Energy Tax Policy: Issues in the 114^th 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 114^th 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 A number of renewable energy and energy efficiency incentives expired at the end of 2013, before being retroactively extended through 2014 by the Tax Increase Prevention Act of 2014 (P.L. 113-295).³ The Tax Relief Extension Act of 2015 (S. 1946) would extend expired energy tax provisions for two years, through 2016. Absent further legislative action in the 114^th Congress, renewable electricity projects that begin construction after December 31, 2014, will not qualify for the production tax credit (PTC). Other provisions that expired at the end of 2014 include incentives designed to promote energy efficiency, as well as incentives that promote alternative fuels and biofuels.

The President's FY2016 budget proposed a number of changes to energy tax policy. Specifically, the Obama Administration has proposed repealing a number of existing tax incentives for fossil fuels, while providing new or expanded incentives for carbon sequestration, alternative and advanced technology vehicles, renewable electricity, energy efficiency, and advanced energy manufacturing. Similar proposals appeared in past Obama Administration budgets.

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 108^th through 113^th 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.

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. The market mechanism will likely lead to an economically inefficient level of production or consumption when externalities are present.

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.⁴

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.⁵

Principal-Agent and Informational Inefficiencies

Market failures in energy use may also arise due to the principal-agent problem.⁶ 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 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.⁷ 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.⁸

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.⁹ 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 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.¹⁰

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.¹¹ 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.¹² 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.¹³ 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, however, has shifted to focus on a carbon tax or emissions fee approach.¹⁴

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.¹⁵ Second, while the subsidy is intended to enhance economic efficiency, subsidies may be inefficient to the extent they are funded with distortionary taxes.¹⁶ 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.¹⁷ 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]).¹⁸

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.¹⁹ 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.²⁰

Taxes as a User Charge

Energy taxes may be employed as user charges for a public good or a quasi-public good.²¹ 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.²² 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.²³ 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.²⁴ 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 related to the production and consumption of energy using fossil-based resources. Table 1 contains a current list of energy-related tax expenditures and other energy tax provisions.²⁵

Fossil Fuels

There are a number of tax incentives currently available for energy production using fossil fuels. They can be broadly categorized as (1) enhancing capital cost recovery; (2) subsidizing extraction of high-cost fossil fuels; or (3) encouraging investment in cleaner fossil fuel energy options. 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 $18.9 billion between 2014 and 2018.

Among the capital cost subsidies, the allowance of the percentage depletion method is estimated to cost $8.7 billion between 2014 and 2018.²⁶ 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. In other words, taxpayers may be able to claim allowances that reduce tax liability even after the cost of investment is fully recovered. 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.²⁷ The expensing of exploration and development costs is estimated to cost the federal government $6.5 billion in revenue losses over the 2014 through 2018 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. In recent years, credits for enhanced oil recovery and oil and gas production from marginal wells have been phased out due to high oil prices.²⁸ In 2014, the enhanced oil recovery credit was fully phased out, as the reference price for oil ($96.13) exceeded the phase-out threshold amount ($28, adjusted for inflation, or $44.73) by $51.40. The phase-out for the marginal wells credit begins once the price of oil exceeds $18 (the $18 amount is adjusted for inflation after 2005). It is possible, however, if oil prices continue to fall and remain low, that these incentives could become available.²⁹ The expensing allowance for tertiary injectants is also estimated to cost less than $50 million over the 2014 through 2018 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.³⁰ The tax credits for investing in clean coal facilities are estimated to cost $1.0 billion over the 2014 through 2018 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 2014 and 2018, 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 $39.2 billion. Of this total, $7.2 billion is for outlays under 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 $32.0 billion between 2014 and 2018.

Historically, the primary tax incentive for renewable electricity has been the production tax credit (PTC).³¹ 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.³² 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 2014 and 2018, this provision is estimated to result in outlays of $7.2 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.³³ 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. The grant program expired at the end of 2011, and the PTC is not currently available for projects that begin construction after December 31, 2014.

Several other tax expenditures related to renewable energy have budgetary effects. First, there is the energy credit (sometimes called the investment tax credit, or ITC), which provides a credit equal to either 10% or 30% of eligible investment in renewable energy production. There is a permanent 10% ITC for solar and geothermal property. However, after 2016, the 30% ITC rate expires, as does the ITC for technologies other than solar and geothermal. 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. This credit is also set to expire at the end of 2016. Third, the reduced depreciable life for renewable energy investments provides an additional subsidy for businesses. Finally, subsidies for clean renewable energy bonds (CREBs) will continue to have a revenue cost over the 2014 through 2018 budget window.³⁴ Taken together, these four provisions are expected to result in $9.1 billion in federal revenue losses between 2014 and 2018.

Several income and excise tax credits are designed to support renewable and alternative fuels. Like other incentives for renewable energy, renewable fuels incentives expired at the end of 2014.³⁵ In recent years, biodiesel and renewable diesel, second generation biofuels, including cellulosic and algae-based biofuels, as well as a number of other alternative fuels have qualified for tax credits. These credits are projected to cost $3.9 billion over the 2014 through 2018 budget window. Extending these incentives beyond 2014 will increase their cost.

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 2014 through 2018 period, revenue losses associated with this provision are estimated to be $1.3 billion.

Energy Efficiency

Incentives for energy efficiency and conservation are designed to encourage owners of residential and commercial property to make 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 2014 and 2018, the total cost of tax expenditures related to energy conservation is estimated to be $6.3 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 2014 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 expired at the end of 2014. 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 $1.6 billion between 2014 and 2018. Extending these tax incentives for residential and commercial energy efficiency will increase their projected revenue costs.

Manufacturers of energy-efficient new homes may also be eligible for a tax incentive. The incentive also expired at the end of 2014. The cost of this incentive between 2014 and 2018 is estimated to be $0.2 billion, but would increase should the provision be extended.

QECBs also encourage energy conservation, by providing subsidized financing to energy conservation projects and other renewable energy projects.³⁶ All available QECB funds have been allocated to the states, with states responsible for making sub-allocations and selecting qualifying projects.³⁷

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.³⁸ The credit will begin to phase out for each manufacturer once 200,000 qualifying vehicles have been sold.³⁹ 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 expired at the end of 2014. Through the end of 2014, taxpayers installing alternative fuel refueling property may have qualified for a tax credit.

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 $5.8 billion between 2014 and 2018.⁴⁰ Special depreciation periods for certain energy property, other than renewable energy property, are estimated to cost $2.8 billion between 2014 and 2018. Excluding interest from private activity bonds related to energy production is estimated to cost $0.2 billion between 2014 and 2018. The deferral of gains from the sale of electric transmission property associated with a Federal Energy Regulatory Commission (FERC) restructuring policy is estimated to cost $1.2 billion between 2014 and 2018.

Energy Tax Issues in the 114^th Congress

Several energy-related tax provisions expired at the end of 2014. Legislation has been introduced, the Tax Relief Extension Act of 2015 (S. 1946), that would extend expired energy tax provisions. In addition to addressing expired tax provisions, other energy tax policy changes may be considered in the 114^th Congress. Recent Obama Administration budget proposals have included a number of energy tax policy changes, which may or may not be considered by Congress. Changes in energy tax policy may also be considered in the context of tax reform.

Expired Energy Tax Provisions

Several energy-related tax provisions expired at the end of 2013, but were retroactively extended one year through the end of 2014 by the Tax Increase Prevention Act of 2014 (P.L. 113-295; see Table 2).⁴¹ Absent further congressional action, the PTC will not be available for renewable energy projects that begin construction after 2014. Other provisions that expired at the end of 2014 include 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 also expired at the end of 2014.

The Tax Relief Extension Act of 2015 (S. 1946) would provide for a two-year extension of all of the energy-related provisions that expired at the end of 2014 (see Table 2).⁴² Additionally, S. 1946 would provide for a two-year extension of the credit for two-wheeled plug-in electric vehicles, which was not extended by the Tax Increase Prevention Act and expired at the end of 2013. The energy-related tax provisions included in the Tax Relief Extension Act of 2015 are estimated to reduce revenues by $17.3 billion between 2016 and 2025.⁴³

In addition to the energy-related provisions that expired at the end of 2014, several energy-related provisions expired at the end of 2013. Specifically, the Tax Increase Prevention Act of 2014 (P.L. 113-295) did not extend the credit for energy-efficient appliance manufacturers or the credit for electric-drive motorcycles and three-wheeled vehicles. However, the Tax Relief Extension Act of 2015 (S. 1946) proposed to extend the credit for two-wheeled plug-in electric drive motorcycles. The placed-in-service deadline for partial expensing of certain refinery property was also not extended beyond 2013 (this incentive was only available for property under contract for construction before January 1, 2010, and thus was effectively already expired).

The President's FY2016 Budget Proposal

The President's FY2016 budget contained a number of energy-tax related proposals (see Table 3). Specifically, the budget proposed to provide $57.0 billion in new or extended energy tax incentives between 2015 and 2025.⁴⁴ Most of this cost is attributable to a permanent extension of the renewable PTC and ITC, at a cost of $35.8 billion. The proposal would make permanent both the PTC and ITC. The PTC would be refundable, and solar would become eligible for the PTC. The proposal would also make costs associated with residential energy efficiency improvements eligible for the PTC, and allow electricity consumed directly by the producer to be PTC eligible. Additionally, the President's budget proposed new tax credits for carbon sequestration, advanced technology and alternative fuel vehicles, advanced energy manufacturing, incentives for energy-efficient buildings, and lowered excise taxes on liquefied natural gas (LNG).

The President's FY2016 budget also proposed eliminating certain tax incentives that support fossil fuels, while also raising and adding new taxes on fossil fuels (see Table 3).⁴⁵ Eliminating certain provisions for oil, natural gas, and coal would raise an estimated $47.6 billion between 2015 and 2025. Among these provisions, repealing the percentage depletion deduction for oil, gas, and hard mineral fossil fuels would raise the most revenue, an estimated $17.9 billion between 2015 and 2025.⁴⁶ The percentage depletion deduction allows independent oil and gas producers to deduct 15%, and up to 25% for marginal wells, from their gross income. The percentage depletion deduction is currently limited to independent producers on their first 1,000 barrels per day. If percentage depletion were repealed, oil and gas producers would instead utilize cost depreciation, which can result in less favorable tax treatment for the producer.⁴⁷ The President's FY2016 budget also proposed to repeal expensing of intangible drilling costs (IDCs), the domestic manufacturing deduction, and several other tax incentives for fossil fuels (as listed in Table 3).

Also included in the President's FY2016 budget proposal were several provisions that would affect the energy sector, but are not targeted specifically to energy. For example, the President's FY2016 budget proposed to repeal last-in, first-out (LIFO) inventory accounting methods. Repealing LIFO would increase tax liability for firms holding inventories that are expected to increase in value over time (e.g., oil). The President's FY2016 budget would also have modified the tax treatment of dual-capacity taxpayers, a proposal that would affect oil and gas companies operating abroad.

The President's FY2016 budget also proposed to modify several other environmental taxes. Specifically, the budget proposed 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;⁴⁸ (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.⁴⁹ JCT estimates that the proposed modifications to the OSLTF excise tax would raise $1.3 billion between 2015 and 2025, with the Superfund excise tax proposals raising $5.5 billion and the Superfund environmental income tax raising $16.4 billion over the same budget window.⁵⁰

Tax Reform

The Tax Reform Act of 2014 (H.R. 1), introduced by then-Chairman of the House Committee on Ways and Means Dave Camp late in the 113^th Congress, would have made a number of changes to energy tax policy. Expired energy tax incentives would not have been extended under the proposal. The value of the PTC would have been reduced for current credit recipients.⁵¹ Most other energy tax expenditures would have been eliminated, although the ability to expense IDCs was retained in the proposal. The Tax Reform Act of 2014 also proposed repealing provisions that while not exclusive to the energy sector are of particular interest, such as LIFO inventory accounting methods.

Earlier in the 113^th Congress, former Senate Committee on Finance Chairman Max Baucus released several tax reform discussion drafts that proposed substantial changes to energy tax policy. Proposals in the cost recovery and accounting draft would have repealed present-law expensing for geological and geophysical expenditures, tertiary injectants, IDCs, and mining exploration and development costs.⁵² These costs would instead be capitalized and amortized. Accelerated depreciation, including five-year depreciation for renewable energy property (e.g., solar and wind), would also have been repealed. The cost recovery and accounting draft proposed a new cost recovery system for tangible assets with asset pools and longer lives, with the goal of better approximating economic depreciation.⁵³ The draft also proposed repealing percentage depletion, instead requiring that costs be recovered using cost depletion.

The energy tax reform discussion draft released by former Chairman Baucus proposed clean energy production and investment tax credits designed to replace existing incentives for renewables and other clean electricity resources (e.g., nuclear, carbon capture, and sequestration).⁵⁴ These credits would have been available for the long term, but were designed to begin phasing out once the annual average greenhouse gas emissions rate for electricity production facilities falls to 372 grams of CO₂e per kWh. The proposal also contained a new tax credit for clean transportation fuels, designed to replace the current system of incentives for biodiesel, renewable diesel, second generation biofuels, and alternative fuels. The summary accompanying the discussion draft indicated that many incentives for energy efficiency, including the Section 25C credit for energy-efficiency improvements to existing homes, would be allowed to expire as scheduled.⁵⁵

Selected Energy Tax Legislation and Proposals⁵⁶

Members of the 114^th Congress have introduced various pieces of energy-tax-related legislation. This section briefly reviews selected legislation and proposals.

Taxes or Fees on Carbon Emissions⁵⁷

Early in the 114^th Congress, S.Con.Res. 1 was introduced to express the sense of Congress that a carbon tax is not in the economic interest of the United States. S.Amdt. 350 to S.Con.Res. 11, proposed and withdrawn on March 25, 2015, would have created a point of order against carbon tax or carbon fee legislation. Similar resolutions were introduced in the 113^th Congress, as was legislation that sought to prohibit the Secretary of the Treasury or the Environmental Protection Agency from implementing a carbon tax (see H.R. 1486 in the 113^th Congress).

Legislation has been introduced in both the House and Senate that would impose a tax or fee on carbon or greenhouse gas emissions. In the House, H.R. 309 would impose a tax on CO₂ emissions from highway fuels, with the idea that the tax on emissions would replace the current federal excise tax on fuels.⁵⁸ Other legislation (H.R. 972) would require emissions permits be purchased from the Treasury, and impose a tax on persons failing to obtain such permits. H.R. 1027 would take a "cap and dividend" approach to requiring emissions permits. H.R. 2202 proposes an excise tax on greenhouse gas emissions, while H.R. 3104 proposes an excise tax on any taxable carbon substance. The American Opportunity Carbon Fee Act of 2015 (S. 1548) would assess fees on major sources of greenhouse gas emissions.

Other

Legislation in the 114^th Congress proposes repealing various energy tax incentives, using revenues to reduce the corporate tax rate (see the Energy Freedom and Economic Prosperity Act [H.R. 1001]). Legislation has also been proposed that would repeal a subset of energy tax expenditures, specifically those available to certain oil and gas companies (e.g., the Close Big Oil Tax Loopholes Act, S. 1907). In the House, similar provisions have also been included in legislation that would repeal the excise tax on medical devices (H.R. 1533).

There has also been congressional interest in ensuring that tar sands oil is subject to the Oil Spill Liability Trust Fund (OSLTF) excise tax. S.Amdt. 123 to S. 1 (the Keystone XL Pipeline Act) expressed the sense of the Senate that all forms of unrefined and unprocessed petroleum should be subject to the OSLTF excise tax. Similar provisions were proposed as a revenue offset in the Student Loan Affordability Act (S. 953) in the 113^th Congress.⁵⁹

Energy Tax Legislation in Past Congresses

This appendix describes legislation during the 108^th through 113^th Congresses that shaped current energy tax policy.

Enacted Legislation in the 108^th and 109^th 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 Section 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 Section 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.⁶⁰

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.

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 109^th 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 110^th and 111^th Congresses

Energy tax policy in the 110^th 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.⁶¹ 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 110^th 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 111^th 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 111^th 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 111^th Congress also eliminated the "black liquor loophole."

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.⁶² 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.⁶³

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.⁶⁴ 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 direct grant from the Treasury in lieu of tax credits under the Section 1603 grant program.⁶⁵ 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.⁶⁶ 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 2010.⁶⁷ 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 111^th 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.⁶⁸ 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.

Recognizing the unintended consequence, Senate Finance Committee Chairman Max Baucus⁶⁹ 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 Grassley⁷⁰ 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 2019.⁷¹ 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,⁷² 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 112^th Congress

Energy tax legislation enacted in the 112^th 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.

The American Taxpayer Relief Act of 2012 (P.L. 112-240)⁷³

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.

Enacted Legislation in the 113^th Congress

Like the 112^th Congress, the primary energy tax legislation in the 113^th Congress was to extend expired energy tax provisions.

The Tax Increase Prevention Act of 2014 (P.L. 113-295)

Several expired energy tax incentives were temporarily extended as part of the Tax Increase Prevention Act of 2014 (P.L. 113-295). Certain provisions were extended through the end of 2014, while others were allowed to expire. A majority of expiring energy tax incentives were preserved as part of the Tax Increase Prevention Act across multiple energy sectors, including fossil fuels, renewables, efficiency, and alternative technology vehicles. Select provisions related to alternative vehicles (credit for electric drive motorcycles and three wheeled vehicles) and energy efficiency (credit for energy efficient appliances) were allowed to expire.

Author Contact Information

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.

Footnotes

1.	For more, see CRS Report R41227, Energy Tax Policy: Historical Perspectives on and Current Status of Energy Tax Expenditures, by [author name scrubbed].
2.	For an overview of non-tax energy policy issues in the 114th Congress, see CRS Report R42756, Energy Policy: 114th Congress Issues, by [author name scrubbed].
3.	See CRS Report R43124, Expired and Expiring Temporary Tax Provisions ("Tax Extenders"), by [author name scrubbed].
4.	See CRS Report RL34266, Climate Change: Science Highlights, by [author name scrubbed].
5.	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.
6.	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 Laboratory, August 12, 2006, http://www.escholarship.org/uc/item/6f14t11t.
7.	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.
8.	Gilbert E. Metcalf, "Using Tax Expenditures to Achieve Energy Policy Goals," American Economic Review, vol. 98, no. 2 (2008), pp. 90-94.
9.	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.
10.	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.
11.	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.
12.	Taxes imposed to correct for negative externalities are also known as Pigovian taxes, named after the economist who developed the concept, Arthur Cecil Pigou.
13.	CRS Report R40242, Carbon Tax and Greenhouse Gas Control: Options and Considerations for Congress, by [author name scrubbed] and [author name scrubbed] for a discussion of the relative merits and demerits of carbon taxes and cap-and-trade systems.
14.	See CRS Report R42731, Carbon Tax: Deficit Reduction and Other Considerations, by [author name scrubbed], [author name scrubbed], and [author name scrubbed].
15.	Gilbert E. Metcalf, "Tax Policies for Low-Carbon Technologies," National Tax Journal, vol. 63, no. 3 (September 2009), pp. 519-533.
16.	Gilbert E. Metcalf, "Federal Tax Policy towards Energy," Tax Policy and the Economy, vol. 21 (2007), pp. 145-184.
17.	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.
18.	See CRS Report RL31181, Research Tax Credit: Current Law and Policy Issues for the 114th Congress, by [author name scrubbed] for an overview of the research tax credit, an umbrella credit under which the energy research credit falls.
19.	Subsidizing domestic production is also problematic in that such policies conflict with environmental objectives.
20.	Gilbert E. Metcalf, "Using Tax Expenditures to Achieve Energy Policy Goals," American Economic Review, vol. 98, no. 2 (2008), pp. 90-94.
21.	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.
22.	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.
23.	For background information on the federal gas tax see CRS Report RL30304, The Federal Excise Tax on Motor Fuels and the Highway Trust Fund: Current Law and Legislative History, by [author name scrubbed] and CRS Report R40808, The Role of Federal Gasoline Excise Taxes in Public Policy, by [author name scrubbed].
24.	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.
25.	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 affect income tax liability.
26.	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.
27.	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.
28.	De minimis tax expenditures are not listed in Table 1.
29.	For more information, see CRS InFocus IF10026, Lower Oil Prices 2015, by [author name scrubbed].
30.	For more information, see CRS Report R43690, Clean Coal Loan Guarantees and Tax Incentives: Issues in Brief, by [author name scrubbed] and [author name scrubbed].
31.	See CRS Report R43453, The Renewable Electricity Production Tax Credit: In Brief, by [author name scrubbed].
32.	See CRS Report R41635, ARRA Section 1603 Grants in Lieu of Tax Credits for Renewable Energy: Overview, Analysis, and Policy Options, by [author name scrubbed] and [author name scrubbed].
33.	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.
34.	See CRS Report R41573, Tax-Favored Financing for Renewable Energy Resources and Energy Efficiency, by [author name scrubbed] and [author name scrubbed].
35.	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.
36.	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.
37.	Official data on QECB issuances are not publicly available. The Energy Programs Consortium tracks known issuances of QECBs. For recent publications, including estimates of QECB issuances, see http://www.energyprograms.org/2014/12/qecb-papers/.
38.	More information on non-tax incentives can be found in CRS Report R42566, Alternative Fuel and Advanced Vehicle Technology Incentives: A Summary of Federal Programs, by [author name scrubbed] et al. and CRS Report R40168, Alternative Fuels and Advanced Technology Vehicles: Issues in Congress, by [author name scrubbed].
39.	More information on qualifying vehicles and phase outs can be found at http://www.irs.gov/Businesses/Plug-In-Electric-Vehicle-Credit-IRC-30-and-IRC-30D.
40.	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 [author name scrubbed] and [author name scrubbed].
41.	More information on expiring tax incentives can be found in CRS Report R43898, Tax Provisions that Expired in 2014 ("Tax Extenders"), by [author name scrubbed].
42.	The tax credits related to biodiesel and renewable diesel are scheduled for a one-year extension before transitioning to a producer credit that would expire at the end of 2016.
43.	U.S. Congress, Joint Committee on Taxation, A Report to the Congressional Budget Office of the Macroeconomic Effects of the "Tax Relief Extension Act of 2015," as Ordered to be Reported by the Senate Committee on Finance, August 4, 2015, JCX-107-15.
44.	U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President's Fiscal Year 2016 Budget Proposal, committee print, 114th Congress, March 6, 2015, JCX-50-15.
45.	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 FY2014 Budget Proposal, by [author name scrubbed].
46.	U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President's Fiscal Year 2016 Budget Proposal, committee print, 114th Congress, March 6, 2015, JCX-50-15.
47.	For more information on the percentage depletion deduction see CRS Report R42374, Oil and Natural Gas Industry Tax Issues in the FY2014 Budget Proposal, by [author name scrubbed]
48.	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 [author name scrubbed].
49.	Unlike the Superfund excise taxes, the corporate environmental income tax has no direct connection to past or current pollution or polluting activities.
50.	U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President's Fiscal Year 2016 Budget Proposal, committee print, 114th Congress, March 6, 2015, JCX-50-15.
51.	For more information, see CRS Report R43453, The Renewable Electricity Production Tax Credit: In Brief, by [author name scrubbed].
52.	For a detailed description of the proposal, see U.S. Congress, Joint Committee on Taxation, Technical Explanation of the Senate Committee on Finance Chairman's Staff Discussion Draft to Reform Certain Business Provisions, committee print, 113th Cong., November 21, 2013, JCX-19-13.
53.	The discussion draft also proposes repealing last-in, first-out (LIFO) inventory accounting methods across all industries. As was noted above in the discussion of the President's FY2014 budget proposal, the energy sector would be substantially affected by this change, even though the policy change would apply to all industries.
54.	For a detailed description of the proposal, see U.S. Congress, Joint Committee on Taxation, Technical Explanation of the Senate Committee on Finance's Staff Discussion Draft to Reform Certain Energy Tax Provisions, committee print, 113th Cong., December 18, 2013, JCX-21-13.
55.	The summary, along with the full text of the discussion draft, can be found on the Senate Committee on Finance website at http://www.finance.senate.gov/newsroom/chairman/release/?id=3a90679c-f8d0-4cb6-b775-ca559f91ebb4.
56.	A comprehensive list of all pending energy tax legislation in the 114th 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 114th Congress propose to extend, expand, or create specific energy-related tax provisions.
57.	For background, see CRS Report R42731, Carbon Tax: Deficit Reduction and Other Considerations, by [author name scrubbed], [author name scrubbed], and [author name scrubbed] and Donald Marron, Eric Toder, and Lydia Austin, Taxing Carbon: What, Why, and How, Tax Policy Center, June 2015, available at http://www.taxpolicycenter.org/UploadedPDF/2000274-Taxing-Carbon-What-Why-and-How.pdf.
58.	For background, see CRS Report RL30304, The Federal Excise Tax on Motor Fuels and the Highway Trust Fund: Current Law and Legislative History, by [author name scrubbed].
59.	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 [author name scrubbed].
60.	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.
61.	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.
62.	See CRS Report RL34696, The 2008 Farm Bill: Major Provisions and Legislative Action, coordinated by [author name scrubbed] for a complete description of the provisions in the 2008 Farm Bill.
63.	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.
64.	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 [author name scrubbed].
65.	The renewable energy PTC for wind facilities was extended through 2012.
66.	Prior to ARRA, the credit rate was 10%.
67.	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.
68.	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 and 2019 from excluding black liquor from the cellulosic biofuel producer's credit.
69.	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.
70.	Ibid.
71.	See Joint Committee on Taxation, JCX-17-10, available at http://www.jct.gov/publications.html?func=showdown&id=3672.
72.	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.
73.	For more information, see CRS Report R42894, An Overview of the Tax Provisions in the American Taxpayer Relief Act of 2012 , by [author name scrubbed].