Energy Tax Policy: Issues in the 111th Congress
Congressional research reportJun 16, 2010
Ask Donna
What actually matters in this document.
Text
Energy Tax Policy: Issues in the 111th Congress
Molly F. Sherlock
Analyst in Economics
Donald J. Marples
Section Research Manager
June 16, 2010
Congressional Research Service
7-5700
www.crs.gov
R40999
CRS Report for Congress
Prepared for Members and Committees of Congress
Energy Tax Policy: Issues in the 111th Congress
Summary
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. In practice, however,
energy tax policy in the United States is made in a political setting, being determined by the
views and interests of the key players in this setting: politicians, special interest groups,
bureaucrats, academic scholars, and fiscal dictates. As a result, enacted tax policy embodies
compromises between economic and political goals, which could either mitigate or compound
existing distortions.
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 and
regulation, in an effort to achieve policy goals.
Current energy policy reflects efforts to achieve both current and past policy objectives. Recent
legislative efforts have primarily focused on renewable energy production and conservation to
address environmental concerns. In contrast, past efforts attempted to reduce reliance on foreign
energy sources through increased domestic production of fossil fuels. Recently enacted legislation
focusing on encouraging renewable energy production and conservation reduces reliance on
imported, foreign oil, while also addressing environmental concerns by reducing the use of fossil
fuels. Favorable tax preferences given to domestic fossil fuel energy sources also promote
domestic energy production, reducing the demand for imported oil.
In the 111th Congress energy tax legislation continues to be focused on increasing incentives for
renewable energy production and conservation. The American Recovery and Reinvestment Act of
2009 (ARRA; P.L. 111-5) expanded and extended a number of tax incentives designed to promote
renewable energy, conservation, and alternative technology vehicles. In addition, the President’s
2010 and 2011 Budget Proposals contain a number of provisions that would, if enacted, continue
to move energy policy toward promoting alternative energy sources by eliminating a number of
the tax subsidies currently available to the oil and gas industry while also imposing additional
taxes that would be borne—at least partially—by these industries. The President’s 2011 Budget
Proposal continued this policy direction through the proposed removal of a number of subsidies
currently available to the coal industry.
Congressional Research Service
Energy Tax Policy: Issues in the 111th Congress
Contents
Introduction ................................................................................................................................1
Economic Rationale for Intervention in Energy Markets..............................................................2
Rationale for Intervention in Energy Markets ........................................................................2
Externalities....................................................................................................................2
Principal-Agent and Informational Inefficiencies.............................................................3
National Security ............................................................................................................4
Potential Interventions in Energy Markets .............................................................................4
Taxes as a User Charge .........................................................................................................6
Current Status of U.S. Energy Tax Policy ....................................................................................7
Fossil Fuel Production......................................................................................................... 14
Renewable Energy Production............................................................................................. 15
Energy Conservation........................................................................................................... 16
Alternative Technology Vehicle Credits............................................................................... 16
Other Energy Tax Provisions ............................................................................................... 17
Energy Tax Legislation in the 111th Congress ............................................................................ 17
The American Recovery and Reinvestment Act of 2009 (P.L. 111-5) ................................... 17
The President’s Fiscal Year 2010 and 2011 Budget Proposals .............................................. 21
American Energy Production and Price Reduction Act (H.R. 3505)..................................... 22
Carbon Tax / Climate Change.............................................................................................. 22
Tax Extenders ..................................................................................................................... 23
The Small Business Jobs Tax Relief Act of 2010 ................................................................. 23
Enacted Legislation in the 110th Congress.................................................................................. 24
Energy Independence and Security Act of 2007 (P.L. 110-140)............................................ 24
Energy Tax Provisions in the Food, Conservation, and Energy Act of 2008 (P.L. 110234) ................................................................................................................................. 24
The Emergency Economic Stabilization Act of 2008 (P.L. 110-343) .................................... 25
Tables
Table 1. Energy Tax Expenditures ...............................................................................................8
Table 2. Energy Tax Provisions Enacted Under American Recovery and Reinvestment
Act of 2009............................................................................................................................ 18
Appendixes
Appendix. Energy Tax Legislation Prior to the 110th Congress................................................... 26
Contacts
Author Contact Information ...................................................................................................... 27
Acknowledgments .................................................................................................................... 27
Congressional Research Service
Energy Tax Policy: Issues in the 111th 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 even macroeconomic) objective. In practice, however,
energy tax policy in the United States is made in a political setting, being determined by the
views and interests of the key players in this setting: politicians, special interest groups,
bureaucrats, academic scholars, and fiscal dictates. As a result, enacted tax policy embodies
compromises between economic and political goals, which could either mitigate or compound
existing distortions.
The idea of applying tax policy instruments to energy markets is not new, but until the 1970s,
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, but appears
currently focused on promoting energy efficiency and renewable energy production while
continuing to promote U.S. energy security.
This report begins with an overview of the economic rationale for intervention in energy markets.
Energy markets are uniquely prone to a number of market failures. The nature of these market
failures is reviewed, followed by an analysis of interventions with the potential to effectively
address these market failures. After presenting the potential energy-related market failures and
policy interventions, the current status of U.S. energy tax policy is examined.
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 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 reducing the nation’s reliance on foreign, imported energy sources.
The primary vehicle for energy tax legislation in the 111th Congress to date has been the
American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5). This legislation
contained a number of provisions that expanded and extended incentives for renewable energy,
energy conservation, and alternative technology vehicles. Additionally, the President’s Fiscal Year
2010 and 2011 budget proposals contain provisions that would scale back existing incentives for
energy production from fossil fuels, and if adopted would decrease the cost of alternative energy
relative to energy produced from conventional fossil fuel (coal, oil, and gas) sources. Finally, the
American Clean Energy and Security Act of 2009 (H.R. 2454), and several other bills, would
control greenhouse gas (GHG) emissions through a cap-and-trade system.
This report concludes with a review of major energy tax legislation enacted in the 110th Congress.
Legislation enacted in the 110th Congress shifted the focus of energy tax policy, emphasizing
alternative and renewable fuels as well as conservation while removing subsidies for oil and gas
Congressional Research Service
1
Energy Tax Policy: Issues in the 111th Congress
industry. The Appendix of this report provides a brief summary of energy tax policies enacted in
the 108th and 109th Congresses.
Economic Rationale for 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 the use of tax policy to achieve social objectives. Tax policy can also be
used to correct for market failures, 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 to rationalize 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. 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 social marginal
cost of supply. The result is a system where cost and/or 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 and/or subsidies will result in 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 as well as result in
other damages to the land. In addition to causing environmental damage, the production and
consumption of energy can also lead to lung damage and a variety of other health problems. The
use of fossil fuels, both in the production of energy (i.e., coal-fired power plants) and at the
Congressional Research Service
2
Energy Tax Policy: Issues in the 111th Congress
consumer level (i.e., using gasoline to power automobiles), and the associated greenhouse gas
emissions have contributed to global climate change. 1
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.2
Principal-Agent and Informational Inefficiencies
Market failures in energy use may also arise due to the principal-agent problem. 3 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. Landlords will under-invest in energysaving 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.4 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 energyefficient products in newly constructed homes. Homebuilders may have an incentive to install
1
See CRS Report RL34513, Climate Change: Current Issues and Policy Tools, by Jane A. Leggett for an overview of
climate change issues and potential policy remedies.
2
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.
3
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 Probelm on U.S. Residential Energy Use, Lawrence Berkeley National
Labratory, August 12, 2006, http://www.escholarship.org/uc/item/6f14t11t.
4
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.
Congressional Research Service
3
Energy Tax Policy: Issues in the 111th Congress
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 energyefficiency investments.5
National Security
Preserving national security is another often cited rationale for intervention in energy markets.
Presently, much of the petroleum consumed in the United States is derived from foreign sources.
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. 6
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. 7 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.8 The tax serves to increase the price of the activity, and reduce the
5
Gilbert E. Metcalf , “Using Tax Expenditures to Achieve Energy Policy Goals,” American Economic Review, vol. 98,
no. 2 (2008), pp. 90-94.
6
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 2007-08
in the succeeding economic recession.
7
There are non-tax options for addressing for addressing energy market failures such as regulation and private sector
solutions.
8
Taxes imposed to correct for negative externalities are also known as Pigovian taxes, named after the economist who
developed the concept, Arthur Cecil Pigou.
Congressional Research Service
4
Energy Tax Policy: Issues in the 111th Congress
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. 9 Current political momentum, however, is behind a cap-and-trade policy, as
is discussed below.
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 clean alternative fuels, as opposed 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. 10
Second, while the subsidy is intended to enhance economic efficiency, subsidies may be
inefficient to the extent they are funded using distortionary taxes.11 Hence, the more efficient
alternative may be to place a tax on the undesirable activity.
The tax code subsidizes research and development (R&D) because of the associated positive
externalities generated. 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. 12 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 (IRC
§41)).13
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
(energy-efficient technologies in the present context). Currently, the definition of 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 the market failure in rental property.
9
See 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-andtrade systems.
10
Gilbert E. Metcalf, Tax Policies for Low-Carbon Technologies, National Bureau of Economic Research, Working
Paper 15054, Cambridge, MA, June 2009.
11
Gilbert E. Metcalf, “Federal Tax Policy towards Energy,” Tax Policy and the Economy, vol. 21 (2007), pp. 145-184.
12
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.
13
See CRS Report RL31181, Research and Experimentation Tax Credit: Current Status and Selected Issues for
Congress, by Gary Guenther for an overview of the research tax credit, an umbrella credit under which the energy
research credit falls.
Congressional Research Service
5
Energy Tax Policy: Issues in the 111th Congress
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’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.14 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.15
Taxes as a User Charge
Energy taxes may be employed as user charges for a public good or a quasi-public good. 16 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. 17 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 rationalized as a user
fee for the federal highway system. 18 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. 19 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.
14
Subsidizing domestic production is also problematic in that such policies conflict with environmental objectives.
Gilbert E. Metcalf, “Using Tax Expenditures to Achieve Energy Policy Goals,” American Economic Review, vol. 98,
no. 2 (2008), pp. 90-94.
16
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.
17
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.
18
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.
19
Another argument is that the federal gas tax should be viewed as correcting the externality associated with gasoline
powered vehicles. Even if the gas tax were to be viewed as one correcting for the carbon emissions, it would make
more economic sense to tax all carbon emissions rather than just those coming from the burning of fossil fuels by motor
(continued...)
15
Congressional Research Service
6
Energy Tax Policy: Issues in the 111th Congress
Current Status of U.S. Energy Tax Policy
Current U.S. energy tax policy appears to be aimed at stemming growth in U.S. dependence on
imported oil, especially from volatile regions of the world. This reflects the belief that national
security is linked to energy security. Many of the specific policies currently in place are the result
of past legislative action and initiatives. The short-run policies aim to increase the domestic
energy production of fossil fuels, while the long-run policies appear aimed at promoting energy
conservation and the use of renewable energy sources. Recently, attention has focused on the
transportation sector, in the nature of both technology and alternative fuels. Table 1 contains a
current list of energy-related tax expenditures. 20
Energy conservation measures and domestic production of energy from renewable resources help
reduce demand for fossil fuels by diversifying the sources from which energy can be derived to
meet U.S. demand. Unlike domestic fossil fuel subsidies, these policies are long-term because
they require a commitment in the face of volatility in fossil fuel prices and technologies that may
not have reached the stage where they are competitive in the market in the absence of
subsidization.
Current energy tax policy is the result of prior policy action undertaken in an effort to achieve the
nation’s long-standing goal of enhancing U.S. energy security. For example, the promotion of
domestic fossil fuel production, the current principle short-run strategy, was a central tenet of
energy tax policy from 1918 through the late 1960s. Further, the current long-run policies of
conservation and alternative fuel sources have origins in tax policies from the 1970s. The
perceived means of achieving U.S. energy security have shifted over the years—and these shifts
are clearly reflected in the current status of U.S. energy tax policy.
Energy tax policy proposed in the Obama Administration’s Fiscal Year 2011 Budget Proposal
differs substantially from current U.S. energy tax policy. If fully enacted, the FY2011 Budget
Proposal would reduce or eliminate several energy tax policies that encourage energy production
from the coal, oil, and gas industries, while expanding incentives for conservation and renewable
energy production. This reflects the shift in energy tax policy from one primarily focused on
enhancing U.S. energy security through diversification of energy resources towards a tax policy
that more readily incorporates environmental concerns (tax policy that discourages the use of
fossil fuels, regardless of their nation of origin).
(...continued)
vehicles.
20
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.
Congressional Research Service
7
Table 1. Energy Tax Expenditures
billions of dollars
Tax Expenditure
Description
Cost 20082012
Expiration
Date
I.R.C.
Section
Fossil Fuels
Expensing of percentage over cost
depletion
Firms that extract oil or gas are permitted to deduct 15% of
sales (up to 25% for marginal wells depending on oil prices) to
recover their capital investment in a mineral reserve.
$7.9
none
611, 612,
613, 613A,
291
Expensing of exploration and
development costs
Firms engaged in the exploration and development of oil, gas,
or geothermal properties have the option of expensing
(deducting in the year paid or incurred) rather than capitalizing
(i.e., recovering such costs through depletion or depreciation)
certain intangible drilling and development costs (IDCs).
$7.5
none
263(c),
291, 616617,
57(a)(2),
59(e), 1254
Amortization of G&G expenditures
associated with oil and gas exploration
Under the Modified Accelerated Cost Recovery System
(MACRS), the cost of selected types of geological and
geophysical property is depreciated over 2 years for
independent producers.
$1.3
none
167(h)
Credit for enhanced oil recovery costs
A 15% income tax credit for the costs of recovering domestic
oil by qualified “enhanced-oil-recovery” (EOR) methods.
Other costs associated with tertiary injectants are also
deductible.
$0.2
none
43, 193
Coal Production Credits
Production credit of $6.20-per-ton production credit for
refined coal used to produce steam, or $2 per barrel-of-oil
equivalent credit for refined coal used as a steel industry fuel,
or a $1.625 per-ton production credit (all adjusted for inflation
from 1992) for coal reserves owned by an Indian tribe.
$0.2
12/31/2009
(refined coal)
45
Tax credit of 20% of investment for integrated gasification
combined cycle (IGCC) systems; 15% for other advanced coal
technologies
$0.8
Credits for investing in clean coal
facilities
CRS-8
12/31/2012
(Indian coal)
none (credit
allocation limit)
48A
Tax Expenditure
Description
Amortization of air and pollution control
facilities
Allows the pre-1976 5-year amortization period for
investments in pollution control equipment for coal-fired
electric generation 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 pollution 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%.
Cost 20082012
Expiration
Date
I.R.C.
Section
$0.6
none
169
Renewable Energy Production
Credits for electricity production from
renewable resources
Tax credit of 2.1¢/kWh for electricity produced from wind,
closed-loop biomass, geothermal energy, and solar sources.
Tax credit of 1.1¢/kWh for electricity produced from openloop biomass, small irrigation, landfill gas, trash combustion,
qualified hydropower, marine and hydrokinetic sources. The
tax credit is given for 10 years after the date the facility is
placed in service.
$7.1
Property must
be placed in
service by
12/31/13
(12/31/12 for
wind)
45
Energy credit
Tax credit equal to 10% of investment in energy production
using geothermal, microturbine, ground water for heating or
cooling, or combined heat and power methods. The tax credit
is equal to 30% of investment in energy production using solar
electric, solar hot water, fuel cell or small wind methods.
(i)
none
(geothermal,
solar electric,
solar hot water
and small wind
electric)
48
12/31/2016
(else)
Residential energy-efficient property
credit
CRS-9
Tax credit for 30% of the cost of the purchase of solar electric
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.
$0.1
12/31/2016
25D
Cost 20082012
Expiration
Date
I.R.C.
Section
Accelerated depreciation allowances are provided under the
modified accelerated cost recovery system (MARCs) for
investments in certain energy property. Specifically, certain
solar, wind, fuel cell, microturbine and biomass property has a
five year recovery period. Cellulosic biofuel plant property is
allowed an additional first-year depreciation deduction equal
to 50% of the property’s adjusted basis.
$0.5
Cellulosic biofuel
property must
be placed in
service by
12/31/2012
168
Credits for holders of clean renewable
energy bonds
Provides a tax credit for the holder of the bond against its
income tax. Clean Renewable Energy Bonds (“CREBs”) are
subject to a 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 bind to be issued at par and without
interest.
$0.5
volume limited
54, 54C
Credit for alcohol fuels
Income or excise tax credit. Ethanol tax credit generally 45¢
per gallon (extra 10¢ for small producers; alcohol tax credit
generally 60¢ per gallon; $1 per gallon for biodiesel, agribiodiesel, and renewable diesel (extra 10¢ for small producers
of agri-biodiesel); alternative fuels generally 50¢ per gallon;
cellulosic biofuels generally $1.01 per gallon.
$0.3 (ii)
12/31/09 for
biodiesel, agribiodiesel,
renewable
biodiesel, black
liquor, and
alternative fuels;
12/31/10 for
alcohol fuels;
12/31/12 for
cellulosic biofuel
40, 40A,
6426,
6427(e)
Tax Expenditure
Description
Five-year cost recovery of certain energy
property
Energy Conservation
CRS-10
Credit for nonbusiness energy property
Tax credit for 30% of the amount paid for qualified energyefficiency improvements and expenditures for residential
energy property including qualifying improvements to the
building’s envelope, the HVAC system, furnaces, or boilers.
Credit limited to $1,500 for 2009 and 2010 combined.
$2.1
12/31/2010
25C
Deduction for expenditures on energyefficient commercial property
Tax deduction for the cost of building envelope components,
heating cooling systems, and lighting. The deduction is limited
to $1.80 per square foot.
$0.2
12/31/2019
179D
Exclusion of energy conservation
subsidies provided by public utilities
Subsidies are not taxable as income.
$0.1
none
136
Tax Expenditure
Description
Cost 20082012
Expiration
Date
I.R.C.
Section
Energy-efficient home credit
Contractor may claim $1,000 credit for building homes 30%
more efficient than the standard; $2,000 credit for homes 50%
more efficient than the standard
$0.1
12/31/2009
45L
Credit for producing energy-efficient
appliances
Tax credit based on energy efficiency, energy savings.
Maximum credit is $75 for dishwashers, $200 for refrigerators,
and $250 for clothes washers.
$0.3
12/31/2010
(earlier
expiration for
lower efficiency
standards)
45M
Qualified energy conservation bonds
Federal government has authorized the issue of $3.2 billion in
Qualified Energy Conservation (“QECBs”). QECBs provide a
tax credit worth 70% of the tax credit bond rate stipulated by
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, public transportation projects or public education
campaigns.
$0.1
volume limited
54D
$0.9
12/31/09
(12/31/10 for
vehicles weighing
more than 8,500
pounds)
30B
Alternative Technology Vehicles
Hybrid vehicles
CRS-11
The first 60,000 hybrid cars or light trucks sold per
manufacturer are eligible for a credit of $400 to $2,400
(depending on fuel economy). An additional credit of $250 to
$1,000 is available depending on a vehicles expected lifetime
fuel savings. Heavy vehicles (those exceeding 8,500 pounds)
qualify for up to $30,000 in credits and is not subject to a
volume cap.
Tax Expenditure
Other alternative fuel vehicles
Description
Fuel cell vehicles receive a base credit of $8,000 (reduced to
$4,000 after 2009) for vehicles weighing less than 8,500
pounds. Heavier vehicles qualify for up to a $40,000 credit. An
additional credit of up to $4,000 is available for cars and light
trucks that exceed the 2002 base fuel economy. Lean burn
vehicles are eligible for the same credit as hybrid vehicles.
Alternative fuel vehicles can qualify for a credit of up to $5,000
for cars and light trucks and $40,000 for heavy vehicles. Credit
amount varies according to the vehicle’s incremental cost and
ratio of alternative fuel use. Credits available for plug-in
electric vehicles are available up to $7,500 (cars and light
trucks) depending on kilowatt hour capacity of vehicle and
$15,000 for heavy vehicles. A 10% credit, up to $2,500, is
available for the cost of electric-drive low-speed neighborhood
vehicle, motorcycle and three-wheeled vehicles. A 10% credit,
up to $4000, is available for conversion to a plug-in electric
drive vehicle.
Cost 20082012
Expiration
Date
I.R.C.
Section
$0.1
12/31/2010 for
advanced lean
burn vehicles,
and alternative
fuel vehicles;
12/31/11 for
electric drive
low speed
vehicles and
conversion to
plug-in vehicle
12/31/2014 for
fuel cell vehicles.
12/31/2009 for
plug-in low
speed vehicles
and heavy
vehicles. Credit
for plug-in
vehicle volume
capped.
30, 30B,
30D
Other / Miscellaneous
CRS-12
Election to expense 50% of qualified
property used to refine liquid fuels
A taxpayer may elect to expense 50% of the cost of any
qualified property used for processing liquid fuel from crude
oil or qualified fuels. The remainder is recovered under the
otherwise applicable rules.
$3.8
12/31/2013
179(c)
Exceptions for energy related Publicly
Traded Partnerships
Publicly Traded Partnerships are generally treated as
corporations. 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.
$2.6
none
7704, 851
Exclusion of interest on State and local
government private activity bonds for
energy production facilities
Exclusion of interest from private activity bonds used to
finance privately owned and/or operated sewage, water, solid
waste disposal, and heating and cooling facilities, certain
private electric and gas facilities, hydroelectric dam
enhancements, qualified green building and sustainable design
projects from tax.
$0.6
none
141, 142
Tax Expenditure
Description
Credit for producing fuels from a nonconventional source
A production tax credit of $3 per barrel of oil-equivalent (in
1979 dollars) for certain types of liquid, gaseous, and solid
fuels produced from selected types of alternative energy
sources (termed “non-conventional fuels”), and sold to
unrelated parties. The full credit is available if oil prices fall
below $23.50 per barrel (in 1979 dollars); the credit is phased
out as oil prices rise above $23.50 (in 1979 dollars) over a $6
range (i.e., the inflation-adjusted $23.50 plus $6). The phase
out limit does not apply to coke or coke gas.
Cost 20082012
Expiration
Date
I.R.C.
Section
$0.6
placed in service
by 12/31/2009
(coke credit)
45K, 40A,
6426
In addition, a $1.00 per gallon tax credit is available for both
biodiesel and renewable biodiesel production, while a 10¢ per
gallon small producer credit is only available on the former.
Further, a 50¢ per gallon credit is available on the production
of alternative fuels.
Depreciation recovery periods for
energy specific items
Smart electric distribution property is allowed 10-year
depreciation under the modified accelerated cost recovery
system (MACRs). Certain electric transmission property is
allowed a 15-year depreciation. Natural gas distribution lines
are also allowed a 15-year depreciation.
$1.3
various
168(e)
Deferral of gains from the sale of electric
transmission property
A taxpayer may elect to recognize the gain from the sale of
certain electric transmission property over an eight year
period.
$0.3
12/31/2009
451
Credits for clean fuel vehicle refueling
property
A 50% credit (capped at $50,000 for business property and
$2,000 for nonbusiness property) for 2009 and 2010) and a
30% credit for hydrogen property (capped at $200,000).
$0.1
12/31/10
(12/31/14 for
hydrogen
refueling
property)
30C
Source: CRS compilation based on Joint Committee on Taxation, Tax Expenditures for Energy Production and Conservation, JCX-25-09R, April 21, 2009.
Notes: i- less than $50 million per year; ii- the credit from excise tax for alcohol fuels results in a reduction of excise tax receipts of $13.6 billion from 2008 – 2012. These
estimates are based on the January 2008 Congressional Budget Office baseline for tax expenditures under present law as of October 31, 2008. *- indicates that the
provision was modified under ARRA. Table 2 provides the additional revenue loss associated with the ARRA modification.
CRS-13
Energy Tax Policy: Issues in the 111th Congress
Energy tax policy—like all tax policy—can lead to unintended consequences. Notably, this issue
has arisen in the 111th Congress in its deliberations concerning “black liquor.” In the context of
taxes, the term “black liquor” currently refers 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” is eligible for the
alternative fuels tax credit, which was not the congressional intent of the provision. 21 Recognizing
the unintended consequence, Senate Finance Committee Chairman Max Baucus22 stated in
response to draft legislation, “Our measure ensures this tax credit is used consistently as the law
intended, not through an unintended loophole,” and Senate Finance Committee Ranking Member
Charles Grassley23 stated, “The paper industry was not intended to receive the alternative fuels
tax credit when the credit was enacted.... This staff draft proposal is meant to clarify that
legislative intent.”
A further unintended consequence of “black liquor” and selected other energy tax credits—such
as those for ethanol—is that by reducing the total cost of blended fuels, they may actually
increase the consumption of fossil fuels that the credits were designed to reduce. 24
Fossil Fuel Production
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. Between 2008 and 2012, the total cost of tax expenditures
related to fossil fuels is estimated to be $18.5 billion.
Among the capital cost subsidies, the allowance of the percentage depletion method is estimated
to cost the most in foregone revenue, $7.9 billion between 2008 and 2012.25 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
21
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 6 months of 2009, more than $2.5 billion have been claimed for
this tax credit, mostly by the paper industry.
22
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.
23
Ibid.
24
Harry De Gorter and David R. Just, “The Law of Unintended Consequences: How the U.S. Biofuel Tax Credit with a
Mandate Subsidizes Oil Consumption and Has No Impact on Ethanol Consumption ,” Cornell University Working
Paper Series, 2007-20 2008.
25
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.
Congressional Research Service
14
Energy Tax Policy: Issues in the 111th Congress
property. 26 The expensing of exploration and development costs is also a relatively large tax
expenditure, estimated to cost the federal government $7.5 billion in revenue losses over the 2008
through 2012 budget window.
Compared to the capital cost recovery provisions, tax expenditures intended to offset high
extraction or refining costs are small. Credits for refined coal production, enhanced oil recovery
costs and investing in clean coal facilities collectively are estimated to result in approximately
$1.2 billion between 2008 and 2012.
Renewable Energy Production
Several tax incentives subsidize the production of energy from renewable sources. While the
specific incentives differ in design, they all 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 2008 and 2012, the total cost of tax expenditures related to the
production of renewable energy is estimated to be $8.5 billion.27
Among the renewable energy tax expenditures, the credit for electricity production from
renewable sources is the most expensive, with an estimated cost of $7.1 billion over the 2008
through 2012 budget window.28 This production tax credit provides a varying incentive for
electricity generation from selected renewable energy sources.29 Other renewable energy
production tax incentives include credits for the production or blending of alcohol fuels and
renewable diesel.
In terms of budgetary impact, there are a number of smaller tax expenditures related to renewable
energy. First, there is the energy credit, which provides a credit equal to either 10% or 30% of
eligible investment in renewable energy production. 30 Second, there is the residential energyefficient 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, clean renewable energy
bonds (CREBs) and new clean renewable energy bonds (New CREBs) are subsidized in that
issuers are not required to pay interest to investors, as investors receive a federal tax credit in lieu
of interest payments.31
26
Expensing costs means to deduct the full cost of an investment in the current tax year, rather than depreciated the
costs over a period of time.
27
Estimates in this section, and in Table 1, are based on current law as of October 31, 2008. The American Recovery
and Reinvestment Act of 2009 (ARRA; P.L. 111-5) made changes to incentives for renewable energy production with
an estimated additional cost of $3.6 billion between 2009 and 2013. These provisions are discussed in more detail
below.
28
Under the ARRA taxpayers may elect to take an investment tax credit in lieu of this production credit. This provision
is discussed below.
29
Electricity produced from wind, closed-loop biomass, selected solar and geothermal sources receive a credit equal to
2.1 cents per kilowatt-hour, while that sourced from open-loop biomass, small irrigation, municipal solid waste, hydro,
marine, and hydrokinetic sources receive a credit of 1 cent per kilowatt-hour.
30
For example, energy produced from a micro-turbine or geothermal deposit is eligible for a 10% credit, while fuel cell
and small wind property is eligible for a credit of 30%.
31
See CRS Report R40523, Tax Credit Bonds: Overview and Analysis, by Steven Maguire for additional information
on tax credit bonds.
Congressional Research Service
15
Energy Tax Policy: Issues in the 111th Congress
Energy Conservation
Incentives for energy conservation primarily operate by providing incentives to owners of
residential and commercial property that undertake energy-efficient upgrades. There are also
incentives to manufacturers of energy-efficient appliances and for the issuance of qualified energy
conservation bonds. Between 2008 and 2012, the total cost of tax expenditures related to energy
conservation is estimated to be $2.9 billion.32
The bulk of spending on energy conservation encourages property owners to undertake energyefficiency improvements on existing buildings. The credit for nonbusiness energy property, which
provides homeowners up to a $1,500 tax credit for expenditures on energy-efficient property such
as windows, doors, furnaces, and boilers, is the largest energy conservation tax expenditure, with
an estimated cost of $2.1 billion during the 2008 through 2012 budget window. In addition,
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. Finally, the exclusion of subsidies provided by utility companies to energy
consumers undertaking energy-efficiency upgrades from income increases the value of such
subsidies, encouraging individuals to undertake such improvements.
There are two additional tax incentives designed to encourage manufacturers to build energyefficient products. First, the energy-efficient home credit gives homebuilders up to a $2,000 credit
for new energy-efficient homes. This credit expires December 31, 2009. Second, the credit for
producing energy-efficient appliances makes manufacturers of energy-efficient dishwashers,
refrigerators, and clothes washers eligible for a credit. The cost of these two programs to the
federal government is $0.4 billion over the 2008 through 2012 budget window.
Qualified energy conservation bonds (QECBs) also encourage energy conservation, by providing
subsidized financing to energy conservation projects. QECBs are tax credit bonds, where the
holder of the bond receives a federal tax credit in lieu of interest payments.
Alternative Technology Vehicle Credits
Various credits are currently in place for the purchase alternative technology vehicles.33 The tax
code defines alternative technology vehicles to include 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. Between 2008 and 2012, the total
cost of tax expenditures related to hybrid and alternative technology vehicles is estimated to be
$1.0 billion. 34
32
Provisions enacted under ARRA added an additional $2.0 billion in tax expenditures related to energy conservation
during the 2009 through 2013 budget window. These provisions are discussed below.
33
CRS Report R40168, Alternative Fuels and Advanced Technology Vehicles: Issues in Congress, by Brent D.
Yacobucci discusses Congressional issues specifically related to advanced technology vehicles.
34
Modifications to tax provisions relating to alternative technology vehicles under ARRA are estimated to cost an
additional $0.1 billion over the 2009 through 2013 budget window. These provisions are discussed in further detail
below.
Congressional Research Service
16
Energy Tax Policy: Issues in the 111th Congress
Other Energy Tax Provisions
There are a number of other energy tax provisions that do not fall under the fossil fuel, renewable
energy, energy conservation, or alternative vehicle technology categories. The largest of these tax
expenditures is the provision allowing taxpayers to expense 50% of the cost of property used to
process qualified fuels (with an estimated budget cost of $3.8 billion over the 2008 through 2012
budget window). The remaining provisions include those giving special tax treatment for energy
related Publicly Traded Partnerships, accelerated depreciation for various energy specific items,
excluding interest from private activity bonds related to energy production, deferral of gains from
the sale of electric transmission property and credits for installing clean fuel vehicle refueling
property. Between 2008 and 2012, the total cost of tax expenditures related to other energy tax
provisions is estimated to be $9.3 billion.35
Energy Tax Legislation in the 111th Congress
Energy tax legislation in the 111th Congress has continued to focus on increasing incentives for
renewable energy production and energy conservation. Further, recent legislation illustrates how
the tax system can attempt to encourage specific behavior, while discouraging other behavior, in a
quest to achieve a policy goal. The American Recovery and Reinvestment Act of 2009 (ARRA;
P.L. 111-5) utilizes incentives to encourage the production of energy from renewable sources and
promote energy conservation. In contrast, the President’s Fiscal Year 2010 and 2011 Budget
Proposals aim to promote renewable energy through the elimination of several incentives for
conventional energy. As the 111th Congress progresses, it is expected that the focus of energy tax
policy will continue to be on the promotion of renewable energy production and energy
conservation.
The American Recovery and Reinvestment Act of 2009 (P.L. 111-5)
From the perspective of energy tax policy, ARRA modified incentives for renewable energy
production, energy conservation, alternative technology vehicles, as well as a number of other
energy tax incentives.36 Taken together, these incentives are estimated to reduce federal revenue
collections by nearly $6 billion over the five-year 2009 through 2013 budget window and nearly
$20 billion over the 2009-2019 budget window. Table 2 categorizes and provides details on the
specific provisions contained within ARRA. Collectively, ARRA’s energy tax provisions lower
the cost of selected renewable energy relative to energy from other sources, such as oil and gas.
35
Modifications to other energy provisions under ARRA are estimated to cost an additional $0.2 billion over the 2009
through 2013 budget window. These provisions are discussed in further detail below.
36
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.
Congressional Research Service
17
Table 2. Energy Tax Provisions Enacted Under American Recovery and Reinvestment Act of 2009
billions of dollars
Tax Expenditure
Changes Under ARRA
Cost 2009-2013
I.R.C. Section
Renewable Energy Production
Extension of the renewable energy production
tax credit
Extended the placed in service dates for wind through
December 31, 2012 and December 31, 2013 for other facilities.
2.9
45
Election of investment credit in lieu of the
production credit
Businesses that place in service facilities producing electricity
from a renewable resource can elect to claim an investment
credit in lieu of the production credit.
0.3
48
Modify energy credit
Remove cap for wind systems and remove cutback to credit for
subsidized energy financing.
0.2
48
Credit for residential energy-efficient property
Increased the credit rate to 30% and removed credit limits.
0.1
25D
Increase limitation on new clean renewable
energy bonds
Increased funds available for the issue of new clean renewable
energy bonds.
0.1
54D
Energy Conservation
Extend and increase credit for nonbusiness
energy property
Removed maximum amounts previously associated with credit
and increased the credit rate to 30% up to at $1,500 maximum.
1.9
25C
Increase limitation on qualified energy
conservation bonds
Increased funds available for the issue of qualified energy
conservation bonds.
0.1
136
Alternative Technology Vehicles
Modify alternative motor vehicle credit and
credit for plug-in electric vehicles
Modified existing credit and added credit for low-speed two and
three wheeled vehicles.
0.1
30D
Credit for plug-in vehicle conversion
Introduced credit for plug-in electric drive conversion kits.
Credit is 10% of expenditures limited to $4,000. The credit
expires on January 1, 2012.
(i)
30B
0.1
30C
Other
Changes to credit for refueling and recharging
property
CRS-18
Increased credit rate from 30% to 50% and limits from $30,000
to $50,000 for business property and $1,000 to $2,000 for
nonbusiness property; added $200,000 limit for hydrogen
property.
Tax Expenditure
Changes Under ARRA
Cost 2009-2013
I.R.C. Section
Five-year recovery period for depreciation of
smart meters
Reduced recovery period for smart meters from 10 years to
five years for property placed in service before January 1, 2011.
0.1
168(e)
Research credit for qualified energy research
Added a 20% credit for qualified expenses on energy research
during 2009 and 2010.
(i)
41
Source: CRS and Joint Committee on Taxation, JCX-18-09
Notes: The revenue losses are losses associated with the provisions as enacted under ARRA.
CRS-19
Energy Tax Policy: Issues in the 111th Congress
Provisions enacted under ARRA extended and expanded a number of incentives to encourage the
production of energy using renewable resources. Specifically, the renewable energy production
tax credit (PTC) was extended through 2013.37 The PTC provides a credit per kilowatt-hour of
electricity produced by a variety of qualified renewable resources.38 In addition, provisions in
ARRA temporarily allow firms to claim the business energy investment tax credit in lieu of the
PTC. Additionally, ARRA allowed projects eligible for a PTC or investment tax credit to
substitute a one time grant from the U.S. Treasury. Allowing investors to take a one time grant
instead of future tax credits addresses uncertainty renewable energy investors may have regarding
future tax positions.
The expansion and extension of the energy credit and the credit for residential energy-efficient
property also promote renewable energy production. Under ARRA, caps previously associated
with certain energy credits were removed. Businesses can now claim an uncapped 30% tax credit
for qualified small wind energy property.39 In addition, individuals are now allowed to claim an
uncapped 30% tax credit for qualified solar heating property, small wind energy property, and
geothermal heat pumps.40 Renewable energy production was also further encouraged by ARRA’s
provision increasing the funds available for the issue of new clean renewable energy bonds.
ARRA contained two tax provisions specifically encouraging 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 can claim a 30% tax.41 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. 42 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 introduced.
There were also a number of other energy tax provisions in ARRA. First, the credit rates and
limits for refueling and recharging property were increased. Second, the recovery period for
depreciating smart meters was temporarily decreased from 10 years to five years. Third, a 20%
tax credit was introduced for expenses related to qualified energy research.
The total cost of these energy tax provisions enacted under ARRA is estimated to be $5.9 billion
over the 2009 through 2013 budget window. The majority of these revenue losses, $3.6 billion,
37
The renewable energy PTC for wind facilities was extended through 2012.
Qualified renewable sources include wind, open-loop biomass, closed-loop biomass, geothermal, qualified
hydroelectric, landfill gas, municipal solid waste, and marine energy sources.
39
Prior to ARRA, the credit was capped at $4,000.
40
Prior to ARRA, the credits were capped at $2,000, $4,000 and $2,000, respectively.
41
Prior to ARRA, the credit rate was 10%.
38
42
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.
Congressional Research Service
20
Energy Tax Policy: Issues in the 111th Congress
are for incentives promoting energy production from renewable sources. Incentives to encourage
energy conservation had revenue losses of $2 billion over the 2009 through 2013 budget window.
Modification to the incentives for alternative technology vehicles are associated with $0.1 billion
in revenue losses over the 2009 through 2013 budget window, while other energy tax provisions
are associated with revenue losses of $0.2 billion over the same time period.
The President’s Fiscal Year 2010 and 2011 Budget Proposals
A reduction in or the repeal of selected tax preferences for the oil and gas industry appears to be
the focus of energy tax policy in the President’s Fiscal Year 2010 and 2011 Budget Proposals.
Specifically, the FY2010 and FY 2011 Budget Proposals contain several provisions directly
targeting the oil and gas industries. These provisions include the domestic manufacturing
deduction for oil and gas production, the repeal of percentage depletion, and the expensing of
intangible drilling costs—three provisions which have been scaled back in recent years—along
with the repeal of the deduction for tertiary injectants and credits for enhanced oil recovery
projects and production from marginal wells. In addition, the FY2010 and FY2011 Budget
Proposals would levy an excise tax on oil and gas production on the Outer Continental Shelf and
increase the amortization period for geological and geophysical costs from five to seven years.
The FY2010 and FY2011 Budget Proposals also contains several additional proposals that would
be borne—at least partially—by the oil and gas industry. The Budget Proposals would reinstate
the superfund excise taxes and environmental income tax.43 Notable among the Superfund taxes
is the excise tax on domestic crude oil and on imported petroleum products, which is taxed at a
rate of 9.7 cents per barrel. Further the FY2010 and FY2011 Budget Proposals would repeal the
last-in, first-out (LIFO) method of inventory accounting. This method of inventory accounting
values the goods sold as the most recent inventory purchase. During a period of rising prices, this
method of inventory accounting increases production costs and reduces taxable income and tax
liabilities.
In addition to items common to both Budget Proposals, the FY2011 Budget Proposal also
contains several proposals targeted at the coal industry. The elimination of percentage depletion
for fossil fuels is estimated to raise nearly $1.1 billion over the 2011-2020 budget window and
represents nearly one-half of the projected revenue gain from repeal of the coal industry tax
preferences identified in the FY2010 Budget Proposal.
Taken as a whole, these provisions raise the cost of coal, oil, and gas production and can be
viewed as reducing the cost of alternative energy production relative to energy production from
conventional energy sources. That is, if enacted, the FY 2010 and FY2011 Budget Proposal
would decrease the relative cost of alternative energy production by increasing the cost of coal,
oil, and gas production.44
43
See CRS Report RL31410, Superfund Taxes or General Revenues: Future Funding Issues for the Superfund
Program, by Jonathan L. Ramseur, Mark Reisch, and James E. McCarthy and CRS Report RL33426, Superfund:
Implementation and Selected Issues, by Jonathan L. Ramseur for more information on Superfund taxes.
44
Note that the FY 2010 and FY2011 Budget Proposals represent one of many possible options to reduce the economic
distortions associated with the tax treatment of energy production.
Congressional Research Service
21
Energy Tax Policy: Issues in the 111th Congress
American Energy Production and Price Reduction Act (H.R. 3505)
This act proposes to increase energy production domestically. Specifically, the act seeks to
increase American oil production, encourage the use of nuclear and solar energy production, as
well as provide incentives for natural gas and clean coal. Additionally, the act would expand a
number of existing credits promoting energy efficiency.
Carbon Tax / Climate Change45
As of the date of this report, Members in the 111th Congress have introduced seven stand-alone
proposals that would control greenhouse gas (GHG) emissions.46 The proposals offered to date
would employ market-based approaches—either a cap-and-trade or carbon tax system, or some
combination thereof—to reduce GHG emissions. The legislative proposals are varied in their
overall approaches in controlling GHG emissions. Some control emissions by setting a quantity
(or cap); others control emissions by setting a price (or tax/fee). In addition, the proposals differ
in their inclusion of particular design elements, such as whether or not to allow offsets (emission
reduction opportunities from economic sectors not directly addressed by the primary approach).
Three of the proposals—H.R. 594 (Stark), H.R. 1337 (Larson), and H.R. 2380 (Inglis)—would
use a carbon tax approach to address carbon dioxide (CO2) emissions from fossil fuel
combustion. H.R. 1683 (McDermott) would establish a program that may be described as a
dynamic carbon tax: the tax rate would be linked with annual emission allocations (or caps).
These carbon tax proposals, however, are not widely seen as the primary energy and climate
change legislative proposal in the 111th Congress. Instead, cap-and-trade programs have
constituted the primary energy and climate change legislative proposals in the 111th Congress.
Current cap-and-trade legislative vehicles include H.R. 2454 and S. 1733. The American Clean
Energy and Security Act of 2009 (H.R. 2454) (Waxman/Markey) which has passed the House
would establish cap-and-trade programs. 47 The Clean Energy Jobs and American Power Act (S.
1733), was considered and ordered to be reported by the Committee on the Environment and
Public Works, would also rely on a cap-and-trade program to reduce greenhouse gas emissions.48
H.R. 1666 (Doggett) would also create a cap-and-trade system, but in the early years of the
program, the number of emission allowances distributed would be based on achieving a specified
allowance price. The latter proposal would not allow offsets to be used for compliance purposes,
while the former two would allow covered entities to satisfy an increasing percentage
(approximately 30% in 2012) of their compliance obligation with offsets.
45
Carbon tax and climate change issues are, however, largely beyond the scope of this report. See CRS Report R40242,
Carbon Tax and Greenhouse Gas Control: Options and Considerations for Congress, by Jonathan L. Ramseur and
Larry Parker and CRS Report R40556, Market-Based Greenhouse Gas Control: Selected Proposals in the 111th
Congress, by Larry Parker, Brent D. Yacobucci, and Jonathan L. Ramseur for a complete discussion on carbon tax (and
other market based approaches) to control greenhouse gas emissions.
46
Greenhouse gases are those that trap heat in the earth’s atmosphere. Carbon dioxide is a greenhouse gas that enters
the atmosphere through the burning of fossil fuels, solid waste, and wood products, among other activities. Increases in
the level of greenhouse gases in the earth’s atmosphere are thought to be associated with climate change.
47
See CRS Report R40643, Greenhouse Gas Legislation: Summary and Analysis of H.R. 2454 as Passed by the House
of Representatives , coordinated by Mark Holt and Gene Whitney, for a detailed analysis of H.R. 2454.
48
For a comparison of H.R. 2454 and S. 1733 see CRS Report R40896, Climate Change: Comparison of the Cap-andTrade Provisions in H.R. 2454 and S. 1733, by Brent D. Yacobucci, Jonathan L. Ramseur, and Larry Parker.
Congressional Research Service
22
Energy Tax Policy: Issues in the 111th Congress
A key element in GHG emission reduction bills is how, to whom, and for what purpose the value
of emission allowances or carbon tax revenue would be distributed. The distribution strategy is a
critical policy decision, because it would affect (1) the overall cost of the program, and (2) how
program costs are distributed throughout the economy. In the early years of the program, H.R.
2454 would distribute allowances at no cost to both covered and non-covered entities to support
various policy objectives. In addition, an increasing percentage (approximately 18% in 2016) of
the allowances would be sold through auction. As with the distribution of no-cost allowances,
auction revenues would be used to further various policy objectives.
Tax Extenders
A number of energy tax provisions expired at the end of 2009 and others are scheduled to expire
at the end of 2010.49 Many of these provisions have been included in comprehensive tax extender
legislation.50
The most recent House-passed version of H.R. 4213, the American Jobs and Closing Tax
Loopholes Act of 2010, proposed extending 11 energy tax provisions. In terms of revenue cost,
the most significant provisions are the extension of the excise tax credits and outlay payments for
biodiesel and renewable diesel ($868 million over the 2010-2020 budget window) and a
temporary modification to the credit for nonbusiness energy property ($145 million over the
2010-2020 budget window). 51 Other provisions would extend credits for the construction of
energy efficient new homes and heavy hybrid vehicles.
The Small Business Jobs Tax Relief Act of 2010
The Small Business Jobs Tax Relief Act of 2010 (H.R. 5486), which passed the House on June
15, 2010, is designed to tax cuts for small businesses to help them grow and create new jobs. 52
Included in the act’s revenue offset provisions is a provision that would make crude tall oil
ineligible for the cellulosic biofuel producer tax credit (IRC §40).53 This proposal is estimated to
raise $1.8 billion over 10 years.
49
For a list of expiring legislation, see U.S. Congress, Joint Committee on Taxation, List Of Expiring Federal Tax
Provisions 2009-2020, committee print, 111th Cong., 2nd sess., January 20, 2010, JCX-3-10 (Washington: GPO, 2010).
50
For a description of the tax extender bills and their current status, see CRS Report RL32367, Certain Temporary Tax
Provisions Scheduled to Expire in 2009 (“Extenders”), by James M. Bickley
51
U.S. Congress, Joint Committee on Taxation, Estimated Revenue Effects Of The Revenue Provisions Contained In
H.R. 4213, The “American Jobs And Closing Tax Loopholes Act Of 2010”, Scheduled For Consideration By The
House Of Representatives, committee print, 111th Cong., 2nd sess., May 28, 2010, JCX-30-10.
52
Committee on Ways and Means, “House Approves Tax Relief for Small Businesses,” press release, June 15, 2010,
http://waysandmeans.house.gov/press/PRArticle.aspx?NewsID=11221.
53
Crude tall oil is a corrosive by-product from the kraft (sulfate) process that turns pinewood into pulp and paper
products. A second by-product of the kraft process, “black liquor,” was made ineligible for the cellulosic biofuel
producer tax credit by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152).
Congressional Research Service
23
Energy Tax Policy: Issues in the 111th Congress
Enacted Legislation in the 110th Congress
Energy tax policy in the 110th Congress represented a shift towards increased taxes (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.54 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 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.
There were two provisions included in H.R. 6 that were not included in the enacted law. H.R. 6
included renewable portfolio standards that would have required a minimum amount of electricity
sold by suppliers be generated using renewable resources (or credits purchased if the minimum
renewable standard was not met). Additionally, H.R. 6 included provisions that would have
repealed a number of subsidies that were currently available to the oil and gas industry. The
approximately $22 billion saved by eliminating these subsides, under H.R. 6, would have been
used to support a variety of energy efficiency and renewable energy tax incentives (such as
extending the credit for electricity production from renewable resources).
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.55 The first provision promotes cellulosic
ethanol through a blenders’ credit of $1.01 per gallon, which applies to ethanol 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.
54
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.
55
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.
Congressional Research Service
24
Energy Tax Policy: Issues in the 111th Congress
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 oil and gas tax increases came
from cutbacks in the IRC §199 manufacturing deduction for income attributable to oil and gas
production, which was frozen at 6% (rather than increasing to 9% as scheduled), reforming the
foreign tax credit provisions, and from increasing the per-barrel tax rate on refinery crude oil
under the Oil Spill Liability Trust Fund provisions.
Congressional Research Service
25
Energy Tax Policy: Issues in the 111th Congress
Appendix. Energy Tax Legislation Prior to the 110th
Congress
This appendix briefly overviews legislation enacted during the 108th and 109th Congresses
responsible for shaping current energy tax policy.
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 cleanvehicle 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.56
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.
56
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..
Congressional Research Service
26
Energy Tax Policy: Issues in the 111th Congress
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.
Author Contact Information
Molly F. Sherlock
Analyst in Economics
msherlock@crs.loc.gov, 7-7797
Donald J. Marples
Section Research Manager
dmarples@crs.loc.gov, 7-3739
Acknowledgments
Portions of this report are drawn from prior reports written by Salvatore Lazarri.
Congressional Research Service
27
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.