Energy Tax Policy: Issues in the 114th Congress
Released: 2016-06-15T00:00:00

Introduction

Energy tax policy involves the use of one of the government's main fiscal instruments, taxes (both as an incentive and as a disincentive) to alter the allocation or configuration of energy resources and their use. In theory, energy taxes and subsidies, like tax policy instruments in general, are intended either to correct a problem or distortion in the energy markets or to achieve some economic (efficiency, equity, or macroeconomic) objective. In practice, however, energy tax policy in the United States is made in a political setting, determined by fiscal dictates and the views and interests of the key players in this setting, including policymakers, special interest groups, and academic scholars. As a result, enacted tax policy embodies compromises between economic and political goals, which could either mitigate or compound existing distortions.

U.S energy tax policy as it presently stands aims to address concerns regarding the environment as well as those surrounding energy security. Incentives promoting renewable energy production, energy efficiency and conservation, and alternative technology vehicles address both environmental and energy security concerns. Tax incentives for the domestic production of fossil fuels also promote energy security by attempting to reduce the nation's reliance on imported energy sources.

The idea of applying tax policy instruments to energy markets is not new. Until the 1970s, however, energy tax policy had been little used, except to promote domestic fossil fuel production. Recurrent energy-related problems since the 1970s—oil embargoes, oil price and supply shocks, wide petroleum price variations and price spikes, large geographical price disparities, tight energy supplies, and rising oil import dependence, as well as increased concern for the environment—have caused policymakers to look toward energy taxes and subsidies with greater frequency. The direction of U.S. energy tax policy has changed several times since the 1970s.

During the 114 th Congress, energy tax policy appears to be designed to encourage energy efficiency and renewable energy production while continuing to promote U.S. energy security. Several expired energy tax incentives were extended through 2016 as part of the Consolidated Appropriations Act, 2016 ( P.L. 114-113 ). Tax incentives for wind and solar were given longer-term extensions coupled with phaseouts. Absent further legislative action in the 114 th Congress, several energy-related tax provisions will expire at the end of 2016.

The President's FY2017 budget proposed a number of changes to energy tax policy. Specifically, the Obama Administration has proposed repealing a number of existing tax incentives for fossil fuels, while providing new or expanded incentives for carbon sequestration, alternative and advanced technology vehicles, renewable electricity, energy efficiency, and advanced energy manufacturing. Similar proposals appeared in past Obama Administration budgets. The FY2017 budget also proposes imposing a per-barrel fee on oil.

The economic rationale for interventions in energy markets helps inform the debate surrounding energy tax policy. This report begins by providing background on the economic rationale for energy market interventions, highlighting various market failures. After identifying possible market failures in the production and consumption of energy, possible interventions are discussed. The report concludes with an analysis of the current status of energy tax policy.

The Appendix of this report provides a brief summary of energy tax legislation from the 108 th through 113 th Congresses that has shaped current energy tax policy.

Policy Intervention in Energy Markets

The primary goal of taxes in the U.S. economy is to raise revenues. There are times, however, when tax policy can be used to achieve other goals. These include the use of tax policy as an economic stimulus or to achieve social objectives. Tax policy can also be used to correct for market failures (for example, the under- or over-supply of a good), which without intervention result in market inefficiencies. There are a number of market failures surrounding the production and consumption of energy. Tax policy, as it relates to energy, can be used to address these market failures.

Rationale for Intervention in Energy Markets3

There are a variety of circumstances in which government intervention in energy markets may improve market outcomes. Generally, government intervention has the potential to improve market outcomes when there are likely to be market failures. Externalities represent one of the most important market failures in energy's production and consumption. Market failures in energy markets also arise from principal-agent problems and information failures. Concerns regarding national security are used as a rationale for intervention in energy markets as well.

Externalities

An externality is a spillover from an economic transaction to a third party, one not directly involved in the transaction itself. Externalities are often present in energy markets as both the production and consumption of energy often involve external costs (or benefits) not taken into account by those involved in the energy-related transaction. Instead, these externalities are imposed on an unaffiliated third party. The market mechanism will likely lead to an economically inefficient level of production or consumption when externalities are present.

When externalities are present, markets fail to establish energy prices equal to the full cost to society of supplying the good. The result is a system where price signals are inaccurate, such that the socially optimal level of output, or allocative efficiency, is not achieved. Economic theory suggests that a tax be imposed on activities associated with external costs, while activities associated with external benefits be subsidized—in order to equate the social and private marginal costs. These taxes or subsidies are intended to provide a more efficient allocation of resources.

Many energy production and consumption activities result in negative externalities, perhaps the most recognized being environmental damage. Air pollution results from mining activities as well as from the transportation, refining, and industrial and consumer use of oil, gas, and coal. Industrial activity can also produce effluents that contaminate water supplies and lead to other damages to the land. These environmental damages can lead to lung damage and a variety of other health problems. The use of fossil fuels, both in the production of energy (e.g., coal-fired power plants) and at the consumer level (e.g., using gasoline to power automobiles), and the associated greenhouse gas emissions are widely claimed to have contributed to global climate change.

There may also be market failures associated with external benefits stemming from the process of learning-by-doing. Learning-by-doing refers to the tendency for production costs to decline with experience. As firms become more experienced in the manufacturing and use of energy-efficient technologies their knowledge may spill over to other firms without compensation. In energy markets, early adopters of energy-efficient technologies and practices may not be fully compensated for the value of the knowledge they generate.

Principal-Agent and Informational Inefficiencies

Market failures in energy use may also arise due to the principal-agent problem. Generally, the principal-agent problem exists when one party, the agent, undertakes activities on the behalf of another party, the principal. When the incentives of the agent differ from those of the principal, the agent's activities are not undertaken in a way that is consistent with the principal's best interest. The result is an inefficient outcome. In energy markets, the principal-agent problem commonly arises when one party is responsible for making equipment purchasing choices while another party is responsible for paying the energy costs, which are related to the efficiency level of the purchased equipment.

For residential rental properties, the incentives for the landlords and tenants surrounding the adoption of energy-savings practices are often not aligned, demonstrating the principal-agent problem. Landlords will tend to under-invest in energy-saving technologies for rental housing when the benefits from such investments accrue to tenants (i.e., tenants are responsible for paying their own utilities) and the landlord does not believe the costs of installing energy-saving devices can be recouped via higher rents. Tenants do not have an incentive to invest in energy-savings technologies in rental units when their expected tenure in a specific property is relatively short, and they will not have enough time to reap the full benefits of the energy-conserving investments. There is also evidence that when utilities are included in the rent, tenants do not engage in energy-conserving behaviors. On the other hand, when tenants pay utilities on their own, energy-saving practices are more frequently adopted. The implication is that inefficient energy use by tenants in apartments where utilities are included as part of the rent would offset energy-saving investments made by landlords; consequently, landlords under-invest in energy efficiency. In general, the under-investment in energy conservation measures in rental housing provides economic rationale for intervention.

In another example, the incentives of homebuilders and homebuyers may not be aligned. Consequently, the principal-agent problem may result in an inefficient utilization of energy-efficient products in newly constructed homes. Homebuilders may have an incentive to install relatively low-efficiency products to keep the cost of construction down, if they do not believe that the cost of installing energy-efficient products will be recovered upon sale of the property. The value of installing energy-efficient devices may not be recoverable, if builders are not able to effectively communicate the value of energy-efficient devices once installed. Further, since homebuilders are not able to observe the energy use level of prospective buyers they may not be able to choose the products that best match the use patterns of the ultimate energy consumer. The result may be less energy efficiency in new homes.

There are also informational problems that may lead to underinvestment in energy-efficient technologies. For example, homeowners may not know the precise payback or rate of return of a specific energy-efficient device. This may explain the so-called "energy paradox"—the empirical observation that consumers require an abnormally high rate of return to undertake energy-efficiency investments.

National Security

Preserving national security is another often-cited rationale for intervention in energy markets. However, in recent years, the proportion of petroleum consumed in the United States imported from foreign countries has declined. In 2015, about 24% of petroleum consumed in the United States was imported, the lowest level since 1970.

There are potentially a number of external costs associated with petroleum importation, especially when imported from unstable countries and regions. First, a high level of reliance on imported oil may contribute to a weakened system of national defense or contribute to military vulnerability in the event of an oil embargo or other supply disruption. Second, there are costs to allocating more resources to national defense than necessary when relying on high levels of imported oil. Specifically, there is an opportunity cost associated with resources allocated to national defense, as such resources are not available for other domestic policy initiatives and programs. To the extent that petroleum importers fail to take these external costs into account, there is market failure.

In addition, the economic well-being and economic security of the nation depends on having stable energy sources. There are economic costs associated with unstable energy supplies. Specifically, increasing unemployment and inflation may follow oil price spikes.

Potential Interventions in Energy Markets

When there are negative externalities associated with an activity, correcting the economic distortion with a tax, if done correctly, can improve economic efficiency. While such taxes are theoretically desirable, historically, such taxes have been politically unpopular. Conversely, when there are positive externalities associated with an activity, a subsidy can improve economic efficiency. The tax (subsidy) should be set equal to the monetary value of the damages (benefits) to third parties imposed by the activity. The tax serves to increase the price of the activity, and reduce the equilibrium quantity of the activity, while a subsidy reduces the price, increasing the equilibrium quantity of the activity.

The production and consumption of fossil fuel energy can have negative externalities via detrimental environmental impacts. While multiple policy options to address this externality exist, economists tend to favor an emissions tax to address this externality because of such a tax's efficiency advantage. In the late 2000s, proponents of greenhouse gas controls favored a cap and trade policy, as proposed in House-passed American Clean Energy and Security Act of 2009 ( H.R. 2454 ). The policy discussion, however, has shifted to focus on a carbon tax or emissions fee approach.

An alternative approach to reducing the use of fossil fuels has been to subsidize energy production from alternative energy sources. There are concerns, however, that using subsidies to stimulate demand for alternative fuels, as an alternative to fossil fuels, may not be economically efficient. First, subsidies reduce the average cost of energy, and as the average cost of energy falls, the quantity of energy demanded increases, countering energy conservation initiatives. Second, while the subsidy is intended to enhance economic efficiency, subsidies may be inefficient to the extent they are funded with distortionary taxes. Hence, the more economically efficient alternative may be to place a tax on the undesirable activity.

Other energy-related activities may have positive externalities. There is the potential for learning-by-doing from early adopters of energy-efficient technologies, indicating that there may be positive external effects associated with these activities. For this reason, subsidies given to early adopters may enhance economic efficiency. Further, positive externalities are associated with R&D activities that lead directly to technological innovations. In addition to budgeted spending on R&D, the tax code provides incentives for firms to engage in energy R&D (for example, the energy research credit [Internal Revenue Code (IRC) §41]).

When principal-agent problems lead to a market failure, economically efficient corrective measures would be those that increase the equilibrium quantity of the underprovided good. The market for energy efficient technologies is one example of this type of market failure. Currently, a taxpayer's gross income excludes any subsidy provided by a public utility to a consumer for the purchase or installation of energy-saving devices (see IRC §136). This exclusion subsidizes energy-efficient devices. This exclusion does not specifically target the inefficiency in rental housing created by the principal-agent problem, since the exclusion applies to both owner- and non-owner-occupied property. Nonetheless, the exclusion may serve to ameliorate some of the market failure in the provision of energy-efficiency for rental property.

There are also various options for market intervention to address the informational problem associated with energy consumption and energy-efficient technologies. One option would be an information-based solution, such as energy-efficiency labeling and education and awareness campaigns. Alternatively, a tax-incentive-based approach—such as a credit or deduction for the purchase of energy-efficient devices—could be used to address the market inefficiency. Given that this market failure is an informational problem, it might be more efficient to pursue information-based solutions (such as energy-efficiency labeling like the U.S. Environmental Protection Agency and Department of Energy's Energy Star program).

Finally, there are questions regarding the most efficient and effective mode of intervention to address the negative external costs, specifically national and economic security concerns, associated with the consumption of imported oil. One option would be to impose a tax to correct the distortion. There are two problems with imposing such a tax. First, a tax on imported oil is likely to violate trade agreements. This has led policymakers to pursue policies that subsidize domestic petroleum production. The second problem is that oil is a commodity priced on world markets. The United States producing oil for its own use does not necessarily insulate consumers from global fluctuations in oil prices. Additionally, to the extent that oil price fluctuations impact export prices in other parts of the world, such as Europe and China, the United States is still likely to experience economic impacts from oil price fluctuations.

Taxes as a User Charge

Energy taxes may be employed as user charges for a public good or a quasi-public good. In the United States, non-toll highways and highway infrastructure have the public good property of non-excludability. Highways are not likely to be provided by the market because public goods and quasi-public goods are susceptible to the free-rider problem. If the private market fails to provide a public good, like highways, then government intervention via provision of highways can enhance economic efficiency. The federal excise tax on gasoline is often viewed as a user fee for the federal highway system. For the tax to be efficient and equitable, it would charge individuals in proportion to their benefit from the public good (the highway system). In practice, gas taxes do not reflect the cost to the user but instead depend on the fuel efficiency of a specific vehicle. Furthermore, some of the revenues collected from the federal gas tax serve to subsidize public transportation, undermining the view of the federal gas tax as a highway user fee.

Current Status of U.S. Energy Tax Policy26

Current U.S. energy tax policy is a combination of long-standing provisions and relatively new incentives. Energy-related tax incentives also support both energy production and consumption. Provisions supporting the oil and gas sector reflect desires for domestic energy production and energy security, long-standing cornerstones of U.S. energy policy. Incentives for renewable energy reflect the desire to have a diverse energy supply, also consistent with a desire for domestic energy security. Incentives for energy efficiency are designed to reduce consumption of energy from all energy sources. Incentives for renewable energy, energy efficiency, and alternative technology vehicles reflect environmental concerns related to the production and consumption of energy using fossil-based resources. Table 1 contains a current list of energy-related tax expenditures and other energy tax provisions.

Fossil Fuels

There are a number of tax incentives currently available for energy production using fossil fuels. They can be broadly categorized as (1) enhancing capital cost recovery; (2) subsidizing extraction of high-cost fossil fuels; or (3) encouraging investment in non-petroleum or cleaner fossil fuel energy options. Certain incentives are designed to support coal, while others tend to support the oil and gas sector. The fossil fuels related incentives listed in Table 1 are estimated to reduce federal tax revenues by $21.5 billion between 2015 and 2019.

Among the capital cost subsidies, the allowance of the percentage depletion method is estimated to cost $8.8 billion between 2015 and 2019. Under percentage depletion, a deduction equal to a fixed percentage of the revenue from the sale of a mineral is allowed. Total lifetime deductions, using this method, typically exceed the capital invested in the project. To the extent that percentage depletion deductions exceed project investment, percentage depletion becomes a production subsidy, instead of an investment subsidy. In other words, taxpayers may be able to claim allowances that reduce tax liability even after the cost of investment is fully recovered. Other capital cost recovery provisions include expensing of intangible drilling costs related to exploration and development and a decrease in the amortization period for certain geological and geophysical (G&G) expenditures. The expensing of exploration and development costs is estimated to cost the federal government $7.5 billion in revenue losses over the 2015 through 2019 budget window, while the reduced amortization period for G&G expenditures is estimated to cost $0.7 billion over the same time period.

Compared to capital cost recovery provisions, tax expenditures intended to offset high extraction costs are small. These provisions do not appear in Table 1 as they fall below the de minimis threshold. In recent years, credits for enhanced oil recovery and oil and gas production from marginal wells were phased out due to high oil prices. In 2015, the enhanced oil recovery credit was fully phased out, as the reference price for oil ($87.39, based on 2014 prices) exceeded the phaseout threshold amount ($28, adjusted for inflation, or $45.49) by $41.90. The phaseout for the marginal wells credit begins once the price of oil exceeds $18 (the $18 amount is adjusted for inflation after 2005). It is possible, however, if oil prices remain low, that these incentives could become available. The expensing allowance for tertiary injectants is also estimated to cost less than $50 million over the 2015 through 2019 budget window.

There are also coal-specific energy tax provisions. These include certain coal production credits, as well as tax credits to support the development of clean coal facilities. The tax credits for investing in clean coal facilities are estimated to cost $1.0 billion over the 2015 through 2019 budget window. There are also provisions that provide for 5-year amortization for investments in pollution control facilities associated with certain coal-fired power plans. This provision has an estimated revenue cost of $1.7 billion between 2015 and 2019.

The credit for alternative fuels and alternative fuels mixtures is a 50-cent per gallon tax credit available to several fossil-based non-petroleum fuels. The credit is anticipated to have a revenue cost of $1.5 billion between 2015 and 2019, although that cost could increase if the credit is extended beyond its current 2016 expiration date.

Renewables

Several tax incentives subsidize the production of energy from renewable sources. While the specific incentives differ in design, they generally work to increase the after-tax return on an investment in renewable energy production by providing tax incentives on the condition of eligible investment or production. Between 2015 and 2019, the total cost of tax-related provisions supporting the production of renewable energy (tax expenditures and grants designed to replace tax expenditures) is estimated to be $50.7 billion. Of this total, $4.2 billion is for outlays under the Section 1603 grants in lieu of tax credits program. Thus, the cost of tax expenditure and excise tax incentives for renewables is estimated to be $46.5 billion between 2015 and 2019.

Historically, the primary tax incentive for renewable electricity has been the production tax credit (PTC). For wind, the PTC is available for projects that begin construction before the end of 2019, although the credit begins to phase out (the credit amount is reduced) after 2016. For other eligible technologies (e.g., biomass, geothermal, etc.) construction must begin by December 31, 2016, to qualify for the credit. The PTC is expected to reduce federal revenues by $19.9 billion between 2015 and 2019.

The energy credit, commonly referred to as the renewable energy investment tax credit (ITC), also supports investment in certain renewable energy technologies. The tax credit is 10% or 30%, depending on the technology. For most technologies, the credit is set to expire at the end of 2016, meaning to qualify property must be placed in service by December 31, 2016. There is a permanent 10% ITC for solar and geothermal. Additionally, the 30% tax credit for solar is available through 2019, with the credit rate phasing down between 2019 and 2021. The ITC is expected to reduce federal revenues by $10.0 billion between 2015 and 2019.

The American Recovery and Reinvestment Act (ARRA; P.L. 111-5 ) substantially modified renewable energy incentives, allowing projects eligible for the renewable PTC or ITC to, temporarily, claim a one-time grant in lieu of the tax credits. This grant was available for projects that were under construction before the end of 2011. Since grants will be paid out when facilities are placed in service, outlays will continue through 2017. Since the grant is paid once a project is completed, the cost of the grant program will be partially offset by reduced PTC claims over time (since the PTC is awarded during the first 10 years of production). Allowing investors to take a one-time grant instead of future tax credits was intended to address uncertainty renewable energy investors may have regarding their future tax positions.

Several other tax expenditures related to renewable energy have budgetary effects. The residential energy-efficient property credit provides a tax credit for the installation of renewable electricity generating property for a residential dwelling. For non-solar technologies, the credit is scheduled to expire at the end of 2016. For solar property, the credit is available through 2021, although the credit begins to phase out after the end of 2019. The residential energy-efficient property credit is expected to reduce federal revenues by $4.9 billion between 2015 and 2019.

Certain renewable energy property also benefits from accelerated depreciation. The five-year cost recovery for renewable energy property is a permanent part of the tax code, and is estimated to reduce federal revenues by $1.3 billion between 2015 and 2019.

Several income and excise tax credits are designed to support renewable fuels. Like other incentives for renewable energy, renewable fuels incentives are temporary. They are currently set to expire at the end of 2016. In recent years, biodiesel and renewable diesel and second generation biofuels, including cellulosic and algae-based biofuels, have qualified for tax credits. These credits are projected to cost $4.5 billion over the 2015 through 2019 budget window. Extending these incentives beyond 2016 will increase their cost.

ARRA also provided $2.3 billion in tax credits for advanced energy manufacturing. Most of these tax credits were allocated to projects in 2009, although $150 million was available for a second allocation round in 2013. The federal government is expected to realize revenue losses as investors that were awarded these tax credits make qualifying investments over time. Between 2015 through 2019, revenue losses associated with this provision are estimated to be $1.2 billion.

Energy Efficiency

Incentives for energy efficiency are designed to encourage owners of residential and commercial property to make energy-efficient upgrades. Between 2015 and 2019, the total cost of tax expenditures related to energy efficiency is estimated to be $3.1 billion.

The majority of revenue loss from tax expenditures related to energy conservation is attributable to three incentives for property owners to undertake energy-efficiency improvements on existing buildings. Certain residential energy-efficiency improvements made before the end of 2016 may qualify for a 10% tax credit of up to $500. Energy-efficient improvements for commercial property, including upgrades to a building's envelope, heating and cooling, or lighting system, are eligible for a tax deduction, limited to $1.80 per square foot. Incentives for both residential and commercial energy efficiency expired at the end of 2016. The exclusion from income of subsidies provided by utility companies to energy consumers undertaking energy-efficiency upgrades increases the value of such subsidies, encouraging individuals to undertake such improvements. Taken together, these three incentives for building energy efficiency are projected to cost $2.2 billion between 2015 and 2019. Extending these tax incentives for residential and commercial energy efficiency will increase their projected revenue costs.

Manufacturers of energy-efficient new homes may also be eligible for a tax incentive. The incentive is also scheduled to expire at the end of 2016. The cost of this incentive between 2015 and 2019 is estimated to be $0.6 billion, but would increase should the provision be extended.

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

Alternative Technology Vehicles

Currently, the primary tax incentive for alternative technology vehicles is the up to $7,500 tax credit for plug-in electric vehicles. The credit will begin to phase out for each manufacturer once 200,000 qualifying vehicles have been sold. In addition, since 2006, the tax code has at times provided incentives for other alternative technology vehicles. Vehicles eligible for tax incentives have included qualified fuel cell vehicles, hybrid vehicles, advanced lean burn technology vehicles, and alternative fuel vehicles, with credit amounts varying by the specific technology and vehicle type. The tax credit for hybrid vehicles, advanced lean burn technology vehicles, and other alternative fuel vehicles expired at the end of 2010. The tax credits for qualified fuel cell vehicles and two-wheeled electric drive vehicles are scheduled to expire at the end of 2016. Through the end of 2016, taxpayers installing alternative fuel refueling property may also qualify for a tax credit.

Other Provisions

There are a number of other energy tax provisions that arguably do not fall under the fossil fuels, renewable energy, energy efficiency, or alternative technology vehicles categories. The largest of these incentives, in terms of revenue cost, is the special tax treatment for energy-related publicly traded partnerships, costing an estimated $5.9 billion between 2015 and 2019. Special depreciation periods for certain energy property, other than renewable energy property, are estimated to cost $2.8 billion between 2015 and 2019. Excluding interest from private activity bonds related to energy production is estimated to cost $0.1 billion between 2015 and 2019. The deferral of gains from the sale of electric transmission property associated with a Federal Energy Regulatory Commission (FERC) restructuring policy is estimated to cost $0.2 billion between 2015 and 2019.

Energy Tax Issues in the 114th Congress

Several expired energy tax incentives were extended as part of the Consolidated Appropriations Act, 2016 ( P.L. 114-113 ). Most energy-related provisions were extended for two years, through the end of 2016. Incentives for wind and solar were given longer-term extensions, with credits scheduled to phase out over a multi-year period in the future. One issue is whether energy-related tax incentives currently scheduled to expire at the end of 2016 will be further extended. This question has been of particular interest with respect to the PTC and ITC, where wind and solar were awarded longer-term extensions, while other technologies face a 2016 expiration.

Recent Obama Administration budget proposals have included a number of energy tax policy changes, which may or may not be considered by Congress. The President's FY2017 budget's energy-tax proposals are summarized below.

Expiring Energy Tax Provisions

Several energy-related tax provisions are scheduled to expire at the end of 2016. Many of the provisions scheduled to expire at the end of 2016 had expired at the end of 2014, before being retroactively extended for two years, through 2016, by the Protecting Americans from Tax Hikes (PATH) Act of 2015. The PATH Act was enacted as Division Q of the Consolidated Appropriations Act, 2016 ( P.L. 114-113 ). Table 2 lists the energy-related tax provisions scheduled to expire at the end of 2016, notes whether the provision was extended in the PATH Act, and the cost of that extension. Note that the PATH Act extended all expired energy tax provisions. Thus, certain energy-related tax provisions scheduled to expire in 2016 had not expired in 2014. These provisions are noted in Table 2 as provisions that were not extended by the PATH Act.

There were a number of other energy tax policy changes in P.L. 114-113 . Specifically, Division P of the law provided longer-term extensions with scheduled phaseouts of tax credits for wind and solar. Specifically, the renewable electricity PTC was extended through 2019, with the phaseout starting for facilities beginning construction in 2017. The 30% ITC for business solar was extended through 2019 and the deadline changed from a placed-in-service deadline to a construction start date. The business solar ITC was set to be 26% for facilities beginning construction in 2020, and 22% for facilities beginning construction in 2021, so long as these facilities are placed in service before the end of 2023. The business solar ITC is scheduled to return to 10% in 2022. The tax credit for residential solar was extended through 2021, with a phaseout starting in 2020.

The President's FY2017 Budget Proposal

The President's FY2017 budget contained a number of energy-tax related proposals (see Table 3 ). Specifically, the budget proposed to provide $41.5 billion in new or extended energy tax incentives between 2016 and 2026. Nearly half of this cost is attributable to a permanent extension of the renewable PTC and ITC, at a cost of $19.8 billion. Additionally, the President's budget proposed new tax credits for carbon sequestration, advanced technology and alternative fuel vehicles, and advanced energy manufacturing, and incentives for biofuels and energy-efficient buildings.

Similar to previous years, the President's FY2017 budget proposed eliminating certain tax incentives that support fossil fuels, while also raising and adding new taxes on fossil fuels (see Table 3 ). Eliminating certain provisions for oil, natural gas, and coal would raise an estimated $41.2 billion between 2016 and 2026.

The President's FY2017 budget proposed to raise revenues to "support critical infrastructure and climate resiliency needs" through a new per-barrel fee on crude oil. This fee would equal $10.25 per barrel, adjusted for inflation from 2016, and be phased in over a five-year period beginning October 1, 2016. The fee would apply to domestically produced and imported petroleum products, but not to exported petroleum products. Home heating oil would also be temporarily exempt. The fee would raise an estimated $273.4 billion between 2016 and 2026. Under the proposal, revenue from the fee would be used to fund infrastructure and transportation system upgrades, invest in cleaner transportation technologies, and to provide relief for households with "particularly heavy energy costs."

The President's FY2017 budget also proposed to modify several other environmental taxes. Specifically, the budget proposed to (1) increase the Oil Spill Liability Trust Fund (OSLTF) excise tax by one cent and expand the scope of the tax to include crudes produced from bituminous deposits and kerogen-rich rock; (2) reinstate and extend the Superfund excise taxes, including a 9.7-cents-per-barrel excise tax on domestic crude oil and imported petroleum products and a tax on hazardous chemicals and imported materials used in the manufacture of hazardous chemicals, at a rate ranging from 22 cents to $4.87 per ton; and (3) reinstate the corporate environmental income tax, which would levy a 0.12% income tax on the amount by which corporate modified alternative minimum taxable income exceeds $2 million. JCT estimates that the proposed modifications to the OSLTF excise tax would raise $1.2 billion between 2016 and 2026, with the Superfund excise tax proposals raising $6.2 billion and the Superfund environmental income tax raising $14.8 billion over the same budget window.

Also included in the President's FY2017 budget proposal were several provisions that would affect the energy sector, but are not targeted specifically to energy. For example, the President's FY2017 budget proposed to repeal last-in, first-out (LIFO) inventory accounting methods. Repealing LIFO would increase tax liability for firms holding inventories that are expected to increase in value over time (e.g., oil). The President's FY2017 budget would also have modified the tax treatment of dual-capacity taxpayers, a proposal that would affect oil and gas companies operating abroad. These provisions are not listed in Table 3 .

Selected Energy Tax Legislation and Proposals50

Enacted Legislation in the 114th Congress

As discussed above, the Protecting Americans from Tax Hikes (PATH) Act of 2015, enacted as Division Q of the Consolidated Appropriations Act, 2016 ( P.L. 114-113 ), extended energy tax provisions that had expired at the end of 2014, for two years, through 2016.

Separately, Division P of P.L. 114-113 provided a longer-term extension for wind and solar tax credits, with those tax credits scheduled to phase out (the credit amounts gradually reduced) over time. Division P of P.L. 114-113 also temporarily modified the Section 199 deduction for independent refiners. These tax policy changes were enacted alongside provisions that removed crude oil export restrictions.

The 114 th Congress also passed legislation reauthorizing current law tax rates on motor fuels, which fund the Highway Trust Fund (HTF) and Leaking Underground Storage Tank (LUST) trust fund (the Fixing America's Surface Transportation [FAST] Act [ P.L. 114-94 ]). In addition to extending current law, the FAST Act changed the way excise taxes are levied on liquefied natural gas (LNG), liquefied petroleum gas (propane), and compressed natural gas (CNG). Specifically, the legislation specifi ed that excise taxes on these fuels be levied on an "energy equivalent" as opposed to per gallon basis.

Energy Tax Proposals in the 114th Congress

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

Taxes or Fees on Carbon Emissions53

On June 10, 2016, the House passed H.Con.Res. 89 , expressing the sense of Congress that a carbon tax would be detrimental to the United States economy. Earlier in the 114 th Congress, S.Con.Res. 1 was introduced to express the sense of Congress that a carbon tax is not in the economic interest of the United States. S.Amdt. 350 to S.Con.Res. 11 , proposed and withdrawn on March 25, 2015, would have created a point of order against carbon tax or carbon fee legislation. Similar resolutions were introduced in the 113 th Congress, as was legislation that sought to prohibit the Secretary of the Treasury or the Environmental Protection Agency from implementing a carbon tax (see H.R. 1486 in the 113 th Congress).

Legislation has been introduced in both the House and Senate that would impose a tax or fee on carbon or greenhouse gas emissions. In the House, H.R. 309 would impose a tax on CO 2 emissions from highway fuels, with the idea that the tax on emissions would replace the current federal excise tax on fuels. Other legislation ( H.R. 972 ) would require emissions permits be purchased from the Treasury, and impose a tax on persons failing to obtain such permits. H.R. 1027 would take a "cap and dividend" approach to requiring emissions permits. H.R. 2202 proposes an excise tax on greenhouse gas emissions, while H.R. 3104 proposes an excise tax on any taxable carbon substance. The American Opportunity Carbon Fee Act of 2015 ( S. 1548 ) would assess fees on major sources of greenhouse gas emissions.

Other

Legislation in the 114 th Congress proposes repealing various energy tax incentives, using revenues to reduce the corporate tax rate (see the Energy Freedom and Economic Prosperity Act [ H.R. 1001 ]). Legislation has also been proposed that would repeal a subset of energy tax expenditures, specifically those available to certain oil and gas companies (e.g., the Close Big Oil Tax Loopholes Act, S. 1907 ). In the House, similar provisions have also been included in legislation that would repeal the excise tax on medical devices ( H.R. 1533 ). Other legislation has proposed repealing certain tax incentives for oil and gas while either temporarily extending ( H.R. 4040 ) or making permanent incentives for renewables ( H.R. 3733 ).

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

Appendix. Energy Tax Legislation in Past Congresses

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

Enacted Legislation in the 108 th and 109 th Congresses

The Working Families Tax Relief Act of 2004 ( P.L. 108-311 )

Several energy tax incentives were extended as part of the Working Families Tax Relief Act of 2004, a $146 billion package of middle class and business tax breaks. This legislation, which was signed into law on October 4, 2004, retroactively extended four energy tax subsidies: the Section 45 renewable energy production tax credit, suspension of the 100% net income limitation for the oil and gas percentage depletion allowance, the $4,000 tax credit for electric vehicles, and the deduction for clean fuel vehicles (which ranges from $2,000 to $50,000). The Section 45 tax credit and the suspension of the 100% net income limitation had each expired on January 1, 2004, but were retroactively extended through December 31, 2005. The electric vehicle credit and the clean-vehicle income tax deduction were in the process of being phased out (phaseout had begun on January 1, 2004). The Working Families Tax Relief Act of 2004 suspended the phaseout—providing 100% of the tax breaks—through 2005. The tax breaks were resumed beginning on January 1, 2006, when only 25% of the tax break was available.

The American Jobs Creation Act of 2004 ( P.L. 108-357 )

The American Jobs Creation Act of 2004 was enacted on October 22, 2004. It included about $5 billion in energy tax incentives primarily targeted at renewable energy as well as alcohol and biofuels. In particular, the act created the production tax credit, eliminated reduced tax rates for most blended alcohol fuels, established the biodiesel fuel and small refiner tax credits, and allowed a credit for oil and gas produced from marginal wells.

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

The Energy Policy Act of 2005 was enacted on August 8, 2005. It included an estimated $9 billion, over five years, in tax incentives distributed among renewable energy, conservation, and traditional energy sources. Among the larger provisions of the act, in revenue cost terms, were the enactment of several alternative technology vehicle credits, enactment of three investment credits for clean coal, and the extension of the production tax credit.

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

The Tax Increase Prevention and Reconciliation Act ( P.L. 109-222 ) was enacted May 17, 2006. It reduced the value of the subsidy by raising the amortization period from two years to five years, still faster than the capitalization treatment before the 2005 act, but slower than the treatment under that act. The higher amortization period applies only to the major integrated oil companies—independent (unintegrated) oil companies may continue to amortize all geological and geophysical (G&G) costs over two years—and it applies to abandoned as well as successful properties. This change increased taxes on major integrated oil companies by an estimated $189 million over 10 years, effectively rescinding about 20% of the nearly $1.1 billion 11-year tax for oil and gas production under the Energy Policy Act of 2005.

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

At the end of 2006, the 109 th Congress enacted a tax extenders package that included extension of numerous renewable energy and excise tax provisions. Many of the renewable energy provisions in this bill had already been extended under the Energy Policy Act of 2005 and were not set to expire until the end of 2007 or later. The Tax Relief and Health Care Act of 2006 provided for one-year extensions of these provisions.

Enacted Legislation in the 110 th and 111 th Congresses

Energy tax policy in the 110 th Congress represented a shift towards increased tax burden (via the removal of subsidies) on the oil and gas industry while also emphasizing energy conservation and alternative and renewable fuels, as opposed to conventional hydrocarbons. This policy direction appeared to be the result of high crude oil and petroleum product prices and oil and gas industry profits, along with the political realignment of the Congress after the 2006 congressional elections. The shift was manifested by proposals to reduce oil and gas production incentives or subsidies, which were initially incorporated into, but ultimately dropped from comprehensive energy policy legislation. Later in the 110 th Congress, enacted legislation focused on increasing incentives for renewable energy production, rather than reducing tax incentives available to the oil and gas industries. The fact that tax incentives for oil and gas were left in place is in part a reflection of the deteriorating business climate during 2008.

Energy tax legislation in the 111 th Congress continued to provide additional support for renewables and energy efficiency. As was the case in previous Congresses, much of the energy tax legislation enacted during the 111 th Congress extended expired or expiring energy-related tax incentives. The American Recovery and Reinvestment Act (ARRA; P.L. 111-5 ) introduced new incentives for renewable energy and advanced energy manufacturing, while providing enhanced incentives for residential energy efficiency. The 111 th Congress also eliminated the "black liquor loophole."

Energy Independence and Security Act of 2007 ( P.L. 110-140 )

The Energy Independence and Security Act of 2007 ( P.L. 110-140 ; H.R. 6 ) contained a number of provisions designed to increase energy efficiency and the availability of renewable energy. Specifically, the act increased the target fuel efficiency for combined fleets of cars and light trucks, increased renewable fuel standards, and increased a number of energy-efficiency standards for household and commercial appliance equipment.

Energy Tax Provisions in the Food, Conservation, and Energy Act of 2008 ( P.L. 110-234 )

The Food, Conservation, and Energy Act of 2008 ( P.L. 110-234 ), otherwise referred to as the 2008 Farm Bill, contained two energy tax provisions. The first provision promotes cellulosic biofuels through a production credit of $1.01 per gallon, which applies to fuels produced from qualifying cellulosic feedstocks. The second provision, the ethanol blender's tax credit (which applies to both domestic and foreign sourced ethanol), was reduced from $0.51 per gallon to $0.45 per gallon.

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

The Emergency Economic Stabilization Act of 2008 ( P.L. 110-343 ), included $17 billion in energy tax incentives. These provisions were primarily extensions of existing provisions (extenders), but also including several new energy tax incentives. The new provisions included $10.9 billion in renewable energy tax incentives aimed at clean energy production, $2.6 billion in incentives targeted toward cleaner vehicles and fuels, and $3.5 billion in tax breaks to promote energy conservation and energy efficiency. The cost of the energy tax extenders legislation in the Emergency Economic Stabilization Act of 2008 was fully financed, or paid for, by raising taxes on the oil and gas industry (mostly by reducing oil and gas tax breaks) and by other tax increases.

The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 )

ARRA modified incentives for renewable energy production, energy conservation, alternative technology vehicles, as well as a number of other energy tax incentives. Collectively, ARRA's energy tax provisions lowered the cost of selected renewable energy relative to energy from other sources, such as oil and gas. Provisions enacted under ARRA extended and expanded a number of incentives for investment in renewable energy. The renewable energy production tax credit (PTC) was extended through 2012 for wind and 2013 for other eligible technologies, the energy credit (ITC) was expanded for small wind property, and taxpayers were given the option of receiving a direct grant from the Treasury in lieu of tax credits under the Section 1603 grant program. Renewable energy production was also encouraged by ARRA's provision increasing the funds available for the issuance of new clean renewable energy bonds. Residential incentives for renewable energy property were expanded under ARRA, as property-specific credit caps for residential renewable energy property were removed.

ARRA contained two tax provisions intended to encourage energy conservation. The first provision modified the tax credits for energy-efficient improvements to existing homes by temporarily increasing the credit rate and removing credit caps previously associated with specific types of property. For qualified energy-efficiency improvements, such as the installation of energy-efficient building envelope components, furnaces, or boilers, installed during 2009 and 2010, taxpayers could claim a 30% tax credit. ARRA also removed property-by-property caps on the tax credit and replaced them with a $1,500 cap for the total amount of the credit claimed during 2009 and 2010. The second energy conservation provision increased funds available for the issue of qualified energy conservation bonds.

To further promote alternative technology vehicles, tax provisions enacted under ARRA modified the credits for alternative fuel vehicles and plug-in electric vehicles. Additionally, a tax credit for plug-in vehicle conversion was enacted.

Tax credits for advanced energy manufacturing (IRC §48C) were also introduced under ARRA. This provision provided $2.3 billion in tax credits to be competitively awarded to qualifying projects.

The Health Care and Education Reconciliation Act of 2010 ( P.L. 111-152 )

Energy tax policy—like all tax policy—can lead to unanticipated consequences. Notably, this issue arose in the 111 th Congress in its deliberations concerning "black liquor." In the context of taxes, the term "black liquor" referred to a process in which pulp mills use a mixture of conventional fuel and a byproduct of the pulping process as an energy source for the mill. According to changes enacted in The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users ( P.L. 109-59 ; SAFETEA-LU), "black liquor" was eligible for the alternative fuels tax credit, which was not the congressional intent of the provision. The IRS later ruled that black liquor would be eligible for the cellulosic biofuel producer credit after the alternative fuels mixture credit expired at the end of 2009.

Recognizing the unintended consequence, Senate Finance Committee Chairman Max Baucus stated in response to draft legislation, "Our measure ensures this tax credit is used consistently as the law intended, not through an unintended loophole." Senator Charles Grassley made similar statements, noting "The paper industry was not intended to receive the alternative fuels tax credit when the credit was enacted." Under The Health Care and Education Reconciliation Act of 2010 ( P.L. 111-152 ), black liquor was made ineligible for the cellulosic biofuel producer credit, reducing revenue losses by $23.6 billion between 2011 and 2019. In addition, with the passage of The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 ( P.L. 111-312 ) at the end of 2010, black liquor could no longer qualify for the alternative fuels tax credit. However, taxpayers may still be claiming tax credits for black liquor, as previously unused credits may be carried forward.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ( P.L. 111-312 )

A number of expiring energy tax provisions were temporarily extended in the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 ( P.L. 111-312 ). The one-year extension of tax credits for alcohol fuels, including ethanol, was estimated to cost $4.9 billion. Extending the Section 1603 grant in lieu of tax credits program for one year was estimated to cost $3.0 billion. The retroactive extension of tax incentives for biodiesel and renewable diesel, which had expired at the end of 2009, was estimated to cost $2.0 billion. Other provisions that were extended included tax credits for residential energy efficiency improvements, energy efficient appliance manufacturers, and energy efficient new homes. Tax provisions related to refined coal, alternative fuel mixtures, electric transmission restructuring, percentage depletion for oil and gas production, and alternative fuel vehicle refueling property were also extended.

Enacted Legislation in the 112 th Congress

Energy tax legislation enacted in the 112 th Congress included measures to extend expired or expiring energy tax incentives. Notably, a number of energy provisions were not extended, including tax credits for ethanol and the Section 1603 grants in lieu of tax credits. Both of these provisions had expired at the end of 2011. The provision allowing for the suspension of the 100%-of-net-income limitation on percentage depletion, which had been part of multiple past tax extenders packages, was also not extended.

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

Several expired and expiring energy tax incentives were temporarily extended as part of the American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240 ). While most expiring energy tax provisions were simply extended through the end of 2013 under ATRA, substantive changes were made to the renewable energy production tax credit (PTC). Specifically, the expiration date for the PTC was changed from a placed-in-service deadline to a construction start date for all qualifying technologies. Extending the PTC for wind for one year and changing the deadline from a placed-in-service to construction start date was estimated to cost $12.2 billion over the 10-year budget window. Other provisions that were extended include credits for biodiesel, renewable diesel, alternative fuels, and second generation (cellulosic) biofuels. The tax credit for cellulosic biofuels was modified to include algae-based fuels. Other incentives related to energy efficiency, including the tax credit for nonbusiness energy property and the credit for the manufacture of energy-efficient appliances, were also extended.

Enacted Legislation in the 113 th Congress

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

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

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