date in the 113th Congress propose to extend, expand, or create specific energy-related tax
provisions.
53 For background, see CRS Report R42731, Carbon Tax: Deficit Reduction and Other Considerations, by Jonathan L.
Ramseur, Jane A. Leggett, and Molly F. Sherlock.
54 The full text of this discussion draft and supporting documents can be found at
http://democrats.energycommerce.house.gov/index.php?q=news/waxman-whitehouse-blumenauer-and-schatz-release-
carbon-price-discussion-draft.
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Master Limited Partnerships
Growing interest in the option of allowing renewables to be taxed as master limited partnerships
(MLPs) is reflected in the Master Limited Partnership Parity Act (S. 795 and H.R. 1696).55
Allowing renewables to be taxed as MLPs could reduce financing costs for renewable energy, but
it would also likely result in corporate tax base erosion.
Other
A number of other energy tax bills have been introduced in the 113th Congress. Some legislation
would repeal various energy tax incentives using revenues to reduce the corporate tax rate (e.g.,
the Energy Freedom and Economic Prosperity Act (H.R. 259)). Other legislation would repeal
some subset of energy tax expenditures, such as those available to certain oil and gas companies
(e.g., the Close Big Oil Tax Loopholes Act of 2013 (S. 307)).
There has also been Congressional interest in ensuring that tar sands oil is subject to the Oil Spill
Liability Trust Fund (OSLTF) excise tax. Provisions to this effect were included as a revenue
offset in the Student Loan Affordability Act (S. 953).56
55 For background, see CRS Report R41893, Master Limited Partnerships: A Policy Option for the Renewable Energy
Industry, by Molly F. Sherlock and Mark P. Keightley.
56 For background and other legislation containing similar proposals see CRS Report R43128, Oil Sands and the Oil
Spill Liability Trust Fund: The Definition of "Oil" and Related Issues for Congress, by Jonathan L. Ramseur.
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Appendix. Energy Tax Legislation in Past
Congresses
This appendix describes legislation during the 108th through 112th Congresses that shaped current
energy tax policy.
Enacted Legislation in the 108th and 109th Congresses
The Working Families Tax Relief Act of 2004 (P.L. 108-311)
Several energy tax incentives were extended as part of the Working Families Tax Relief Act of
2004, 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 energy production 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 but were
retroactively extended through December 31, 2005. The electric vehicle credit and the clean-
vehicle income tax deduction were in the process of being phased-out (phase-out had begun on
January 1, 2004). The Working Families Tax Relief Act of 2004 suspended the phase-out—
providing 100% of the tax breaks—through 2005. The tax breaks were resumed beginning on
January 1, 2006, when only 25% of the tax break was available.
The American Jobs Creation Act of 2004 (P.L. 108-357)
The American Jobs Creation Act of 2004 was enacted on October 22, 2004. It included about $5
billion in energy tax incentives primarily targeted at renewable energy as well as alcohol and
biofuels. In particular, the act created the production tax credit, eliminated reduced tax rates for
most blended alcohol fuels, established the biodiesel fuel and small refiner tax credits, and
allowed a credit for oil and gas produced from marginal wells.57
The Energy Policy Act of 2005 (P.L. 109-58)
The Energy Policy Act of 2005 was enacted on August 8, 2005. It included an estimated $9
billion, over five years, in tax incentives distributed among renewable energy, conservation, and
traditional energy sources. Among the larger provisions of the act, in revenue cost terms, were the
enactment of several alternative technology vehicle credits, enactment of three investment credits
for clean coal, and the extension of the production tax credit.
57 The alcohol fuel mixture tax credit, which became law in 2005, has been the source of controversy as the credit has
been claimed by a number of paper companies that burn “black liquor,” a practice that was not anticipated when the
legislation was drafted. When the credit was initially enacted, it was expected to cost less than $100 million annually.
During the first 6 months of 2009, more than $2.5 billion has been claimed for this tax credit. For more information see
Martin A. Sullivan, “IRS Allows New $25 Billion Tax Break for Paper Industry,” Tax Notes, October 19, 2009, pp.
271-272 and Chuck O'Toole, “Baucus, Grassley Draft Bill to End ‘Black Liquor’ Subsidy,” Tax Notes, June 15, 2009,
pp. 1312-1313.
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The Tax Increase Prevention and Reconciliation Act (P.L. 109-222)
The Tax Increase Prevention and Reconciliation Act (P.L. 109-222) was enacted May 17, 2006. It
reduced the value of 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 geological
and geophysical (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 the Energy Policy Act of 2005.
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 provisions
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.
Enacted Legislation in the 110th and 111th Congresses
Energy tax policy in the 110th Congress represented a shift towards increased tax burden (via the
removal of subsidies) on the oil and gas industry while also emphasizing energy conservation and
alternative and renewable fuels, as opposed to conventional hydrocarbons.58 This policy direction
appeared to be the result of high crude oil and petroleum product prices and oil and gas industry
profits, along with the political realignment of the Congress after the 2006 congressional
elections. The shift was manifested by proposals to reduce oil and gas production incentives or
subsidies, which were initially incorporated into, but ultimately dropped from comprehensive
energy policy legislation. Later in the 110th Congress, enacted legislation focused on increasing
incentives for renewable energy production, rather than reducing tax incentives available to the
oil and gas industries. The fact that tax incentives for oil and gas were left in place is in part a
reflection of the deteriorating business climate during 2008.
Energy tax legislation in the 111th Congress continued to provide additional support for
renewables and energy efficiency. As was the case in previous Congresses, much of the energy
tax legislation enacted during the 111th Congress extended expired or expiring energy-related tax
incentives. The American Recovery and Reinvestment Act (ARRA; P.L. 111-5) introduced new
incentives for renewable energy and advanced energy manufacturing, while providing enhanced
incentives for residential energy efficiency. The 111th Congress also eliminated the “black liquor
loophole.”
58 There is an important economic distinction between a subsidy and a tax benefit. As is discussed elsewhere in this
report, firms receive a variety of tax benefits that are not necessarily targeted subsidies (or tax expenditures) because
they are available generally.
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Energy Independence and Security Act of 2007 (P.L. 110-140)
The Energy Independence and Security Act of 2007 (P.L. 110-140; H.R. 6) contained a number of
provisions designed to increase energy efficiency and the availability of renewable energy.
Specifically, the act increased the target fuel efficiency for combined fleets of cars and light
trucks, increased renewable fuel standards, and increased a number of energy-efficiency standards
for household and commercial appliance equipment.
Energy Tax Provisions in the Food, Conservation, and Energy Act of 2008 (P.L.
110-234)
The Food, Conservation, and Energy Act of 2008 (P.L. 110-234), otherwise referred to as the
2008 Farm Bill, contained two energy tax provisions.59 The first provision promotes cellulosic
biofuels through a production credit of $1.01 per gallon, which applies to fuels produced from
qualifying cellulosic feedstocks. The second provision, the ethanol blender’s tax credit (which
applies to both domestic and foreign sourced ethanol), was reduced from $0.51 per gallon to
$0.45 per gallon.60
The Emergency Economic Stabilization Act of 2008 (P.L. 110-343)
The Emergency Economic Stabilization Act of 2008 (P.L. 110-343), included $17 billion in
energy tax incentives. These provisions were primarily extensions of existing provisions
(extenders), but also including several new energy tax incentives. The new provisions included
$10.9 billion in renewable energy tax incentives aimed at clean energy production, $2.6 billion in
incentives targeted toward cleaner vehicles and fuels, and $3.5 billion in tax breaks to promote
energy conservation and energy efficiency. The cost of the energy tax extenders legislation in the
Emergency Economic Stabilization Act of 2008 was fully financed, or paid for, by raising taxes
on the oil and gas industry (mostly by reducing oil and gas tax breaks) and by other tax increases.
The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5)
ARRA modified incentives for renewable energy production, energy conservation, alternative
technology vehicles, as well as a number of other energy tax incentives.61 Collectively, ARRA’s
energy tax provisions lowered the cost of selected renewable energy relative to energy from other
sources, such as oil and gas. Provisions enacted under ARRA extended and expanded a number of
incentives for investment in renewable energy. The renewable energy production tax credit (PTC)
was extended through 2012 for wind and 2013 for other eligible technologies, the energy credit
(ITC) was expanded for small wind property, and taxpayers were given the option of receiving a
59 See CRS Report RL34696, The 2008 Farm Bill: Major Provisions and Legislative Action, coordinated by Renée
Johnson for a complete description of the provisions in the 2008 Farm Bill.
60 For cellulosic ethanol, the value of the cellulosic biofuel production credit is reduced by the value of the ethanol
blender’s credit and the small ethanol producer credit—so that the combined value of the credits equals $1.01. Thus,
the credit for cellulosic ethanol is currently $0.46 per gallon ($1.01 minus $0.45 minus $0.10 [the small ethanol
producer credit]). If the blender’s credit and small ethanol producer credit were reduced (or eliminated), the value of
the cellulosic ethanol production credit would increase to keep the combined value at $1.01.
61 For information on all energy provisions in ARRA see CRS Report R40412, Energy Provisions in the American
Recovery and Reinvestment Act of 2009 (P.L. 111-5), coordinated by Fred Sissine.
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direct grant from the Treasury in lieu of tax credits under the Section 1603 grant program.62
Renewable energy production was also encouraged by ARRA’s provision increasing the funds
available for the issuance of new clean renewable energy bonds. Residential incentives for
renewable energy property were expanded under ARRA, as property-specific credit caps for
residential renewable energy property were removed.
ARRA contained two tax provisions intended to encourage energy conservation. The first
provision modified the tax credits for energy-efficient improvements to existing homes by
temporarily increasing the credit rate and removing credit caps previously associated with
specific types of property. For qualified energy-efficiency improvements, such as the installation
of energy-efficient building envelope components, furnaces, or boilers, installed during 2009 and
2010, taxpayers could claim a 30% tax credit.63 ARRA also removed property-by-property caps
on the tax credit and replaced them with a $1,500 cap for the total amount of the credit claimed
during 2009 and 2010.64 The second energy conservation provision increased funds available for
the issue of qualified energy conservation bonds.
To further promote alternative technology vehicles, tax provisions enacted under ARRA modified
the credits for alternative fuel vehicles and plug-in electric vehicles. Additionally, a tax credit for
plug-in vehicle conversion was enacted.
Tax credits for advanced energy manufacturing (IRC § 48C) were also introduced under ARRA.
This provision provided $2.3 billion in tax credits to be competitively awarded to qualifying
projects.
The Health Care and Education Reconciliation Act of 2010 (P.L. 111-152)
Energy tax policy—like all tax policy—can lead to unanticipated consequences. Notably, this
issue arose in the 111th Congress in its deliberations concerning “black liquor.” In the context of
taxes, the term “black liquor” referred to a process in which pulp mills use a mixture of
conventional fuel and a byproduct of the pulping process as an energy source for the mill.
According to changes enacted in The Safe, Accountable, Flexible, Efficient Transportation Equity
Act: A Legacy for Users (P.L. 109-59; SAFETEA-LU), “black liquor” was eligible for the
alternative fuels tax credit, which was not the congressional intent of the provision.65 The IRS
later ruled that black liquor would be eligible for the cellulosic biofuel producer credit after the
alternative fuels mixture credit expired at the end of 2009.
62 The renewable energy PTC for wind facilities was extended through 2012.
63 Prior to ARRA, the credit rate was 10%.
64 Prior to ARRA, the credit caps ranged from $50 to $300, depending on the type of property installed. The credit was
limited to $500 total for the 2006 and 2007 tax years combined. The credit was not available in 2008. The $1,500 limit
applies to cumulative spending in the 2009 and 2010 tax years.
65 See Martin A. Sullivan, “IRS Allows New $25 Billion Tax Break for Paper Industry,” Tax Notes, October 19, 2009,
pp. 271-272 for additional information concerning the original legislative intent of the modification of the alternative
fuels tax credit in SAFETEA-LU. When enacted, the modification to the alternative fuels tax credit was estimated to
cost less than $100 million annually. During the first six months of 2009, more than $2.5 billion were claimed for this
tax credit, mostly by the paper industry. In addition, the Joint Committee on Taxation estimated that $23.6 billion will
be saved between 2010-2019 from excluding black liquor from the cellulosic biofuel producers credit.
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Recognizing the unintended consequence, Senate Finance Committee Chairman Max Baucus66
stated in response to draft legislation, “Our measure ensures this tax credit is used consistently as
the law intended, not through an unintended loophole.” Senator Charles Grassley67 made similar
statements, noting “The paper industry was not intended to receive the alternative fuels tax credit
when the credit was enacted.” Under The Health Care and Education Reconciliation Act of 2010
(P.L. 111-152), black liquor was made ineligible for the cellulosic biofuel producer credit,
reducing revenue losses by $23.6 billion between 2011 and 2019.68 In addition, with the passage
of The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (P.L.
111-312) at the end of 2010, black liquor could no longer qualify for the alternative fuels tax
credit. However, taxpayers may still be claiming tax credits for black liquor, as previously unused
credits may be carried forward.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation
Act of 2010 (P.L. 111-312)
A number of expiring energy tax provisions were temporarily extended in the Tax Relief,
Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312). The one-year
extension of tax credits for alcohol fuels, including ethanol, was estimated to cost $4.9 billion.
Extending the Section 1603 grant in lieu of tax credits program for one year was estimated to cost
$3.0 billion. The retroactive extension of tax incentives for biodiesel and renewable diesel, which
had expired at the end of 2009, was estimated to cost $2.0 billion. Other provisions that were
extended included tax credits for residential energy efficiency improvements,69 energy efficient
appliance manufacturers, and energy efficient new homes. Tax provisions related to refined coal,
alternative fuel mixtures, electric transmission restructuring, percentage depletion for oil and gas
production, and alternative fuel vehicle refueling property were also extended.
Enacted Legislation in the 112th Congress
Energy tax legislation enacted in the 112th Congress included measures to extend expired or
expiring energy tax incentives. Notably, a number of energy provisions were not extended,
including tax credits for ethanol and the Section 1603 grants in lieu of tax credits. Both of these
provisions had expired at the end of 2011. The provision allowing for the suspension of the
100%-of-net-income limitation on percentage depletion, which had been part of multiple past tax
extenders packages, was also not extended.
66 U.S. Congress, Senate Committee on Finance, “Baucus, Grassley Release Staff Draft of Legislation to Close
Alternative Fuels Tax Credit Loophole,” press release, June 11, 2009, http://finance.senate.gov/press/Gpress/2009/
prg061109.pdf.
67 Ibid.
68 See Joint Committee on Taxation, JCX-17-10, available at http://www.jct.gov/publications.html?func=showdown&
id=3672.
69 These credits were extended at a reduced rate, 10% as opposed to 30%. The limit associated with the credit was also
reduced, from $1,500 to $500. Property specific caps for certain types of investments were reinstated.
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The American Taxpayer Relief Act of 2012 (P.L. 112-240)70
Several expired and expiring energy tax incentives were temporarily extended as part of the
American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240). While most expiring energy tax
provisions were simply extended through the end of 2013 under ATRA, substantive changes were
made to the renewable energy production tax credit (PTC). Specifically, the expiration date for
the PTC was changed from a placed-in-service deadline to a construction start date for all
qualifying technologies. Extending the PTC for wind for one year and changing the deadline from
a placed-in-service to construction start date was estimated to cost $12.2 billion over the 10-year
budget window. Other provisions that were extended include credits for biodiesel, renewable
diesel, alternative fuels, and second generation (cellulosic) biofuels. The tax credit for cellulosic
biofuels was modified to include algae-based fuels. Other incentives related to energy efficiency,
including the tax credit for nonbusiness energy property and the credit for the manufacture of
energy-efficient appliances, were also extended.
Author Contact Information
Molly F. Sherlock
Specialist in Public Finance
msherlock@crs.loc.gov, 7-7797
Acknowledgments
Portions of this report are drawn from prior reports written by Donald Marples, Specialist in Public
Finance; Salvatore Lazarri, former CRS Specialist in Energy and Environmental Economics; and Margot
Crandall-Hollick, Analyst in Public Finance.
70 For more information, see CRS Report R42894, An Overview of the Tax Provisions in the American Taxpayer Relief
Act of 2012 , by Margot L. Crandall-Hollick.
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