Energy Tax Policy: History and Current Issues

Energy Tax Policy:
History and Current Issues
Updated October 30, 2008
Salvatore Lazzari
Specialist in Energy and Environmental Economics
Resources, Science, and Industry Division

Energy Tax Policy: History and Current Issues
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tax subsidies that had not been repealed, which together created negative effective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.

In troduction ......................................................1
Background ......................................................2
Energy Tax Policy from 1918 to 1970: Promoting Oil and Gas..........2
Energy Tax Policy During the 1970s: Conservation and Alternative Fuels.3
Energy Tax Policy in the 1980s: The “Free-Market Approach”..........6
Energy Tax Policy After 1988....................................7
Energy Tax Incentives in Comprehensive Energy Legislation Since 1998......8
Brief History of Comprehensive Energy Policy Proposals..............8
Energy Tax Action in the 107th Congress...........................9th
Energy Tax Action in the 108 Congress..........................10
Energy Action in the 109th Congress..................................11
The Energy Policy Act of 2005 (P.L. 109-58).......................11
The Tax Increase Prevention and Reconciliation Act (P.L. 109-222).....12
The Tax Relief and Health Care Act of 2006 (P.L. 109-432)...........13
Current Posture of Energy Tax Policy.................................13
Energy Tax Policy in the 110th Congress...............................14
H.R. 5351...................................................15
H.R. 6049 ..................................................15
H.R. 6899...................................................16
Substitute Amendment of S. 3478................................16
The Economic Stabilization Act of 2008 (P.L. 110-343)..............17
Windfall Profit Tax Legislation..................................18
Energy Tax Provisions in the Farm Bill (P.L. 110-234)...............19
For Additional Reading............................................19
List of Tables
Table 1. Comparison of Energy Tax Provisions the House, Senate, and
Enacted Versions of H.R. 6 (P.L. 109-58): 11-Year Estimated Revenue
Loss by Type of Incentive ......................................21
Table 2. Current Energy Tax Incentives and Taxes: Estimated Revenue
Effects FY2007 ..............................................22

Energy Tax Policy:
History and Current Issues
Energy tax policy involves the use of the government’s main fiscal instruments
— taxes (financial disincentives) and tax subsidies (or incentives) — to alter the
allocation or configuration of energy resources. In theory, energy taxes and subsidies,
like tax policy instruments in general, are intended either to correct a problem or
distortion in the energy markets or to achieve some social, economic (efficiency,
equity, or even macroeconomic), environmental, or fiscal objective. In practice,
however, energy tax policy in the United States is made in a political setting, being
determined by the views and interests of the key players in this setting: politicians,
special interest groups, bureaucrats, and academic scholars. This implies that the
policy does not generally, if ever, adhere to the principles of economic or public
finance theory alone; that more often than not, energy tax policy may compound
existing distortions, rather than correct them.1
The idea of applying tax policy instruments to the energy markets is not new,
but until the 1970s, energy tax policy had been little used, except for the oil and gas
industry. Recurrent energy-related problems since the 1970s — oil embargoes, oil
price and supply shocks, wide petroleum price variations and price spikes, large
geographical price disparities, tight energy supplies, and rising oil import
dependence, as well as increased concern for the environment — have caused
policymakers to look toward energy taxes and subsidies with greater frequency.
Comprehensive energy policy legislation containing numerous tax incentives,
and some tax increases on the oil industry, was signed on August 8, 2005 (P.L. 109-
58). The law, the Energy Policy Act of 2005, contained about $15 billion in energy
tax incentives over 11 years, including numerous tax incentives for the supply of
conventional fuels. However, record oil industry profits, due primarily to high crude
oil and refined oil product prices, and the 2006 mid-term elections, which gave the
control of the Congress to the Democratic Party, has changed the mood of
policymakers. Instead of stimulating the traditional fuels industry — oil, gas, and
electricity from coal — in addition to incentivizing alternative fuels and energy
conservation, the mood now is to take away, or rescind, the 2005 tax incentives and
use the money to further stimulate alternative fuels and energy conservation. A minor
step in this direction was made, on May 17, 2006, when President Bush signed a $70
billion tax reconciliation bill (P.L. 109-222). This bill included a provision that

1 The theory underlying these distortions, and the nature of the distortions, is discussed in
detail in a companion report: CRS Report RL30406, Energy Tax Policy: An Economic
Analysis, by Salvatore Lazzari.

further increased taxes on major integrated oil companies by extending the
depreciation recovery period for geological and geophysical costs from two to five
years (thus taking back some of the benefits enacted under the 2005 law). And
currently, the major tax writing committees in both Houses are considering further,
but more significant, tax increases on the oil and gas industry to fund additional tax
cuts for the alternative fuels and energy conservation industries. These bills are being
considered as part of the debate over new versions of comprehensive energy policy
legislation in the 110th Congress (H.R. 6).
This report discusses the history, current posture, and outlook for federal energy
tax policy. It also discusses current energy tax proposals and major energy tax
provisions enacted in the 109th Congress. (For a general economic analysis of energy
tax policy, see CRS Report RL30406, Energy Tax Policy: An Economic Analysis, by
Salvatore Lazzari.)
The history of federal energy tax policy can be divided into four eras: the oil
and gas period from 1916 to 1970, the energy crisis period of the 1970s, the free-
market era of the Reagan Administration, and the post-Reagan era — including the
period since 1998, which has witnessed a plethora of energy tax proposals to address
recurring energy market problems.
Energy Tax Policy from 1918 to 1970: Promoting Oil and Gas
Historically, federal energy tax policy was focused on increasing domestic oil
and gas reserves and production; there were no tax incentives for energy conservation
or for alternative fuels. Two oil/gas tax code preferences embodied this policy: (1)
expensing of intangible drilling costs (IDCs) and dry hole costs, which was
introduced in 1916, and (2) the percentage depletion allowance, first enacted in 1926
(coal was added in 1932).2
Expensing of IDCs (such as labor costs, material costs, supplies, and repairs
associated with drilling a well) gave oil and gas producers the benefit of fully
deducting from the first year’s income (“writing off”) a significant portion of the
total costs of bringing a well into production, costs that would otherwise (i.e., in
theory and under standard, accepted tax accounting methods) be capitalized (i.e.,
written off during the life of the well as income is earned). For dry holes, which
comprised on average about 80% of all the wells drilled, the costs were also allowed
to be deducted in the year drilled (expensed) and deducted against other types of
income, which led to many tax shelters that benefitted primarily high-income

2 Tax preferences are special tax provisions — such as tax credits, exemptions, exclusions,
deductions, deferrals, or favorable tax rates — that reduce tax rates for the preferred
economic activity and favored taxpayers. Such preferences, also known as tax expenditures
or tax subsidies, generally deviate from a neutral tax system and from generally accepted
economic and accounting principles unless they are targeted to the correction of preexisting
market distortions.

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
These and other tax subsidies discussed later (e.g., capital gains treatment of the
sale of successful properties, the special exemption from the passive loss limitation
rules, and special tax credits) reduced marginal effective tax rates in the oil and gas
industries, reduced production costs, and increased investments in locating reserves
(increased exploration). They also led to more profitable production and some
acceleration of oil and gas production (increased rate of extraction), and more rapid
depletion of energy resources than would otherwise occur. Such subsidies tend to
channel resources into these activities that otherwise would be used for oil and gas
activities abroad or for other economic activities in the United States. Relatively low
oil prices encouraged petroleum consumption (as opposed to conservation) and
inhibited the development of alternatives to fossil fuels, such as unconventional fuels
and renewable forms of energy. Oil and gas production increased from 16% of total
U.S. energy production in 1920 to 71.1% of total energy production in 1970 (the peak
Energy Tax Policy During the 1970s:
Conservation and Alternative Fuels
Three developments during the 1970s caused a dramatic shift in the focus of
federal energy tax policy. First, the large revenue losses associated with the oil and
gas tax preferences became increasingly hard to justify in the face of increasing
federal budget deficits — and in view of the longstanding economic arguments
against the special tax treatment for oil and gas, as noted in the above paragraph.
Second, heightened awareness of environmental pollution and concern for
environmental degradation, and the increased importance of distributional issues in
policy formulation (i.e., equity and fairness), lost the domestic oil and gas industry
much political support. Thus, it became more difficult to justify percentage depletion
and other subsidies, largely claimed by wealthy individuals and big vertically
integrated oil companies. More importantly, during the 1970s there were two energy
crises: the oil embargo of 1973, also known as the first oil shock, and the Iranian
Revolution in 1978-1979, which focused policymakers’ attention on the problems
(alleged “failures”) in the energy markets and how these problems reverberated
throughout the economy, causing stagflation, shortages, productivity problems, rising
import dependence, and other economic and social problems.
These developments caused federal energy tax policy to shift from oil and gas
supply toward energy conservation (reduced energy demand) and alternative energy

Three broad actions were taken through the tax code to implement the new
energy tax policy during the 1970s. First, the oil industry’s two major tax
preferences — expensing of IDCs and percentage depletion — were significantly
reduced, particularly the percentage depletion allowance, which was eliminated for
the major integrated oil companies and reduced for the remaining producers. Other
oil and gas tax benefits were also cut back during this period. For example, oil- and
gas-fired boilers used in steam generation (e.g., to generate electricity) could no
longer qualify for accelerated depreciation as a result of the Energy Tax Act of 1978
(as discussed below).
The second broad policy action was the imposition of several new excise taxes
penalizing the use of conventional fossil fuels, particularly oil and gas (and later
coal). The Energy Tax Act of 1978 (ETA, P.L. 95-618) created a federal “gas
guzzler” excise tax on the sale of automobiles with relatively low fuel economy
ratings. This tax, which is still in effect, currently ranges from $1,000 for an
automobile rated between 21.5 and 22.5 miles per gallon (mpg) to $7,700 for an
automobile rated at less than 12.5 mpg. Chief among the taxes on oil was the
windfall profit tax (WPT) enacted in 1980 (P.L. 96-223). The WPT imposed an
excise tax of 15% to 70% on the difference between the market price of oil and a
predetermined (adjusted) base price. This tax, which was repealed in 1988, was part
of a political compromise that decontrolled oil prices. (Between 1971 and 1980, oil
prices were controlled under President Nixon’s Economic Stabilization Act of 1970
— the so-called “wage-price freeze.”) (For more detail on the windfall profit tax on
crude oil that was imposed from 1980 until its repeal in 1988, see CRS Report
RL33305, The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current
Energy Policy, by Salvatore Lazzari.)
Another, but relatively small, excise tax on petroleum was instituted in 1980:
the environmental excise tax on crude oil received at a U.S. refinery. This tax, part
of the Comprehensive Environmental Response, Compensation, and Liability Act of
1980 (P.L. 96-510), otherwise known as the “Superfund” program, was designed to
charge oil refineries for the cost of releasing any hazardous materials that resulted
from the refining of crude oil. The tax rate was set initially at 0.79¢ ($0.0079) per
barrel and was subsequently raised to 9.70¢ per barrel. This tax expired at the end
of 1995, but legislation has been proposed since then to reinstate it as part of
Superfund reauthorization.
The third broad action taken during the 1970s to implement the new and
refocused energy tax policy was the introduction of numerous tax incentives or
subsidies (e.g., special tax credits, deductions, exclusions) for energy conservation,
the development of alternative fuels (renewable and nonconventional fuels), and the
commercialization of energy efficiency and alternative fuels technologies. Most of
these new tax subsidies were introduced as part of the Energy Tax Act of 1978 and
expanded under the WPT, which also introduced additional new energy tax subsidies.
The following list describes these:
!Residential and Business Energy Tax Credits. The ETA provided
income tax credits for homeowners and businesses that invested in
a variety of energy conservation products (e.g., insulation and other
energy-conserving components) and for solar and wind energy

equipment installed in a principal home or a business. The business
energy tax credits were 10% to 15% of the investment in
conservation or alternative fuels technologies, such as synthetic
fuels, solar, wind, geothermal, and biomass. These tax credits were
also expanded as part of the WPT, but they generally expired (except
for business use of solar and geothermal technologies) as scheduled
either in 1982 or 1985. A 15% investment tax credit for business
use of solar and geothermal energy, which was made permanent, is
all that remains of these tax credits.
!Tax Subsidies for Alcohol Fuels. The ETA also introduced the excise
tax exemption for gasohol, recently at 5.2¢ per gallon out of a
gasoline tax of 18.4¢/gal. Subsequent legislation extended the
exemption and converted it into an immediate tax credit (currently
at 51¢/gallon of ethanol).
!Percentage Depletion for Geothermal. The ETA made geothermal
deposits eligible for the percentage depletion allowance, at the rate
of 22%. Currently the rate is 15%.
!§29 Tax Credit for Unconventional Fuels. The 1980 WPT included
a $3.00 (in 1979 dollars) production tax credit to stimulate the
supply of selected unconventional fuels: oil from shale or tar sands,
gas produced from geo-pressurized brine, Devonian shale, tight
formations, or coalbed methane, gas from biomass, and synthetic
fuels from coal. In current dollars this credit, which is still in effect
for certain types of fuels, was $6.56 per barrel of liquid fuels and
about $1.16 per thousand cubic feet (mcf) of gas in 2004.
!Tax-Exempt Interest on Industrial Development Bonds. The WPT
made facilities for producing fuels from solid waste exempt from
federal taxation of interest on industrial development bonds (IDBs).
This exemption was for the benefit of the development of alcohol
fuels produced from biomass, for solid-waste-to-energy facilities, for
hydroelectric facilities, and for facilities for producing renewable
energy. IDBs, which provide significant benefits to state and local
electric utilities (public power), had become a popular source of
financing for renewable energy projects.
Some of these incentives — for example, the residential energy tax credits —
have since expired, but others remain and still new ones have been introduced, such
as the §45 renewable electricity tax credit, which was introduced in 1992 and
expanded under the American Jobs Creation Act of 2004 (P.L. 108-357). This
approach toward energy tax policy — subsidizing a plethora of different forms of
energy (both conventional and renewable) and providing incentives for diverse
energy conservation (efficiency) technologies in as many sectors as possible — has
been the paradigm followed by policymakers since the 1970s. A significant increase
in nontax interventions in the energy markets — laws and regulations, such as the
Corporate Average Fuel Economy (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.
Energy Tax Policy in the 1980s: The “Free-Market Approach”
The Reagan Administration opposed using the tax law to promote oil and gas
development, energy conservation, or the supply of alternative fuels. The idea was
to have a more neutral and less distortionary energy tax policy, which economic
theory predicts would make energy markets work more efficiently and generate
benefits to the general economy. The Reagan Administration believed that the
responsibility for commercializing conservation and alternative energy technologies
rested with the private sector and that high oil prices — real oil prices (corrected for
inflation) were at historically high levels in 1981 and 1982 — would be ample
encouragement for the development of alternative energy resources. High oil prices
in themselves create conservation incentives and stimulate oil and gas production.
President Reagan’s free-market views were well known prior to his election.
During the 1980 presidential campaign, he proposed repealing the WPT, deregulating
oil and natural gas prices, and minimizing government intervention in the energy
markets. The Reagan Administration’s energy tax policy was professed more
formally in several energy and tax policy studies, including its 1981 National Energy
Policy Plan and the 1983 update to this plan; it culminated in a 1984 Treasury study
on general tax reform, which also proposed fundamental reforms of federal energy
tax policy. In terms of actual legislation, many of the Reagan Administration’s
objectives were realized, although as discussed below there were unintended effects.
In 1982, the business energy tax credits on most types of nonrenewable
technologies — those enacted under the ETA of 1978 — were allowed to expire as
scheduled; other business credits and the residential energy tax credits were allowed
to expire at the end of 1985, also as scheduled. Only the tax credits for business
solar, geothermal, ocean thermal, and biomass technologies were extended. As
mentioned above, today the tax credit for business investment in solar and
geothermal technologies, which has since been reduced to 10%, is all that remains
of these tax credits. A final accomplishment was the repeal of the WPT, but not until
1988, the end of Reagan’s second term. The Reagan Administration’s other energy
tax policy proposals, however, were not adopted. The tax incentives for oil and gas
were not eliminated, although they were pared back as part of the Tax Reform Act
(TRA) of 1986.
Although the Reagan Administration’s objective was to create a free-market
energy policy, significant liberalization of the depreciation system and reduction in
marginal tax rates — both the result of the Economic Recovery Tax Act of 1981
(ERTA, P.L. 97-34) — combined with the regular investment tax credit and the
business energy investment tax credits, resulted in negative effective tax rates for
many investments, including alternative energy investments, such as solar and
synthetic fuels. Also, the retention of percentage depletion and expensing of IDCs
(even at the reduced rates) rendered oil and gas investments still favored relative to
investments in general.

Energy Tax Policy After 1988
After the Reagan Administration, several major energy and non-energy laws
were enacted that amended the energy tax laws in several ways, some major.
!Revenue Provisions of the Omnibus Reconciliation Act of 1990.
President George H.W. Bush’s first major tax law included
numerous energy tax incentives: (1) for conservation (and deficit
reduction), the law increased the gasoline tax by 5¢/gallon and
doubled the gas-guzzler tax; (2) for oil and gas, the law introduced
a 10% tax credit for enhanced oil recovery expenditures, liberalized
some of the restrictions on the percentage depletion allowance, and
reduced the impact of the alternative minimum tax on oil and gas
investments; and (3) for alternative fuels, the law expanded the §29
tax credit for unconventional fuels and introduced the tax credit for
small producers of ethanol used as a motor fuel.
!Energy Policy Act of 1992 (P.L. 102-486). This broad energy
measure introduced the §45 tax credit, at 1.5¢ per kilowatt hour, for
electricity generated from wind and “closed-loop” biomass systems.
(Poultry litter was added later.) For new facilities, this tax credit
expired at the end of 2001 and again in 2003 but has been
retroactively extended by recent tax legislation (as discussed below).
In addition, the 1992 law (1) added an income tax deduction for the
costs, up to $2,000, of clean-fuel powered vehicles; (2) liberalized
the alcohol fuels tax exemption; (3) expanded the §29 production tax
credit for nonconventional energy resources; and (4) liberalized the
tax breaks for oil and gas.
!Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66).
President Clinton proposed a differential Btu tax on fossil fuels (a
broadly based general tax primarily on oil, gas, and coal based on the
British thermal units of heat output), which was dropped in favor of
a broadly applied 4.3¢/gallon increase in the excise taxes on motor
fuels, with revenues allocated for deficit reduction rather than the
various trust funds.
!Taxpayer Relief Act of 1997 (P.L. 105-34). This law included a
variety of excise tax provisions for motor fuels, of which some
involved tax reductions on alternative transportation fuels, and some
involved increases, such as on kerosene, which on balance further
tilted energy tax policy toward alternative fuels.
!Tax Relief and Extension Act. Enacted as Title V of the Ticket to
Work and Work Incentives Improvement Act of 1999 (P.L. 106-
170), it extended and liberalized the 1.5¢/kWh renewable electricity
production tax credit, and renewed the suspension of the net income
limit on the percentage depletion allowance for marginal oil and gas

As this list suggests, the post-Reagan energy tax policy returned more to the
interventionist course established during the 1970s and primarily was directed at
energy conservation and alternative fuels, mostly for the purpose of reducing oil
import dependence and enhancing energy security. However, there is an
environmental twist to energy tax policy during this period, particularly in the
Clinton years. Fiscal concerns, which for most of that period created a perennial
search for more revenues to reduce budget deficits, have also driven energy tax policy
proposals during the post-Reagan era. This is underscored by proposals, which have
not been enacted, to impose broad-based energy taxes such as the Btu tax or the
carbon tax to mitigate greenhouse gas emissions.
Another interesting feature of the post-Reagan energy tax policy is that while
the primary focus continues to be energy conservation and alternative fuels, no
energy tax legislation has been enacted during this period that does not also include
some, relatively minor, tax relief for the oil and gas industry, either in the form of
new tax incentives or liberalization of existing tax breaks (or both).
Energy Tax Incentives in
Comprehensive Energy Legislation Since 1998
Several negative energy market developments since about 1998, characterized
by some as an “energy crisis,” have led to congressional action on comprehensive
energy proposals, which included numerous energy tax incentives.
Brief History of Comprehensive Energy Policy Proposals
Although the primary rationale for comprehensive energy legislation has
historically been spiking petroleum prices, and to a lesser extent spiking natural gas
and electricity prices, the origin of bills introduced in the late 1990s was the very low
crude oil prices of that period. Domestic crude oil prices reached a low of just over
$10 per barrel in the winter of 1998-1999, among the lowest crude oil prices in
history after correcting for inflation. From 1986 to 1999, oil prices averaged about
$17 per barrel, fluctuating between $12 and $20 per barrel. These low oil prices hurt
oil producers, benefitted oil refiners, and encouraged consumption. They also served
as a disincentive to conservation and investment in energy efficiency technologies
and discouraged production of alternative fuels and renewable technologies. Toth
address the low oil prices, there were many tax bills in the first session of the 106
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 truckers)
cushion the financial effect of the price spikes. The Midwest gasoline price spike in
summer 2000 kept interest in these excise tax moratoria alive and generated interest
in proposals for a windfall profit tax on oil companies, which, by then, were earning
substantial profits from high prices.
Despite numerous bills to address these issues, no major energy tax bill was
enacted in the 106th Congress. However, some minor amendments to energy tax
provisions were enacted as part of nonenergy tax bills. This includes Title V of the
Ticket to Work and Work Incentives Improvement Act of 1999 (P.L. 106-170).
Also, the 106th Congress did enact a package of $500 million in loan guarantees for
small independent oil and gas producers (P.L. 106-51).
Energy Tax Action in the 107th Congress
In early 2001, the 107th Congress faced a combination of fluctuating oil prices,
an electricity crisis in California, and spiking natural gas prices. The gas prices had
increased steadily in 2000 and reached $9 per thousand cubic feet (mcf) at the outset
of the 107th Congress. At one point, spot market prices reached about $30 per mcf,
the energy equivalent of $175 per barrel of oil. The combination of energy problems
had developed into an “energy crisis,” which prompted congressional action on a
comprehensive energy policy bill — the first since 1992 — that included a significant
expansion of energy tax incentives and subsidies and other energy policy measures.
In 2002, the House and Senate approved two distinct versions of an omnibus
energy bill, H.R. 4. While there were substantial differences in the nontax provisions
of the bill, the energy tax measures also differed significantly. The House bill
proposed larger energy tax cuts, with some energy tax increases. It would have
reduced energy taxes by about $36.5 billion over 10 years, in contrast to the Senate
bill, which cut about $18.3 billion over 10 years, including about $5.1 billion in tax
credits over 10 years for two mandates: a renewable energy portfolio standard ($0.3
billion) and a renewable fuel standard ($4.8 billion). The House version emphasized
conventional fuels supply, including capital investment incentives to stimulate
production and distribution of oil, natural gas, and electricity. This focus assumed
that recent energy problems were due mainly to supply and capacity shortages driven
by economic growth and low energy prices. In comparison, the Senate bill would
have provided a much smaller amount of tax incentives for fossil fuels and nuclear
power and somewhat fewer incentives for energy efficiency, but provided more
incentives for alternative and renewable fuels. The conference committee on H.R.

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

Energy Tax Action in the 108th Congress
On the House side, on April 3, 2003, the Ways and Means Committee (WMC)
voted 24-12 for an energy tax incentives bill (H.R. 1531) that was incorporated into
H.R. 6 and approved by the House on April 11, 2003, by a vote of 247-175. The
House version of H.R. 6 provided about $17.1 billion of energy tax incentives and
included $83 million of non-energy tax increases, or offsets. This bill was a
substantially scaled-down version of the House energy tax bill, H.R. 2511 (107th
Congress), which was incorporated into H.R. 4, the House energy bill of the 107th
Congress that never became law. After returning from the August 2003 recess, a
House and Senate conference committee negotiated differences among provisions in
three energy policy bills: the House and Senate versions of H.R. 6, and a substitute
to the Senate Finance Committee (SFC) bill — a modified (or amended) version of
S. 1149 substituted for Senate H.R. 6 in conference as S.Amdt. 1424 and S.Amdt.


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 Salvatore Lazzari.)
The American Jobs Creation Act of 2004 (P.L. 108-357), commonly referred
to as the “FSC-ETI” or “jobs” bill, was enacted on October 22, 2004. It included
about $5 billion in energy tax incentives.
Energy Action in the 109th Congress
The 109th Congress enacted the Energy Policy Act of 2005 (P.L. 109-58), which
included the most extensive amendments to U.S. energy tax laws since 1992, and the
Tax Relief and Health Care Act of 2006, which extended the energy tax subsidies
enacted under the 2005 Energy Policy Act (EPACT05).
The Energy Policy Act of 2005 (P.L. 109-58)
On June 28, 2005, the Senate approved by an 85-12 vote a broadly based energy
bill (H.R. 6) with an 11-year, $18.6 billion package of energy tax breaks tilted toward
renewable energy resources and conservation. Joint Committee on Taxation figures
released on June 28 show that the bill included about $0.2 billion in non-energy tax
cuts and more than $4.7 billion in revenue offsets, meaning the bill had a total tax cut
of $18.8 billion over 11 years, offset by the $4.7 billion in tax increases. The House
energy bill, which included energy tax incentives totaling about $8.1 billion over 11
years, and no tax increases, was approved in April. This bill was weighted almost
entirely toward fossil fuels and electricity supply. On July 27, 2005, the conference
committee on H.R. 6 reached agreement on $11.1 billion of energy tax incentives,
including $3 billion in tax increases (both energy and non-energy). The distribution
of the cuts by type of fuel for each of the three versions of H.R. 6 is shown in Table


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).
The Tax Increase Prevention and Reconciliation Act
(P.L. 109-222)
After expanding energy tax incentives in the EPACT05, the 109th Congress
moved to rescind oil and gas incentives, and even to raise energy taxes on oil and gas,
in response to the high energy prices and resulting record oil and gas industry profits.
Many bills were introduced in the 109th Congress to pare back or repeal the oil and
gas industry tax subsidies and other loopholes, both those enacted under EPACT05
as well as those that preexisted EPACT05. Many of the bills focused on the oil and
gas exploration and development (E&D) subsidy — expensing of intangible drilling
costs (IDCs). This subsidy, which has been in existence since the early days of the
income tax, is available to integrated and independent oil and gas companies, both
large and small alike.3 It is an exploration and development incentive, which allows
the immediate tax write-off of what economically are capital costs, that is, the costs
of creating a capital asset (the oil and gas well).
Public and congressional outcry over high crude oil and product prices, and the
oil and gas industry’s record profits, did lead to a paring back of one of EPACT05’s
tax subsidies: two-year amortization, rather than capitalization, of geological and
geophysical (G&G) costs, including those associated with abandoned wells (dry
holes). Prior to the EPACT05, G&G costs for dry holes were expensed in the first
year and for successful wells they were capitalized, which is consistent with
economic theory and accounting principles. The Tax Increase Prevention and
Reconciliation Act, (P.L. 109-222), signed into law May 2006, reduced the value of

3 As is discussed later in the report, many of the other remaining tax subsidies are only
available to independent oil and gas producers, which, however, may be very large.

the subsidy by raising the amortization period from two years to five years, still faster
than the capitalization treatment before the 2005 act, but slower than the treatment
under that act. The higher amortization period applies only to the major integrated
oil companies — independent (unintegrated) oil companies may continue to amortize
all G&G costs over two years — and it applies to abandoned as well as successful
properties. This change increased taxes on major integrated oil companies by an
estimated $189 million over 10 years, effectively rescinding about 20% of the nearly
$1.1 billion 11-year tax for oil and gas production under EPACT05.
The Tax Relief and Health Care Act of 2006 (P.L. 109-432)
At the end of 2006, the 109th Congress enacted a tax extenders package that
included extension of numerous renewable energy and excise tax provisions. Many
of the renewable energy provision in this bill had already been extended under the
Energy Policy Act of 2005 and were not set to expire until the end of 2007 or later.
The Tax Relief and Health Care Act of 2006 provided for one-year extensions of
these provisions.
Current Posture of Energy Tax Policy
The above background discussion of energy tax policy may be conveniently
summarized in Table 2, which shows current energy tax provisions — both special
(or targeted) energy tax subsidies and targeted energy taxes — and related revenue
effects. A minus sign (“-“) indicates revenue losses, which means that the provision
is a tax subsidy or incentive, intended to increase the subsidized activity (energy
conservation measures or the supply of some alternative and renewable fuel or
technology); no minus sign means that the provision is a tax, which means that it
should reduce supply of, or demand for, the taxed activity (either conventional fuel
supply, energy demand, or the demand for energy-using technologies, such as cars).
Note that the table defines those special or targeted tax subsidies or incentives
as those that are due to provisions in the tax law that apply only to that particular
industry and not to others. Thus, for example, in the case of the oil and gas industry,
the table excludes tax subsidies and incentives of current law that may apply
generally to all businesses but that may also confer tax benefits to it. There are
numerous such provisions in the tax code; a complete listing of them is beyond the
scope of this report. However, the following example illustrates the point: The
current system of depreciation allows the writeoff of equipment and structures
somewhat faster than would be the case under both general accounting principles and
economic theory; the Joint Committee on Taxation treats the excess of depreciation
deductions over the alternative depreciation system as a tax subsidy (or “tax
expenditure”). In FY2006, the JCT estimates that the aggregate revenue loss from
this accelerated depreciation deduction (including the expensing under IRC §179) is
$6.7 billion. A certain, but unknown, fraction of this revenue loss or tax benefits
accrues to the domestic oil and gas industry, but separate estimates are unavailable.
This point applies to all the industries reflected in Table 2.

Energy Tax Policy in the 110th Congress
Continued high crude oil and petroleum product prices and oil and gas industry
profits, and the political realignment of the Congress resulting from the 2006
Congressional elections continued the energy policy shift toward increased taxes on
the oil and gas industry, and the emphasis on energy conservation and alternative and
renewable fuels rather than conventional hydrocarbons.4 In the 110th Congress, the
shift became reflected in proposals to reduce oil and gas production incentives or
subsidies, which were initially incorporated into, but ultimately dropped from
comprehensive energy policy legislation. In the debate over these two comprehensive
energy bills, raising taxes on the oil and gas industry, by either repealing tax
incentives enacted under EPACT05, by introducing new taxes on the industry, or by
other means was a key objective, motivated by the feeling that additional tax
incentives were unnecessary — record crude oil and gasoline prices and industry
profits provides sufficient (if not excessive) incentives.
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
The Democratic leadership in the 110 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 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
tax-related provisions that survived were (1) an extension of the Federal
Unemployment Tax Act surtax for one year, raising about $1.5 billion, (2) higher
penalties for failure to file partnership returns, increasing revenues by $655 million,
and (3) an extension of the amortization period for geological and geophysical
expenditures 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.

4 There is an important economic distinction between a subsidy and a tax benefit. As is
discussed elsewhere in this report, firms receive a variety of tax benefits that are not
necessarily targeted subsidies (or tax expenditures) because they are available generally.

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.
H.R. 5351
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.”
H.R. 6049
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. The latest was H.R. 6049, the House tax extenders
bill, which was approved by the House on May 21, 2008, but failed three cloture7

votes in the Senate.
5 See. U.S. Library of Congress. Congressional Research Service. Extension of Expiring
Energy Tax Provisions. CRS Report RL32265 by Salvatore Lazzari.
6 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.
7 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.

H.R. 6899
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.
Substitute Amendment of S. 3478
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 the9

8 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 Adam Vann. For a comparison of different
proposals see CRS Report RL34667, Outer Continental Shelf Leasing: Side-by-Side
Comparison of Five Legislative Proposals, by Marc Humphries.
9 Bureau of National Affairs. Daily Tax Report. “Reid Says ‘Must Pass’ Energy Legislation

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

9 (...continued)
Should be Handled Before Tax Extenders.” September 15, 2008. P. G-5.
10 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.
11 The legislative text and summary of the substitute of S. 3478 are in: Bureau of National
Affairs. Daily Tax Report. September 18, 2008.

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.
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.
Windfall Profit Tax Legislation
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 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 Profit Tax, by Salvatore Lazzari
and Robert Pirog.
Energy Tax Provisions in the Farm Bill (P.L. 110-234)
It should also be mentioned that there are several, relatively small, energy tax
provisions in the farm bill (H.R. 2419), which was just recently enacted (P.L. 110-
234). These provisions, all intended to promote alternative and renewable fuels from
agricultural resources.
For Additional Reading
U.S. Congress, Senate Budget Committee, Tax Expenditures: Compendium of
Background Material on Individual Provision, Committee Print, December

2006, 109th Cong., 2nd sess.

U.S. Congress, Joint Tax Committee, “Description of the Tax Provisions in H.R.
2776, The Renewable Energy and Energy Conservation Tax Act of 2007,” June

19, 2007 (JCX-35-07).

U.S. Congress, Joint Tax Committee, “Description of the Chairman’s Modification
to the Provisions of the Energy Advancement and Investment Act of 2007,”
June 19, 2007 (JCX-33-07).
U.S. Congress, Joint Tax Committee, Description And Technical Explanation of the
Conference Agreement of H.R. 6, Title XIII, “Energy Tax Policy Tax Incentives
Act of 2005,” July 27, 2005.
CRS Report RS21935, The Black Lung Excise Tax on Coal, by Salvatore Lazzari.
CRS Report RL33302, Energy Policy Act of 2005: Summary and Analysis of Enacted
Provisions, by Mark Holt and Carol Glover.
CRS Report RL30406, Energy Tax Policy: An Economic Analysis, by Salvatore
CRS Report RS22344, The Gulf Opportunity Zone Act of 2005, by Erika Lunder.
CRS Report RL33763, Oil and Gas Tax Subsidies: Current Status and Analysis, by
Salvatore Lazzari.
CRS Report RS22558, Tax Credits for Hybrid Vehicles, by Salvatore Lazzari.
CRS Report RS22322, Taxes and Fiscal Year 2006 Reconciliation: A Brief
Summary, by David L. Brumbaugh.
CRS Report RL33305, The Crude Oil Windfall Profits Tax of the 1980s:
Implications for Current Energy Policy, by Salvatore Lazzari.
CRS Report RL34669, Side-by-Side Comparison of Energy Tax Bills in the House
(H.R. 6049) and Senate (S. 3478), by Salvatore Lazzari.
CRS Report RL34676, Side-by-Side Comparison of the Energy Tax Provisions of
H.R. 6899 and the Proposed Substitute of S. 3478, by Salvatore Lazzari.
CRS Report RL34689, Oil Industry Financial Performance and the Windfall Profits
Tax, by Salvatore Lazzari and Robert Pirog.

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. 6Senate H.R. 6 P.L. 109-58
(1) Oil & Gas Production-1,52518.9%-1,4167.6%-1,1327.8%
(2) Oil & Gas Refining-1,66320.6%-1,3997.5%-1,50110.4%
and Distribution
(3) Coal-1,49018.4%-3,00316.2%-2,94820.3%
(4) Subtotal-4,67857.8%-5,81831.3%-5,58138.6%
(5) Nuclear-1,31316.2%-2781.5%-1,57110.9%
(6) Other-1,52918.9%-475 2.6%-1,54910.7%
(7) Subtotal-2,84235.1%-7534.1%-3,12021.6%
(8) Energy Efficiency-5707.0%-3,98721.4%-1,2608.7%
(9) Renewable Energy &00%-8,03143.2%-4,50031.1%
Alternative Fuels
(10) Subtotal-5707.0%-12,01864.6%-5,76039.8%
(11) Net Energy Tax Cuts-8,010100%-18,589100%-14,461100.0%
(12) Non Energy Taxa0-213-92
(13) Total Energy and0-18,802-14,553
Non-Energy Tax Cuts
(14) Energy Taxb00+2,857
(15) Other Tax Increases+ 4,705171
(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 industrys 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.

Table 2. Current Energy Tax Incentives and Taxes:
Estimated Revenue Effects FY2007
(in millions of dollars)
CategoryProvisionMajor LimitationsEffects
(bpd = barrels per day; < indicates less than)
Targeted Tax Subsidies
% depletion — oil,15% of sales (higheronly for independents,- 1,200
gas, and coalfor marginal wells);up to 1,000 or equiv.
10% for coalbpd
expensing ofIDCs 100% deductiblecorporations expense - 1,100a
intangible drillingin first yearonly 70% of IDCs;
costs (IDCs) and remaining 30% are
exploration andamortized over 5 years
development costs
— oil/gas and other
amortization ofcosts amortized over 2major integrated oil- 100
geological andyears for both drycompanies must
geophysical costsholes and successfulamortize such costs
for oil and gaswells(for both abandoned
and successful
properties) over 7 years
expensing ofdeduction of 50% ofmust increase the- 26
refinery investmentsthe cost of qualifiedcapacity of an existing
refinery property, inrefinery by 5%;
the taxable year inremaining 50% is
which the refinery isdepreciated; must be
placed in service placed in service before
January 1, 2012
incentives for small$2.10 credit per barrelcredit limited to 25% - < 50

refiners to complyof low-sulfur diesel,of capital costs;
with EPA sulfurplus expensing of 75%expensing phases out
regulationsof capital costsfor refining capacity of
barrels per day.

CategoryProvisionMajor LimitationsEffects
Tax Credits forIRC §43 provides for aThe EOR credit is non- 200
Enhanced Oil15% income tax creditrefundable, and is
Recovery Costsfor the costs ofallowable provided that
(EOR)recovering domesticthe average wellhead
oil by qualifiedprice of crude oil
“enhanced-oil-(using West Texas
recovery” (EOR)Intermediate as the
methods, to extract oilreference), in the year
that is too viscous tobefore credit is
be extracted byclaimed, is below the
conventional primarystatutorily established
and secondary water-threshold price of $28
flooding techniques.(as adjusted for
inflation since 1990),
in the year the credit is
claimed. With average
wellhead oil prices for
2005 (about $65) well
above the reference
price (about $38) the
EOR credit was not
MarginalA $3 tax credit isThe credit phases out0
Production Taxprovided per barrel ofas oil prices rise from
Creditoil ($0.50 per$15 to $18 per barrel
thousand cubic feet(and as gas prices rise
(mcf)) of gas fromfrom $1.67 to
marginal wells, and$2.00/thousand cubic
for heavy oil.feet), adjusted for
inflation. The credit is
limited to 25 bpd or
equivalent amount of
gas and to 1,095 barrels
per year or equivalent.
Credit may be carried
back up to 5 years. At

2005 oil and gas prices,

the marginal
production tax credit
was not available.
nuclearliberalizes taxin general, the IRS sets- 600

decommissioningdeductiblelimits on the annual
contributions to a fundamounts made to a
in advance of actualnuclear
decommissioningdecommissioning fund

CategoryProvisionMajor LimitationsEffects
electric utilitiesallows net-operatingonly 20% of the NOLs- < 50
losses (NOLs) to bein
carried back 5 years,2003-2005 qualify
as compared with 2
years for all other
disposition ofcapital gainproceeds must be- < 50
electricityrecognized evenlyreinvested in other
transmissionover 8 yearselectricity generating
property toassets
implement FERC
tax credit for1.8¢/kWh tax creditlimited to 6,000- < 50
advanced nuclearmegawatts of aggregate
power facilitiescapacity; each
taxpayer’s credit also
has a per kWh or
power limitation and an
aggregate limitation
credit for clean-coal20% for integratedeach system has- 100
technologiesgasification combinedmaximum aggregate
cycle (IGCC) systems;dollar limits
15% for other
advanced coal
Targeted Taxes
black-lung coal$1.25/ton forcoal tax not to exceed900
excise taxes andunderground coal4.4% of sales price
abandoned($0.90 for surface(2.2% for the AML
minelandcoal) fee)
reclamation (AML)
oil spill liability$0.05/barrel tax onmoneys are allocated150
trust fund excise taxevery barrel of crudeinto a fund for cleaning
oil refinedup oil spills
Targeted Tax Subsidies
§29, production tax$6.40/bar. of oil or biogas, coal synfuels,- 4,500
credit($1.13/mcf of gas)coalbed methane, etc.
credits for fuel$0.51 blender’s creditfor biomass ethanol - 3,000
ethanol andplus $0.10/gal smallonly (e.g., from corn)
biodieselproducer credit
tax credit for clean-$30,000 tax credit forper location, per- < 50

fuel refuelingalternative fueltaxpayer (replaces a
propertyequipment deduction)

CategoryProvisionMajor LimitationsEffects
§45 credit for1.8¢/kWh. (0.9¢ inwind, closed-loop- 1,100
renewablesome cases;biomass, poultry
electricity$4.375/ton of refinedwaste, solar,
coal geothermal, etc.
alternative fuel$400-$40,000 credittax credit is function of - 300
motor vehiclefor each fuel cell,vehicle weight, fuel
(AFV) tax creditshybrid, lean burn andeconomy, and lifetime
other AFVsfuel savings
exclusion of interestinterest incomefor hydroelectric or- 100
on state and localexempt from taxbiomass facilities used
bondsto produce electricity
credits for biodiesel$0.50/gal. of recycled sold at retail or used in - 122
biodiesel; $1.00/gal.a trade or business;
for virgin biodieselapplies to oils from
vegetables or animal
credit for business10% investment taxutilities excluded - < 100
solar andcredit for businesses
tax credit forcredit equals the creditproceeds must be used- < 50
renewable energyrate times by thefor renewable
bondsbond’s face amountelectricity projects.
national limit of $1.2
billion in bonds
Targeted Subsidies
mass transitexclusion of- 192
subsidies $105/month
manufacturer’smax credit is $50 foramount of credit- 100
credit for energydishwashers, $175 fordepends on energy
efficient appliancesrefrigerators, and $200efficiency, energy
for clothes washerssavings, and varies by
year; total annual credit
is also limited
deduction for thetax deduction of costtotal deductions cannot- < 50
cost of energyof envelopeexceed $1.80/sq.ft.
efficient property incomponents, heating
commercialcooling systems, and
buildings lighting
credit for energy10% tax creditmax credit on windows- 300

efficiency($500/home) on up tois $200
improvements to$5,000 of costs; $50-
existing homes$300 credit for other

CategoryProvisionMajor LimitationsEffects
exclusion for utilitysubsidies not taxableany energy - < 50
conservationas incomeconservation measure
Targeted Taxes
fuels taxes18.4¢/gal. on gasoline 4.4¢-24.4¢ for other35,000
gas-guzzler tax$1,000-$7,700/trucks and SUVs are 201
(FY2006)vehicle weighingexempt
6,000 lbs. or less
Source: Joint Tax Committee estimates and Internal Revenue Service data.
Notes: A negative sign indicates a tax subsidy or incentive; no negative sign indicates an energy tax.
NA denotes not available.
a. The revenue loss estimate excludes the benefit of expensing costs of dry tracts and dry holes, which
includes expensing some things that would otherwise be capitalized. This is a normal feature
of the tax code but confers special benefits on an industry where the cost of finding producing
wells includes spending money on a lot that turn out dry. This is probably more important than
IDCs or percentage depletion.