Energy Tax Policy: History and Current Issues

Congressional research reportOct 30, 2008

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Prepared for Members and Committees of Congress

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Historically, U.S. federal energy tax policy promoted the supply of oil and gas. However, the

1970s witnessed (1) a significant cutback in the oil and gas industry’s tax preferences, (2) the

imposition of new excise taxes on oil, and (3) the introduction of numerous tax preferences for

energy conservation, the development of alternative fuels, and the commercialization of the

technologies for producing these fuels (renewables such as solar, wind, and biomass, and

nonconventional fossil fuels such as shale oil and coalbed methane). The Reagan Administration,

using a free-market approach, advocated repeal of the windfall profit tax on oil and the repeal or

phase-out of most energy tax preferences—for oil and gas, as well as alternative fuels. Due to the

combined effects of the Economic Recovery Tax Act and the energy tax subsidies that had not

been repealed, which together created negative effective tax rates in some cases, the actual energy

tax policy differed from the stated policy. The George H. W. Bush and Bill Clinton years

witnessed a return to a much more activist energy tax policy, with an emphasis on energy

conservation and alternative fuels. While the original aim was to reduce demand for imported oil,

energy tax policy was also increasingly viewed as a tool for achieving environmental and fiscal

objectives. The Clinton Administration’s energy tax policy emphasized the environmental

benefits of reducing greenhouse gases and global climate change, but it will also be remembered

for its failed proposal to enact a broadly based energy tax on Btus (British thermal units) and its

1993 across-the-board increase in motor fuels taxes of 4.3¢/gallon.

The 109th Congress enacted the Energy Policy Act of 2005 (P.L. 109-58), signed by President

Bush on August 8, 2005, provided a net energy tax cut of $11.5 billion ($14.5 billion gross energy

tax cuts, less $3 billion of energy tax increases) for fossil fuels and electricity, as well as for

energy efficiency, and for several types of alternative and renewable resources, such as solar and

geothermal. The Tax Relief and Health Care Act of 2006 (P.L. 109-432), enacted in December

2006, provided for one-year extensions of these provisions. The current energy tax structure

favors tax incentives for alternative and renewable fuels supply relative to energy from

conventional fossil fuels, and this posture was accentuated under the Energy Policy Act of 2005.

On October 3, President Bush signed the Economic Stabilization Act of 2008 (P.L. 110-343),

which includes $17 billion in energy tax incentives, primarily extensions of pre-existing

provisions, but also including several new energy tax incentives: $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 is 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 comprise cutbacks in the IRC §199 manufacturing

deduction for income attributable to oil and gas production, which will be frozen at 6% (rather

than increasing to 9% as scheduled), reforming the foreign tax credit provisions, and by

increasing the per-barrel tax rate on refinery crude oil under the Oil Spill Liability Trust Fund

provisions.

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Introduction ..................................................................................................................................... 1

Background ..................................................................................................................................... 2

Energy Tax Policy from 1918 to 1970: Promoting Oil and Gas ............................................... 2

Energy Tax Policy During the 1970s: Conservation and Alternative Fuels .............................. 3

Energy Tax Policy in the 1980s: The “Free-Market Approach”................................................ 5

Energy Tax Policy After 1988 ................................................................................................... 6

Energy Tax Incentives in Comprehensive Energy Legislation Since 1998 ..................................... 7

Brief History of Comprehensive Energy Policy Proposals ....................................................... 7

Energy Tax Action in the 107th Congress .................................................................................. 8

Energy Tax Action in the 108th Congress .................................................................................. 8

Energy Action in the 109th Congress ............................................................................................... 9

The Energy Policy Act of 2005 (P.L. 109-58)......................................................................... 10

The Tax Increase Prevention and Reconciliation Act (P.L. 109-222) ......................................11

The Tax Relief and Health Care Act of 2006 (P.L. 109-432) ...................................................11

Current Posture of Energy Tax Policy ............................................................................................11

Energy Tax Policy in the 110th Congress....................................................................................... 12

H.R. 5351 ................................................................................................................................ 13

H.R. 6049 ................................................................................................................................ 13

H.R. 6899 ................................................................................................................................ 14

Substitute Amendment of S. 3478........................................................................................... 14

The Economic Stabilization Act of 2008 (P.L. 110-343) ........................................................ 15

Windfall Profit Tax Legislation............................................................................................... 16

Energy Tax Provisions in the Farm Bill (P.L. 110-234) .......................................................... 17

For Additional Reading ................................................................................................................. 17

Table 1. Comparison of Energy Tax Provisions the House, Senate, and Enacted Versions

of H.R. 6 (P.L. 109-58): 11-Year Estimated Revenue Loss by Type of Incentive..................... 18

Table 2. Current Energy Tax Incentives and Taxes: Estimated Revenue Effects FY2007 ............ 19

Author Contact Information .......................................................................................................... 22

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Energy tax policy involves the use of the government’s main fiscal instruments—taxes (financial

disincentives) and tax subsidies (or incentives)—to alter the allocation or configuration of energy

resources. In theory, energy taxes and subsidies, like tax policy instruments in general, are

intended either to correct a problem or distortion in the energy markets or to achieve some social,

economic (efficiency, equity, or even macroeconomic), environmental, or fiscal objective. In

practice, however, energy tax policy in the United States is made in a political setting, being

determined by the views and interests of the key players in this setting: politicians, special interest

groups, bureaucrats, and academic scholars. This implies that the policy does not generally, if

ever, adhere to the principles of economic or public finance theory alone; that more often than

not, energy tax policy may compound existing distortions, rather than correct them.1

The idea of applying tax policy instruments to the energy markets is not new, but until the 1970s,

energy tax policy had been little used, except for the oil and gas industry. Recurrent energyrelated problems since the 1970s—oil embargoes, oil price and supply shocks, wide petroleum

price variations and price spikes, large geographical price disparities, tight energy supplies, and

rising oil import dependence, as well as increased concern for the environment—have caused

policymakers to look toward energy taxes and subsidies with greater frequency.

Comprehensive energy policy legislation containing numerous tax incentives, and some tax

increases on the oil industry, was signed on August 8, 2005 (P.L. 109-58). The law, the Energy

Policy Act of 2005, contained about $15 billion in energy tax incentives over 11 years, including

numerous tax incentives for the supply of conventional fuels. However, record oil industry

profits, due primarily to high crude oil and refined oil product prices, and the 2006 mid-term

elections, which gave the control of the Congress to the Democratic Party, has changed the mood

of policymakers. Instead of stimulating the traditional fuels industry—oil, gas, and electricity

from coal—in addition to incentivizing alternative fuels and energy conservation, the mood now

is to take away, or rescind, the 2005 tax incentives and use the money to further stimulate

alternative fuels and energy conservation. A minor step in this direction was made, on May 17,

2006, when President Bush signed a $70 billion tax reconciliation bill (P.L. 109-222). This bill

included a provision that further increased taxes on major integrated oil companies by extending

the depreciation recovery period for geological and geophysical costs from two to five years (thus

taking back some of the benefits enacted under the 2005 law). And currently, the major tax

writing committees in both Houses are considering further, but more significant, tax increases on

the oil and gas industry to fund additional tax cuts for the alternative fuels and energy

conservation industries. These bills are being considered as part of the debate over new versions

of comprehensive energy policy legislation in the 110th Congress (H.R. 6).

This report discusses the history, current posture, and outlook for federal energy tax policy. It also

discusses current energy tax proposals and major energy tax provisions enacted in the 109th

Congress. (For a general economic analysis of energy tax policy, see CRS Report RL30406,

Energy Tax Policy: An Economic Analysis, by (name redacted).)

The theory underlying these distortions, and the nature of the distortions, is discussed in detail in a companion report:

CRS Report RL30406, Energy Tax Policy: An Economic Analysis, by (name redacted).

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The history of federal energy tax policy can be divided into four eras: the oil and gas period from

1916 to 1970, the energy crisis period of the 1970s, the free-market era of the Reagan

Administration, and the post-Reagan era—including the period since 1998, which has witnessed a

plethora of energy tax proposals to address recurring energy market problems.

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Historically, federal energy tax policy was focused on increasing domestic oil and gas reserves

and production; there were no tax incentives for energy conservation or for alternative fuels. Two

oil/gas tax code preferences embodied this policy: (1) expensing of intangible drilling costs

(IDCs) and dry hole costs, which was introduced in 1916, and (2) the percentage depletion

allowance, first enacted in 1926 (coal was added in 1932).2

Expensing of IDCs (such as labor costs, material costs, supplies, and repairs associated with

drilling a well) gave oil and gas producers the benefit of fully deducting from the first year’s

income (“writing off”) a significant portion of the total costs of bringing a well into production,

costs that would otherwise (i.e., in theory and under standard, accepted tax accounting methods)

be capitalized (i.e., written off during the life of the well as income is earned). For dry holes,

which comprised on average about 80% of all the wells drilled, the costs were also allowed to be

deducted in the year drilled (expensed) and deducted against other types of income, which led to

many tax shelters that benefitted primarily high-income taxpayers. Expensing accelerates tax

deductions, defers tax liability, and encourages oil and gas prospecting, drilling, and the

development of reserves.

The oil and gas percentage depletion allowance permitted oil and gas producers to claim 27.5% of

revenue as a deduction for the cost of exhaustion or depletion of the deposit, allowing deductions

in excess of capital investment (i.e, in excess of adjusted cost depletion)—the economically

neutral method of capital recovery for the extractive industries. Percentage depletion encourages

faster mineral development than cost depletion (the equivalent of depreciation of plants and

equipment).

These and other tax subsidies discussed later (e.g., capital gains treatment of the sale of successful

properties, the special exemption from the passive loss limitation rules, and special tax credits)

reduced marginal effective tax rates in the oil and gas industries, reduced production costs, and

increased investments in locating reserves (increased exploration). They also led to more

profitable production and some acceleration of oil and gas production (increased rate of

extraction), and more rapid depletion of energy resources than would otherwise occur. Such

subsidies tend to channel resources into these activities that otherwise would be used for oil and

gas activities abroad or for other economic activities in the United States. Relatively low oil

prices encouraged petroleum consumption (as opposed to conservation) and inhibited the

Tax preferences are special tax provisions—such as tax credits, exemptions, exclusions, deductions, deferrals, or

favorable tax rates—that reduce tax rates for the preferred economic activity and favored taxpayers. Such preferences,

also known as tax expenditures or tax subsidies, generally deviate from a neutral tax system and from generally

accepted economic and accounting principles unless they are targeted to the correction of preexisting market

distortions.

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development of alternatives to fossil fuels, such as unconventional fuels and renewable forms of

energy. Oil and gas production increased from 16% of total U.S. energy production in 1920 to

71.1% of total energy production in 1970 (the peak year).

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Three developments during the 1970s caused a dramatic shift in the focus of federal energy tax

policy. First, the large revenue losses associated with the oil and gas tax preferences became

increasingly hard to justify in the face of increasing federal budget deficits—and in view of the

longstanding economic arguments against the special tax treatment for oil and gas, as noted in the

above paragraph. Second, heightened awareness of environmental pollution and concern for

environmental degradation, and the increased importance of distributional issues in policy

formulation (i.e., equity and fairness), lost the domestic oil and gas industry much political

support. Thus, it became more difficult to justify percentage depletion and other subsidies, largely

claimed by wealthy individuals and big vertically integrated oil companies. More importantly,

during the 1970s there were two energy crises: the oil embargo of 1973, also known as the first

oil shock, and the Iranian Revolution in 1978-1979, which focused policymakers’ attention on the

problems (alleged “failures”) in the energy markets and how these problems reverberated

throughout the economy, causing stagflation, shortages, productivity problems, rising import

dependence, and other economic and social problems.

These developments caused federal energy tax policy to shift from oil and gas supply toward

energy conservation (reduced energy demand) and alternative energy sources.

Three broad actions were taken through the tax code to implement the new energy tax policy

during the 1970s. First, the oil industry’s two major tax preferences—expensing of IDCs and

percentage depletion—were significantly reduced, particularly the percentage depletion

allowance, which was eliminated for the major integrated oil companies and reduced for the

remaining producers. Other oil and gas tax benefits were also cut back during this period. For

example, oil- and gas-fired boilers used in steam generation (e.g., to generate electricity) could no

longer qualify for accelerated depreciation as a result of the Energy Tax Act of 1978 (as discussed

below).

The second broad policy action was the imposition of several new excise taxes penalizing the use

of conventional fossil fuels, particularly oil and gas (and later coal). The Energy Tax Act of 1978

(ETA, P.L. 95-618) created a federal “gas guzzler” excise tax on the sale of automobiles with

relatively low fuel economy ratings. This tax, which is still in effect, currently ranges from $1,000

for an automobile rated between 21.5 and 22.5 miles per gallon (mpg) to $7,700 for an

automobile rated at less than 12.5 mpg. Chief among the taxes on oil was the windfall profit tax

(WPT) enacted in 1980 (P.L. 96-223). The WPT imposed an excise tax of 15% to 70% on the

difference between the market price of oil and a predetermined (adjusted) base price. This tax,

which was repealed in 1988, was part of a political compromise that decontrolled oil prices.

(Between 1971 and 1980, oil prices were controlled under President Nixon’s Economic

Stabilization Act of 1970—the so-called “wage-price freeze.”) (For more detail on the windfall

profit tax on crude oil that was imposed from 1980 until its repeal in 1988, see CRS Report

RL33305, The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current Energy

Policy, by (name redacted).)

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Another, but relatively small, excise tax on petroleum was instituted in 1980: the environmental

excise tax on crude oil received at a U.S. refinery. This tax, part of the Comprehensive

Environmental Response, Compensation, and Liability Act of 1980 (P.L. 96-510), otherwise

known as the “Superfund” program, was designed to charge oil refineries for the cost of releasing

any hazardous materials that resulted from the refining of crude oil. The tax rate was set initially

at 0.79¢ ($0.0079) per barrel and was subsequently raised to 9.70¢ per barrel. This tax expired at

the end of 1995, but legislation has been proposed since then to reinstate it as part of Superfund

reauthorization.

The third broad action taken during the 1970s to implement the new and refocused energy tax

policy was the introduction of numerous tax incentives or subsidies (e.g., special tax credits,

deductions, exclusions) for energy conservation, the development of alternative fuels (renewable

and nonconventional fuels), and the commercialization of energy efficiency and alternative fuels

technologies. Most of these new tax subsidies were introduced as part of the Energy Tax Act of

1978 and expanded under the WPT, which also introduced additional new energy tax subsidies.

The following list describes these:

•

Residential and Business Energy Tax Credits. The ETA provided income tax

credits for homeowners and businesses that invested in a variety of energy

conservation products (e.g., insulation and other energy-conserving components)

and for solar and wind energy equipment installed in a principal home or a

business. The business energy tax credits were 10% to 15% of the investment in

conservation or alternative fuels technologies, such as synthetic fuels, solar,

wind, geothermal, and biomass. These tax credits were also expanded as part of

the WPT, but they generally expired (except for business use of solar and

geothermal technologies) as scheduled either in 1982 or 1985. A 15% investment

tax credit for business use of solar and geothermal energy, which was made

permanent, is all that remains of these tax credits.

•

Tax Subsidies for Alcohol Fuels. The ETA also introduced the excise tax

exemption for gasohol, recently at 5.2¢ per gallon out of a gasoline tax of

18.4¢/gal. Subsequent legislation extended the exemption and converted it into

an immediate tax credit (currently at 51¢/gallon of ethanol).

•

Percentage Depletion for Geothermal. The ETA made geothermal deposits

eligible for the percentage depletion allowance, at the rate of 22%. Currently the

rate is 15%.

•

§29 Tax Credit for Unconventional Fuels. The 1980 WPT included a $3.00 (in

1979 dollars) production tax credit to stimulate the supply of selected

unconventional fuels: oil from shale or tar sands, gas produced from geopressurized brine, Devonian shale, tight formations, or coalbed methane, gas

from biomass, and synthetic fuels from coal. In current dollars this credit, which

is still in effect for certain types of fuels, was $6.56 per barrel of liquid fuels and

about $1.16 per thousand cubic feet (mcf) of gas in 2004.

•

Tax-Exempt Interest on Industrial Development Bonds. The WPT made facilities

for producing fuels from solid waste exempt from federal taxation of interest on

industrial development bonds (IDBs). This exemption was for the benefit of the

development of alcohol fuels produced from biomass, for solid-waste-to-energy

facilities, for hydroelectric facilities, and for facilities for producing renewable

energy. IDBs, which provide significant benefits to state and local electric

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utilities (public power), had become a popular source of financing for renewable

energy projects.

Some of these incentives—for example, the residential energy tax credits—have since expired,

but others remain and still new ones have been introduced, such as the §45 renewable electricity

tax credit, which was introduced in 1992 and expanded under the American Jobs Creation Act of

2004 (P.L. 108-357). This approach toward energy tax policy—subsidizing a plethora of different

forms of energy (both conventional and renewable) and providing incentives for diverse energy

conservation (efficiency) technologies in as many sectors as possible—has been the paradigm

followed by policymakers since the 1970s. A significant increase in nontax interventions in the

energy markets—laws and regulations, such as the Corporate Average Fuel Economy (CAFE)

standards to reduce transportation fuel use, and other interventions through the budget and the

credit markets—has also been a significant feature of energy policy since the 1970s. This

included some of the most extensive energy legislation ever enacted.

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The Reagan Administration opposed using the tax law to promote oil and gas development,

energy conservation, or the supply of alternative fuels. The idea was to have a more neutral and

less distortionary energy tax policy, which economic theory predicts would make energy markets

work more efficiently and generate benefits to the general economy. The Reagan Administration

believed that the responsibility for commercializing conservation and alternative energy

technologies rested with the private sector and that high oil prices—real oil prices (corrected for

inflation) were at historically high levels in 1981 and 1982—would be ample encouragement for

the development of alternative energy resources. High oil prices in themselves create

conservation incentives and stimulate oil and gas production.

President Reagan’s free-market views were well known prior to his election. During the 1980

presidential campaign, he proposed repealing the WPT, deregulating oil and natural gas prices,

and minimizing government intervention in the energy markets. The Reagan Administration’s

energy tax policy was professed more formally in several energy and tax policy studies, including

its 1981 National Energy Policy Plan and the 1983 update to this plan; it culminated in a 1984

Treasury study on general tax reform, which also proposed fundamental reforms of federal energy

tax policy. In terms of actual legislation, many of the Reagan Administration’s objectives were

realized, although as discussed below there were unintended effects.

In 1982, the business energy tax credits on most types of nonrenewable technologies—those

enacted under the ETA of 1978—were allowed to expire as scheduled; other business credits and

the residential energy tax credits were allowed to expire at the end of 1985, also as scheduled.

Only the tax credits for business solar, geothermal, ocean thermal, and biomass technologies were

extended. As mentioned above, today the tax credit for business investment in solar and

geothermal technologies, which has since been reduced to 10%, is all that remains of these tax

credits. A final accomplishment was the repeal of the WPT, but not until 1988, the end of

Reagan’s second term. The Reagan Administration’s other energy tax policy proposals, however,

were not adopted. The tax incentives for oil and gas were not eliminated, although they were

pared back as part of the Tax Reform Act (TRA) of 1986.

Although the Reagan Administration’s objective was to create a free-market energy policy,

significant liberalization of the depreciation system and reduction in marginal tax rates—both the

result of the Economic Recovery Tax Act of 1981 (ERTA, P.L. 97-34)—combined with the

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regular investment tax credit and the business energy investment tax credits, resulted in negative

effective tax rates for many investments, including alternative energy investments, such as solar

and synthetic fuels. Also, the retention of percentage depletion and expensing of IDCs (even at

the reduced rates) rendered oil and gas investments still favored relative to investments in

general.

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After the Reagan Administration, several major energy and non-energy laws were enacted that

amended the energy tax laws in several ways, some major.

•

Revenue Provisions of the Omnibus Reconciliation Act of 1990. President George

H.W. Bush’s first major tax law included numerous energy tax incentives: (1) for

conservation (and deficit reduction), the law increased the gasoline tax by

5¢/gallon and doubled the gas-guzzler tax; (2) for oil and gas, the law introduced

a 10% tax credit for enhanced oil recovery expenditures, liberalized some of the

restrictions on the percentage depletion allowance, and reduced the impact of the

alternative minimum tax on oil and gas investments; and (3) for alternative fuels,

the law expanded the §29 tax credit for unconventional fuels and introduced the

tax credit for small producers of ethanol used as a motor fuel.

•

Energy Policy Act of 1992 (P.L. 102-486). This broad energy measure introduced

the §45 tax credit, at 1.5¢ per kilowatt hour, for electricity generated from wind

and “closed-loop” biomass systems. (Poultry litter was added later.) For new

facilities, this tax credit expired at the end of 2001 and again in 2003 but has

been retroactively extended by recent tax legislation (as discussed below). In

addition, the 1992 law (1) added an income tax deduction for the costs, up to

$2,000, of clean-fuel powered vehicles; (2) liberalized the alcohol fuels tax

exemption; (3) expanded the §29 production tax credit for nonconventional

energy resources; and (4) liberalized the tax breaks for oil and gas.

•

Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66). President Clinton

proposed a differential Btu tax on fossil fuels (a broadly based general tax

primarily on oil, gas, and coal based on the British thermal units of heat output),

which was dropped in favor of a broadly applied 4.3¢/gallon increase in the

excise taxes on motor fuels, with revenues allocated for deficit reduction rather

than the various trust funds.

•

Taxpayer Relief Act of 1997 (P.L. 105-34). This law included a variety of excise

tax provisions for motor fuels, of which some involved tax reductions on

alternative transportation fuels, and some involved increases, such as on

kerosene, which on balance further tilted energy tax policy toward alternative

fuels.

•

Tax Relief and Extension Act. Enacted as Title V of the Ticket to Work and Work

Incentives Improvement Act of 1999 (P.L. 106-170), it extended and liberalized

the 1.5¢/kWh renewable electricity production tax credit, and renewed the

suspension of the net income limit on the percentage depletion allowance for

marginal oil and gas wells.

As this list suggests, the post-Reagan energy tax policy returned more to the interventionist

course established during the 1970s and primarily was directed at energy conservation and

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alternative fuels, mostly for the purpose of reducing oil import dependence and enhancing energy

security. However, there is an environmental twist to energy tax policy during this period,

particularly in the Clinton years. Fiscal concerns, which for most of that period created a

perennial search for more revenues to reduce budget deficits, have also driven energy tax policy

proposals during the post-Reagan era. This is underscored by proposals, which have not been

enacted, to impose broad-based energy taxes such as the Btu tax or the carbon tax to mitigate

greenhouse gas emissions.

Another interesting feature of the post-Reagan energy tax policy is that while the primary focus

continues to be energy conservation and alternative fuels, no energy tax legislation has been

enacted during this period that does not also include some, relatively minor, tax relief for the oil

and gas industry, either in the form of new tax incentives or liberalization of existing tax breaks

(or both).

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Several negative energy market developments since about 1998, characterized by some as an

“energy crisis,” have led to congressional action on comprehensive energy proposals, which

included numerous energy tax incentives.

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Although the primary rationale for comprehensive energy legislation has historically been spiking

petroleum prices, and to a lesser extent spiking natural gas and electricity prices, the origin of

bills introduced in the late 1990s was the very low crude oil prices of that period. Domestic crude

oil prices reached a low of just over $10 per barrel in the winter of 1998-1999, among the lowest

crude oil prices in history after correcting for inflation. From 1986 to 1999, oil prices averaged

about $17 per barrel, fluctuating between $12 and $20 per barrel. These low oil prices hurt oil

producers, benefitted oil refiners, and encouraged consumption. They also served as a

disincentive to conservation and investment in energy efficiency technologies and discouraged

production of alternative fuels and renewable technologies. To address the low oil prices, there

were many tax bills in the first session of the 106th Congress (1999) focused on production tax

credits for marginal or stripper wells, but they also included carryback provisions for net

operating losses, and other fossil fuels supply provisions.

By summer 1999, crude oil prices rose to about $20 per barrel, and peaked at more than $30 per

barrel by summer 2000, causing higher gasoline, diesel, and heating oil prices. To address the

effects of rising crude oil prices, legislative proposals again focused on production tax credits and

other supply incentives. The rationale was not tax relief for a depressed industry but tax

incentives to increase output, reduce prices, and provide price relief to consumers.

In addition to higher petroleum prices there were forces—some of which were understood

(factors such as environmental regulations and pipeline breaks) and others that are still are not so

clearly understood—that caused the prices of refined petroleum products to spike. In response,

there were proposals in 2000 to either temporarily reduce or eliminate the federal excise tax on

gasoline, diesel, and other special motor fuels. The proposals aimed to help consumers (including

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truckers) cushion the financial effect of the price spikes. The Midwest gasoline price spike in

summer 2000 kept interest in these excise tax moratoria alive and generated interest in proposals

for a windfall profit tax on oil companies, which, by then, were earning substantial profits from

high prices.

Despite numerous bills to address these issues, no major energy tax bill was enacted in the 106th

Congress. However, some minor amendments to energy tax provisions were enacted as part of

non-energy tax bills. This includes Title V of the Ticket to Work and Work Incentives

Improvement Act of 1999 (P.L. 106-170). Also, the 106th Congress did enact a package of $500

million in loan guarantees for small independent oil and gas producers (P.L. 106-51).

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In early 2001, the 107th Congress faced a combination of fluctuating oil prices, an electricity

crisis in California, and spiking natural gas prices. The gas prices had increased steadily in 2000

and reached $9 per thousand cubic feet (mcf) at the outset of the 107th Congress. At one point,

spot market prices reached about $30 per mcf, the energy equivalent of $175 per barrel of oil. The

combination of energy problems had developed into an “energy crisis,” which prompted

congressional action on a comprehensive energy policy bill—the first since 1992—that included a

significant expansion of energy tax incentives and subsidies and other energy policy measures.

In 2002, the House and Senate approved two distinct versions of an omnibus energy bill, H.R. 4.

While there were substantial differences in the nontax provisions of the bill, the energy tax

measures also differed significantly. The House bill proposed larger energy tax cuts, with some

energy tax increases. It would have reduced energy taxes by about $36.5 billion over 10 years, in

contrast to the Senate bill, which cut about $18.3 billion over 10 years, including about $5.1

billion in tax credits over 10 years for two mandates: a renewable energy portfolio standard ($0.3

billion) and a renewable fuel standard ($4.8 billion). The House version emphasized conventional

fuels supply, including capital investment incentives to stimulate production and distribution of

oil, natural gas, and electricity. This focus assumed that recent energy problems were due mainly

to supply and capacity shortages driven by economic growth and low energy prices. In

comparison, the Senate bill would have provided a much smaller amount of tax incentives for

fossil fuels and nuclear power and somewhat fewer incentives for energy efficiency, but provided

more incentives for alternative and renewable fuels. The conference committee on H.R. 4 could

not resolve differences, so the bills were dropped on November 13, 2002.

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On the House side, on April 3, 2003, the Ways and Means Committee (WMC) voted 24-12 for an

energy tax incentives bill (H.R. 1531) that was incorporated into H.R. 6 and approved by the

House on April 11, 2003, by a vote of 247-175. The House version of H.R. 6 provided about

$17.1 billion of energy tax incentives and included $83 million of non-energy tax increases, or

offsets. This bill was a substantially scaled-down version of the House energy tax bill, H.R. 2511

(107th Congress), which was incorporated into H.R. 4, the House energy bill of the 107th Congress

that never became law. After returning from the August 2003 recess, a House and Senate

conference committee negotiated differences among provisions in three energy policy bills: the

House and Senate versions of H.R. 6, and a substitute to the Senate Finance Committee (SFC)

bill—a modified (or amended) version of S. 1149 substituted for Senate H.R. 6 in conference as

S.Amdt. 1424 and S.Amdt. 1431.

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On November 14, 2003, House and Senate conferees reconciled the few remaining differences

over the two conference versions of H.R. 6, which primarily centered on several energy tax

issues—ethanol tax subsidies, the §29 unconventional fuels tax credit, tax incentives for nuclear

power, and clean coal. On November 18, 2003, the House approved, by a fairly wide margin

(246-180), the conference report containing about $23.5 billion of energy tax incentives.

However, the proposed ethanol mandate would further reduce energy tax receipts—the 10-year

revenue loss was projected to be around $26 billion. On November 24, Senate Republicans put

aside attempts to enact H.R. 6. A number of uneasy alliances pieced together to bridge

contentious divides over regional issues as varied as electricity, fuel additives (MTBE), and

natural gas subsidies, failed to secure the necessary 60 votes to overcome a Democratic filibuster

before Congress’s adjournment for the holiday season. This represented the third attempt to pass

comprehensive energy legislation, a top priority for many Republicans in Congress and for

President Bush.

Senator Domenici introduced a smaller energy bill as S. 2095 on February 12, 2004. S. 2095

included a slightly modified version of the amended energy tax bill S. 1149; the tax provisions of

S. 2095 were added to the export tax repeal bill S. 1637, on April 5, 2004. The Senate approved

S. 1637, with the energy tax measures, on May 11. H.R. 4520, the House version of the export tax

repeal legislation, did not contain energy tax measures; they were incorporated into H.R. 6.

Some energy tax incentives were enacted on October 4, 2004, as part of the Working Families

Tax Relief Act of 2004 (P.L. 108-311), a $146 billion package of middle class and business tax

breaks. This legislation, which was signed into law on October 4, 2004, retroactively extended

four energy tax subsidies: the §45 renewable tax credit, suspension of the 100% net income

limitation for the oil and gas percentage depletion allowance, the $4,000 tax credit for electric

vehicles, and the deduction for clean fuel vehicles (which ranges from $2,000 to $50,000). The

§45 tax credit and the suspension of the 100% net income limitation had each expired on January

1, 2004; they were retroactively extended through December 31, 2005. The electric vehicle credit

and the clean-vehicle income tax deduction were being phased out gradually beginning on

January 1, 2004. P.L. 108-311 arrested the phase-down—providing 100% of the tax breaks—

through 2005, but resumed it beginning on January 1, 2006, when only 25% of the tax break was

available. (For more information, see CRS Report RL32265, Expired and Expiring Energy Tax

Incentives, by (name redacted).)

The American Jobs Creation Act of 2004 (P.L. 108-357), commonly referred to as the “FSC-ETI”

or “jobs” bill, was enacted on October 22, 2004. It included about $5 billion in energy tax

incentives.

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The 109th Congress enacted the Energy Policy Act of 2005 (P.L. 109-58), which included the

most extensive amendments to U.S. energy tax laws since 1992, and the Tax Relief and Health

Care Act of 2006, which extended the energy tax subsidies enacted under the 2005 Energy Policy

Act (EPACT05).

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On June 28, 2005, the Senate approved by an 85-12 vote a broadly based energy bill (H.R. 6)

with an 11-year, $18.6 billion package of energy tax breaks tilted toward renewable energy

resources and conservation. Joint Committee on Taxation figures released on June 28 show that

the bill included about $0.2 billion in non-energy tax cuts and more than $4.7 billion in revenue

offsets, meaning the bill had a total tax cut of $18.8 billion over 11 years, offset by the $4.7

billion in tax increases. The House energy bill, which included energy tax incentives totaling

about $8.1 billion over 11 years, and no tax increases, was approved in April. This bill was

weighted almost entirely toward fossil fuels and electricity supply. On July 27, 2005, the

conference committee on H.R. 6 reached agreement on $11.1 billion of energy tax incentives,

including $3 billion in tax increases (both energy and non-energy). The distribution of the cuts by

type of fuel for each of the three versions of H.R. 6 is shown in Table 1.

One way to briefly compare the two measures is to compare revenue losses from the energy tax

incentives alone and the percentage distribution by type of incentive as a percent of the net energy

tax cuts (i.e., the columns marked “%” divided by the dollar figures in row 11). The net revenue

losses over an 11-year time frame from FY2005 to FY2015 were estimated by the Joint

Committee on Taxation. The total revenue losses are reported in two ways. The absolute dollar

value of tax cuts over 11 years and the percentage distribution of total revenue losses by type of

incentive for each measure.

Table 1 shows that the conference report provided about $1.3 billion for energy efficiency and

conservation, including a deduction for energy-efficient commercial property, fuel cells, and

micro-turbines, and $4.5 billion in renewables incentives, including a two-year extension of the

tax code §45 credit, renewable energy bonds, and business credits for solar. A $2.6 billion

package of oil and gas incentives included seven-year depreciation for natural gas gathering lines,

a refinery expensing provision, and a small refiner definition for refiner depletion. A nearly $3

billion coal package provided for an 84-month amortization for pollution control facilities and

treatment of §29 as a general business credit. More than $3 billion in electricity incentives leaned

more toward the House version, including provisions providing 15-year depreciation for

transmission property, nuclear decommissioning provisions, and a nuclear electricity production

tax credit. It also provided for the five-year carryback of net operating losses of certain electric

utility companies. A Senate-passed tax credit to encourage the recycling of a variety of items,

including paper, glass, plastics, and electronic products, was dropped from the final version of the

energy bill (H.R. 6). Instead, conferees included a provision requiring the Treasury and Energy

departments to conduct a study on recycling. The House approved the conference report on July

28, 2005; the Senate on June 28, 2005, one month later on July 28, 2005, clearing it for the

President’s signature on August 8 (P.L. 109-58).

Four revenue offsets were retained in the conference report: reinstatement of the Oil Spill

Liability Trust Fund; extension of the Leaking Underground Storage Tank (LUST) trust fund rate,

which would be expanded to all fuels; modification of the §197 amortization, and a small increase

in the excise taxes on tires. The offsets total roughly $3 billion compared with nearly $5 billion in

the Senate-approved H.R. 6. Because the oil spill liability tax and the Leaking Underground

Storage Tank financing taxes are imposed on oil refineries, the oil and gas refinery and

distribution sector (row 2 of Table 1) received a net tax increase of $1,769 ($2,857-$1,088).

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After expanding energy tax incentives in the EPACT05, the 109th Congress moved to rescind oil

and gas incentives, and even to raise energy taxes on oil and gas, in response to the high energy

prices and resulting record oil and gas industry profits. Many bills were introduced in the 109th

Congress to pare back or repeal the oil and gas industry tax subsidies and other loopholes, both

those enacted under EPACT05 as well as those that preexisted EPACT05. Many of the bills

focused on the oil and gas exploration and development (E&D) subsidy—expensing of intangible

drilling costs (IDCs). This subsidy, which has been in existence since the early days of the income

tax, is available to integrated and independent oil and gas companies, both large and small alike.3

It is an exploration and development incentive, which allows the immediate tax write-off of what

economically are capital costs, that is, the costs of creating a capital asset (the oil and gas well).

Public and congressional outcry over high crude oil and product prices, and the oil and gas

industry’s record profits, did lead to a paring back of one of EPACT05’s tax subsidies: two-year

amortization, rather than capitalization, of geological and geophysical (G&G) costs, including

those associated with abandoned wells (dry holes). Prior to the EPACT05, G&G costs for dry

holes were expensed in the first year and for successful wells they were capitalized, which is

consistent with economic theory and accounting principles. The Tax Increase Prevention and

Reconciliation Act, (P.L. 109-222), signed into law May 2006, reduced the value of the subsidy

by raising the amortization period from two years to five years, still faster than the capitalization

treatment before the 2005 act, but slower than the treatment under that act. The higher

amortization period applies only to the major integrated oil companies—independent

(unintegrated) oil companies may continue to amortize all G&G costs over two years—and it

applies to abandoned as well as successful properties. This change increased taxes on major

integrated oil companies by an estimated $189 million over 10 years, effectively rescinding about

20% of the nearly $1.1 billion 11-year tax for oil and gas production under EPACT05.

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At the end of 2006, the 109th Congress enacted a tax extenders package that included extension of

numerous renewable energy and excise tax provisions. Many of the renewable energy provision

in this bill had already been extended under the Energy Policy Act of 2005 and were not set to

expire until the end of 2007 or later.

The Tax Relief and Health Care Act of 2006 provided for one-year extensions of these provisions.

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The above background discussion of energy tax policy may be conveniently summarized in Table

2, which shows current energy tax provisions—both special (or targeted) energy tax subsidies and

targeted energy taxes—and related revenue effects. A minus sign (“-”) indicates revenue losses,

which means that the provision is a tax subsidy or incentive, intended to increase the subsidized

activity (energy conservation measures or the supply of some alternative and renewable fuel or

As is discussed later in the report, many of the other remaining tax subsidies are only available to independent oil and

gas producers, which, however, may be very large.

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technology); no minus sign means that the provision is a tax, which means that it should reduce

supply of, or demand for, the taxed activity (either conventional fuel supply, energy demand, or

the demand for energy-using technologies, such as cars).

Note that the table defines those special or targeted tax subsidies or incentives as those that are

due to provisions in the tax law that apply only to that particular industry and not to others. Thus,

for example, in the case of the oil and gas industry, the table excludes tax subsidies and incentives

of current law that may apply generally to all businesses but that may also confer tax benefits to

it. There are numerous such provisions in the tax code; a complete listing of them is beyond the

scope of this report. However, the following example illustrates the point: The current system of

depreciation allows the writeoff of equipment and structures somewhat faster than would be the

case under both general accounting principles and economic theory; the Joint Committee on

Taxation treats the excess of depreciation deductions over the alternative depreciation system as a

tax subsidy (or “tax expenditure”). In FY2006, the JCT estimates that the aggregate revenue loss

from this accelerated depreciation deduction (including the expensing under IRC §179) is $6.7

billion. A certain, but unknown, fraction of this revenue loss or tax benefits accrues to the

domestic oil and gas industry, but separate estimates are unavailable. This point applies to all the

industries reflected in Table 2.

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Continued high crude oil and petroleum product prices and oil and gas industry profits, and the

political realignment of the Congress resulting from the 2006 Congressional elections continued

the energy policy shift toward increased taxes on the oil and gas industry, and the emphasis on

energy conservation and alternative and renewable fuels rather than conventional hydrocarbons.4

In the 110th Congress, the shift became reflected in proposals to reduce oil and gas production

incentives or subsidies, which were initially incorporated into, but ultimately dropped from

comprehensive energy policy legislation. In the debate over these two comprehensive energy

bills, raising taxes on the oil and gas industry, by either repealing tax incentives enacted under

EPACT05, by introducing new taxes on the industry, or by other means was a key objective,

motivated by the feeling that additional tax incentives were unnecessary—record crude oil and

gasoline prices and industry profits provides sufficient (if not excessive) incentives.

In early December 2007, it appeared that the congressional conferees had reached agreement on

another comprehensive energy bill, the Energy Independence and Security Act (H.R. 6), and

particularly on the controversial energy tax provisions. The Democratic leadership in the 110th

Congress proposed to eliminate or reduce tax subsidies for oil and gas and use the additional

revenues to increase funding for their energy policy priorities: energy efficiency and alternative

and renewable fuels (i.e., reducing fossil fuel demand) rather than an energy (oil and gas) supply

increase. In addition, congressional leaders wanted to extend many of the energy efficiency and

renewable fuels tax incentives that either had expired or were about to expire.

The compromise on the energy tax title in H.R. 6 proposed to raise taxes by about $21 billion to

fund extensions and liberalization of existing energy tax incentives. However, the Senate stripped

There is an important economic distinction between a subsidy and a tax benefit. As is discussed elsewhere in this

report, firms receive a variety of tax benefits that are not necessarily targeted subsidies (or tax expenditures) because

they are available generally.

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the controversial tax title from its version of the comprehensive energy bill (H.R. 6) and then

passed the bill (86-8) on December 13, 2007, leading to the President’s signing of the Energy

Independence and Security Act of 2007 (P.L. 110-140), on December 19, 2007. The only taxrelated provisions that survived were (1) an extension of the Federal Unemployment Tax Act

surtax for one year, raising about $1.5 billion, (2) higher penalties for failure to file partnership

returns, increasing revenues by $655 million, and (3) an extension of the amortization period for

geological and geophysical expenditures from five to seven years, raising $103 million in

revenues. The latter provision was the only tax increase on the oil and gas industry in the final

bill. Those three provisions would offset the $2.1 billion in lost excise tax revenues going into the

federal Highway Trust Fund as a result of the implementation of the revised Corporate Average

Fuel Economy standards. The decision to strip the much larger $21 billion tax title stemmed from

a White House veto threat and the Senate’s inability to get the votes required to end debate on the

bill earlier in the day. Senate Majority Leader Harry Reid’s (D-Nev.) effort to invoke cloture fell

short by one vote, in a 59-40 tally.

Since then, the Congress had tried several times to pass energy tax legislation, and thus avoid the

impending expiration of several popular energy tax incentives, such as the “wind” energy tax

credit under Internal Revenue Code (IRC) §45, which, since its enactment in 1992, had lapsed

three times only to be reinstated.5 Several energy tax bills have passed the House but not the

Senate, where on several occasions, the failure to invoke cloture failed to bring up the legislation

for consideration. Senate Republicans objected to the idea of raising taxes to offset extension of

expiring energy tax provisions, which they consider to be an extension of current tax policy rather

than new tax policy. In addition, Senate Republicans objected to raising taxes on the oil and gas

industry, such as by repealing the (IRC) §199 deduction, and by streamlining the foreign tax

credit for oil companies.6 The Bush administration repeatedly threatened to veto these types of

energy tax bills, in part because of their proposed increased taxes on the oil and gas industry.

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Frustrated with the lack of action on energy tax legislation over the last two years, House

Democrats introduced and approved several such bills, such as H.R. 5351, which was approved

by the House on February 27, 2008. House Speaker Pelosi and other Democrats sent President

Bush a letter February 28, 2008, urging him to reconsider his opposition to the Democratic

renewable energy plan, arguing that their energy tax plan would “correct an imbalance in the tax

code.”

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As noted, several times the House had approved energy tax legislation, and several times in the

Senate such legislation failed a cloture vote and thus could not be brought to the floor for debate.

See. U.S. Library of Congress. Congressional Research Service. Extension of Expiring Energy Tax Provisions. CRS

Report RL32265 by (name redacted).

Enacted in 2004 as an export tax incentive, this provision allows a deduction, as a business expense, for a specified

percentage of the qualified production activity’s income (or profit) subject to a limit of 50% of the wages paid that are

allocable to the domestic production during the taxable year. The deduction was 3% of income for 2006, is currently

6%, and is scheduled to increase to 9% when fully phased in by 2010.

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The latest was H.R. 6049, the House tax extenders bill, which was approved by the House on

May 21, 2008, but failed three cloture votes in the Senate.7

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In the House, energy tax provisions were part of H.R. 6899, House Democratic leadership’s draft

of broad-based energy policy legislation, the Comprehensive American Energy Security and

Consumer Protection Act. Passed on September 16, 2008, the bill reverses the long-standing

opposition of Democratic leaders to expanding oil and gas drilling offshore by allowing oil and

gas exploration and production in areas of the outer continental shelf that are currently off limits,

except for waters in the Gulf of Mexico off the Florida coast. Under the bill, states could allow

such drilling between 50 and 100 miles offshore, while the federal government could permit

drilling from 100 to 200 miles offshore.8 Revenue from the new offshore leases would be used to

assist the development of alternative energy, and would not be shared by the adjacent coastal

states. The bill also repeals the current ban on leasing federal lands for oil shale production if

states enact laws providing for such leases and production. H.R. 6899 also enacts a renewable

portfolio standard, a mandate or requirement that power companies must generate 15% of their

energy from renewable sources by 2020.

The energy tax provisions in H.R. 6899 (Title XIII, the Energy Tax Incentives Act of 2008) are

largely the same as those in H.R. 5351

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In the Senate, legislative efforts on energy tax incentives and energy tax extenders had centered

around S. 3478, the Energy Independence and Investment Act of 2008, a $40 billion energy tax

bill offered by Finance Committee Chairman Max Baucus and ranking Republican Charles

Grassley. Senate Majority Leader Harry Reid said on September 12 that S. 3478 was “must-pass”

legislation. Reid told reporters the energy tax package, which includes extensions of tax

incentives for renewable energy, should be prioritized even ahead of the broader energy policy

bills being considered, and the rest of the non-energy tax extenders package. Reid said he hopes

to bring the bill to the floor during the week of September 15, but noted that the schedule depends

on whether Senate Republicans will agree to move to the legislation.9

Several times in the 110th Congress, the Senate has not taken action on energy tax legislation due to the failure to

invoke cloture on the motion to proceed to the House energy tax extenders bills. The first was June 10, 2008, when the

motion failed by a vote of 50-44; the second was on June 17, when the motion failed by a vote of 52-44; the third was

July 29, when the cloture motion failed by a vote of 53 to 43. In addition, on July 30 the Senate rejected by a vote of 51

to 43 a motion to invoke cloture on a motion to proceed to debate S. 3335, Senator Baucus’ energy tax bill.

The House Democratic leadership’s energy proposal is centered around opening the Outer Continental Shelf to oil and

gas development. The OCS areas—the Atlantic OCS, Gulf of Mexico (GOM) OCS, Pacific OCS, and Alaska OCS—

are the offshore lands under the jurisdiction of the U.S. government. Federal law allows or confirms state boundaries

and jurisdiction over the continental shelf areas up to 3 nautical miles from the coastline, except that (in the GOM)

Texas and Florida offshore boundaries extend up to 9 nautical miles from the coastline. Exclusive federal jurisdiction

over resources of the shelf applies from state boundaries out to 200 miles from the U.S. coastline For a more detailed

definition of the OCS and various governmental jurisdictions see CRS Report RL33404, Offshore Oil and Gas

Development: Legal Framework, by (name redacted). For a comparison of different proposals see CRS Report RL34667,

Outer Continental Shelf Leasing: Side-by-Side Comparison of Five Legislative Proposals, by (name redacted).

Bureau of National Affairs. Daily Tax Report. “Reid Says ‘Must Pass’ Energy Legislation Should be Handled Before

Tax Extenders.” September 15, 2008. P. G-5.

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Although most of the tax incentives in the bill are extensions of existing policy and are not

controversial, the legislation would need to be paid for through new sources of revenue. One

proposed offset—which had been previously blocked by some Republicans—would have

completely repealed the IRC §199 manufacturing deduction for the five major oil and gas

producers, raising $13.9 billion over 10 years. The bill also would have included a new 13%

excise tax on oil and natural gas pumped from the Outer Continental Shelf, a proposal to

eliminate the distinction between foreign oil-and-gas extraction income and foreign oil-related

income, and an extension and increase in the oil spill tax through the end of 2017. In total, tax

increases on the oil and gas industry would account for $31 billion of the $40 billion total cost of

the legislation. The final major offset would have come from a requirement on securities brokers

to report on the cost basis for transactions they handle to the Internal Revenue Service, a

provision expected to raise about $8 billion in new revenues over 10 years.

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As noted above, some Republicans had, in the past, objected to the idea of raising taxes to offset

extension of expiring energy tax provisions, which they consider to be an extension of current tax

policy rather than new tax policy. In addition, some Senate Republicans have objected to raising

taxes on the oil and gas industry, particularly by repealing the IRC §199 deduction. The Bush

Administration threatened also to veto any energy tax bill that would increase taxes on the oil and

gas industry. At this writing, it appears that inclusion of the §199 deduction repeal as an offset

might preclude the energy tax bill from coming to the Senate floor—some believe that it would

fail another cloture vote—so this provision might not survive the process.10

Given continued Republican opposition (including a possible Presidential veto), and to avoid

another legislative impasse—a failed cloture vote—Senators Baucus and Grassley released a

scaled-down version of S. 3478.11 This energy tax extenders package (i.e., the substitute of S.

3478) is a substitute amendment to the previously House-approved energy tax extenders bill H.R.

6049; is valued at nearly $17 billion, less than half the size of S. 3478; and is fully offset. The

modified draft bill would also raise revenue by increasing the tax burden on the oil industry.

Unlike the original version of S. 3478, however, which would have repealed the §199 for major

integrated oil companies completely, the substitute bill would freeze the value of the

manufacturing deduction for all oil companies at 6%, the current rate. This modification is

estimated to raise $4.9 billion over 10 years, about 2/3 less than complete repeal. Because of

smaller tax increases, the bill’s remaining provisions—measures to increase tax subsidies for

renewable fuels and for energy efficiency—had to be cut back. Thus, the scaled-down bill drops

the nuclear electricity production tax credit provision, scales back the §45 renewable electricity

tax credit, and generally shortens the extension periods.

The substitute amendment of S. 3478 (S.Amdt. 5633) was added to H.R. 6049, which also

includes an AMT patch, disaster tax relief, and extensions of (non-energy) individual and

business tax provisions. It was passed by the Senate on September 23, by a vote of 93-2. There

was only one change to the original Baucus/Grassley substitute version: Language extending a

10¢ per-gallon credit for small producers of alcohol fuels was eliminated in the final bill.

Bureau of National Affairs. Daily Tax Report. “Plan to Bring Tax Extenders to Floor Scraps Section 199 Deduction

Repeal for Oil Firms.” September 17, 2008. P. G-13.

The legislative text and summary of the substitute of S. 3478 are in: Bureau of National Affairs. Daily Tax Report.

September 18, 2008.

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Finally, H.R. 6049, including the energy tax amendments approved by the Senate, were added to

the economic stabilization legislation (H.R. 1424) as Subdivision B, the Energy Improvement and

Extension Act of 2008. On October 3, President Bush signed this legislation, the Economic

Stabilization Act of 2008 (P.L. 110-343), which includes $17 billion in energy tax incentives,

primarily extensions of pre-existing provisions, but also including several new energy tax

incentives: $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 is 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

comprise cutbacks in the IRC §199 manufacturing deduction for income attributable to oil and

gas production, which will be frozen at 6% (rather than increasing to 9% as scheduled), reforming

the foreign tax credit provisions, and by increasing the per-barrel tax rate on refinery crude oil

under the Oil Spill Liability Trust Fund provisions.

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Over the past ten years, surging crude oil and petroleum product prices have increased oil and gas

industry revenues and generated record profits particularly for the top five major integrated

companies (also known as the “super-majors”): Exxon-Mobil, Royal Dutch Shell, BP, Chevron,

and Conoco/Phillips. These companies, which reported a predominate share of those profits,

generated over $100 billion dollars in profits on nearly $1.5 trillion of revenues in 2007. From

2003 to 2007, revenues increased by 51%; net income (profits) increased by 85%. Oil output for

the five majors over this time period declined by over 2%, from 9.85 to 9.63 million barrels per

day. Since oil industry income has been largely price driven, with no increase in output, and with

little new production resulting from increased oil industry investment, many believe that a portion

of the increased income over this period represents a windfall and unearned gain, i.e., income not

earned by any additional effort on the part of the firms, but due primarily to record crude oil

prices, which are set in the world oil marketplace.

Numerous bills have been introduced in the Congress over this period to impose a windfall profit

tax (WPT) on oil. Most of the bills were introduced in the 109th and 110th Congresses, after the

enactment of the Energy Policy Act of 2005, which provided additional oil and gas industry tax

incentives, on top of the industry’s traditional tax subsidies. S. 3044, for instance, would roll back

$17 billion in existing tax breaks over 10 years for the largest oil companies and impose a 25%

windfall profit tax on major oil companies; revenues would be earmarked to expanding renewable

energy development. In general, an excise-tax based WPT, like the one in effect from 1980-1988,

would increase marginal oil production costs, reduce domestic oil supply, and raise petroleum

imports, making the United States more dependent on foreign oil, undermining goals of energy

independence and energy security. By contrast, the income-tax based WPT would be more

economically neutral (less distortionary) in the short-run: sizeable revenues could be raised

without reducing domestic oil supplies, which means oil imports would not tend to increase.

Neither the excise-tax based or income-tax based WPT are expected to have significant price

effects: neither tax would increase the price of crude oil, which means that refined petroleum

product prices, such as pump prices, would likely not tend to increase.

In lieu of these two types of WPT, an administratively simple way of increasing the tax burden on

the oil industry, and therefore recouping some of the excess or windfall profits, particularly from

major integrated producers, would raise the corporate tax rate, by, for instance repealing or

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reducing the domestic manufacturing activities deduction under IRC §199. This deduction is

presently 6% of a firm’s net income and is available generally to all domestic manufacturing

businesses (service firms are excluded), including almost all oil firms. Repealing this deduction

for the major integrated oil companies, and freezing it at 6% for the remaining qualifying oil

companies is estimated by the Joint Committee on Taxation to generate about $10 billion over 10

years.

For an analysis of windfall profit legislation, see CRS Report RL34689, Oil Industry Financial

Performance and the Windfall Profits Tax, by (name redacted) and (name redacted).

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It should also be mentioned that there are several, relatively small, energy tax provisions in the

farm bill (H.R. 2419), which was just recently enacted (P.L. 110-234). These provisions, all

intended to promote alternative and renewable fuels from agricultural resources.

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U.S. Congress, Senate Budget Committee, Tax Expenditures: Compendium of Background

Material on Individual Provision, Committee Print, December 2006, 109th Cong., 2nd sess.

U.S. Congress, Joint Tax Committee, “Description of the Tax Provisions in H.R. 2776, The

Renewable Energy and Energy Conservation Tax Act of 2007,” June 19, 2007 (JCX-35-07).

U.S. Congress, Joint Tax Committee, “Description of the Chairman’s Modification to the

Provisions of the Energy Advancement and Investment Act of 2007,” June 19, 2007 (JCX-33-07).

U.S. Congress, Joint Tax Committee, Description And Technical Explanation of the Conference

Agreement of H.R. 6, Title XIII, “Energy Tax Policy Tax Incentives Act of 2005,” July 27, 2005.

CRS Report RS21935, The Black Lung Excise Tax on Coal, by (name redacted).

CRS Report RL33302, Energy Policy Act of 2005: Summary and Analysis of Enacted Provisions,

by (name redacted) et al.

CRS Report RL30406, Energy Tax Policy: An Economic Analysis, by (name redacted).

CRS Report RL33763, Oil and Gas Tax Subsidies: Current Status and Analysis, by (name reda

cted).

CRS Report RS22558, Tax Credits for Hybrid Vehicles, by (name redacted).

CRS Report RS22322, Taxes and Fiscal Year 2006 Budget Reconciliation: A Brief Summary, by

David L. Brumbaugh.

CRS Report RL33305, The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current

Energy Policy, by (name redacted).

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CRS Report RL34669, Side-by-Side Comparison of Energy Tax Bills in the House (H.R. 6049)

and Senate (S. 3478), by (name redacted).

CRS Report RL34676, Side-by-Side Comparison of the Energy Tax Provisions of H.R. 6899 and

the Proposed Substitute of S. 3478, by (name redacted).

CRS Report RL34689, Oil Industry Financial Performance and the Windfall Profits Tax, by

(name redacted) and (name redacted).

Table 1. Comparison of Energy Tax Provisions the House, Senate, and Enacted

Versions of H.R. 6 (P.L. 109-58):

11-Year Estimated Revenue Loss by Type of Incentive

(in millions of dollars; percentage of total revenue losses)

House H.R. 6

Senate H.R. 6

P.L. 109-58

INCENTIVES FOR FOSSIL FUELS SUPPLY

(1) Oil & Gas Production

-1,525

18.9%

-1,416

7.6%

-1,132

7.8%

(2) Oil & Gas Refining and Distribution

-1,663

20.6%

-1,399

7.5%

-1,501

10.4%

(3) Coal

-1,490

18.4%

-3,003

16.2%

-2,948

20.3%

(4) Subtotal

-4,678

57.8%

-5,818

31.3%

-5,581

38.6%

ELECTRICITY RESTRUCTURING PROVISIONS

(5) Nuclear

(6) Other

-1,313 16.2%

-278

1.5%

-1,571

10.9%

-1,529 18.9%

-475

2.6%

-1,549

10.7%

(7) Subtotal

-2,842 35.1%

-753

4.1%

-3,120

21.6%

INCENTIVES FOR EFFICIENCY, RENEWABLES, AND ALTERNATIVE FUELS

(8) Energy Efficiency

-570

7.0%

-3,987 21.4%

-1,260

8.7%

(9) Renewable Energy & Alternative Fuels

-8,031 43.2%

-4,500

31.1%

(10) Subtotal

-570

7.0% -12,018 64.6%

-5,760

39.8%

(11) Net Energy Tax Cuts

-8,010 100% -18,589 100% -14,461 100.0%

(12) Non Energy Tax Cutsa

-213

-92

(13) Total Energy and Non-Energy Tax Cuts

-18,802

-14,553

(14) Energy Tax Increasesb

+2,857

(15) Other Tax Increases

+ 4,705

171

(16) NET TAX CUTS

-8,010

-14,055

-11,525

Source: CRS estimates based on Joint Tax Committee reports.

a. The conference report includes a provision to expand R&D for all energy activities. This provision is listed

as a nonenergy tax cut to simplify the table.

b. Energy tax increases comprise the oil spill liability tax and the Leaking Underground Storage Tank financing

rate, both of which are imposed on oil refineries. If these taxes are subtracted from the tax subsidies (row

2), the oil and gas refinery and distribution sector suffered a net tax increase of $1,356 ($2,857-$1501); if

the taxes are subtracted from all of the industry’s tax subsidies (rows 1 and 2), the industry experienced a

net tax increase of $224 million ($2,857-$2,633). Also, the Tax Increase Prevention and Reconciliation Bill

of 2006 (P.L. 109-222), enacted on May 17, 2006, increased taxes on the oil industry by about $189 million.

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. Current Energy Tax Incentives and Taxes: Estimated Revenue Effects FY2007

Table 2

(in millions of dollars)