Side-by-Side Comparison of Energy Tax Provisions of H.R

Order Code RL34674

Side-by-Side Comparison of Energy TaxProvisions of H.R. 6899 and S. 3478

September 18, 2008

Salvatore LazzariSpecialist in Energy and Environmental Economics

Resources, Science, and Industry Division

Side-by-Side Comparison of the Energy Tax Provisionsin H.R. 6899 and S. 3478

Summary

The Comprehensive American Energy Security and Consumer Protection Act,H.R. 6899, was introduced on September 15, 2008, and approved by the House onSeptember 16, 2008. This plan allows oil and gas drilling in the Outer ContinentalShelf (OCS), and it incorporates most of the energy tax provisions from an energytax bill, H.R. 5351, and some of H.R. 6049, both of which were previously approvedby the House of Representatives but failed to be taken up by the Senate.

In the Senate, legislative efforts on energy tax incentives and energy taxextenders center around S. 3478, the $40 billion energy tax bill offered by FinanceCommittee Chairman Max Baucus and ranking Republican Charles Grassley, andsupported by Senate Democratic leadership. In the Senate, controversy over taxincreases on the oil and gas industry, particularly over proposed repeal of the taxcode’s §199 deduction for the major integrated oil companies, continues; it remainsunclear whether an energy tax bill with this provision will pass a cloture vote to limitdebate, and thus be taken up.

This report is a side-by-side comparison of energy tax bills H.R. 6899 and S.3478.

Contents

Energy Tax Provisions in H.R. 6899 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

S. 3478 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

List of Tables

Table 1. Side-by-Side Comparison of S. 3478, and the Energy Tax Provisions of H.R. 6899 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Side-by-Side Comparison of the Energy TaxProvisions in H.R. 6899 and S. 3478

The idea of using the tax code to achieve energy policy goals and other nationalobjectives is not new but, historically, U.S. federal energy tax policy promoted theexploration and development — the supply of — oil and gas. The 1970s witnessed(1) a significant cutback in the oil and gas industry’s tax preferences, (2) theimposition of new excise taxes on oil (some of which were subsequently repealed orexpired), and (3) the introduction of numerous tax preferences for energyconservation, the development of alternative fuels, and the commercialization of thetechnologies for producing these fuels (renewables such as solar, wind, and biomass,and nonconventional fossil fuels such as shale oil and coalbed methane).

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 energytax incentives over 11 years, including numerous tax incentives for the supply ofconventional fuels, as well as for energy efficiency, and for several types ofalternative and renewable resources, such as solar and geothermal. The Tax Reliefand Health Care Act of 2006 (P.L. 109-432), enacted in December 2006, providedfor one-year extensions of some of these provisions. But some of these energy taxincentives expired on January 1, 2008, while others are about to expire at the end of2008.

In early December 2007, it appeared that congressional conferees had reachedagreement on another comprehensive energy bill, the Energy Independence andSecurity Act (H.R. 6), and particularly on the controversial energy tax provisions.The Democratic leadership in the 110th Congress proposed to eliminate or reduce taxsubsidies for oil and gas and use the additional revenues to increase funding for theirenergy policy priorities: energy efficiency and alternative and renewable fuels, thatis, reducing fossil fuel demand rather than increasing energy (oil and gas) supply. Inaddition, congressional leaders wanted to extend many of the energy efficiency andrenewable 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 byabout $21 billion to fund extensions and liberalization of existing energy taxincentives. However, the Senate on December 13, 2007, stripped the controversialtax title from its version of the comprehensive energy bill (H.R. 6) and then passedthe bill, 86-8, leading to the President’s signing of the Energy Independence andSecurity Act of 2007 (P.L. 110-140), on December 19, 2007. The only tax-relatedprovisions that survived were (1) an extension of the Federal Unemployment Tax Actsurtax for one year, raising about $1.5 billion; (2) higher penalties for failure to filepartnership returns, increasing revenues by $655 million; and (3) an extension of theamortization period for geological and geophysical expenditures from five to seven

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1 See. U.S. Library of Congress. Congressional Research Service. Extension of ExpiringEnergy Tax Provisions. CRS Report RL32265 by Salvatore Lazzari.2 Enacted in 2004 as an export tax incentive, this provision allows a deduction, as a businessexpense, 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 productionduring the taxable year. The deduction was 3% of income for 2006, is currently 6%, and isscheduled to increase to 9% when fully phased in by 2010. 3 Several times the House has approved energy tax legislation, and several times in theSenate such legislation failed a cloture vote and thus could not be brought to the floor fordebate. The latest was H.R. 6049, the House tax extenders bill, which was approved by theHouse on May 21, 2008, but failed three cloture votes in the Senate. Several times recently,the Senate has been prevented from taking action on energy tax legislation due to the failureto invoke cloture on the motion to proceed to the House energy tax extenders bills. The firstwas June 10, when the motion failed by a vote of 50-44; the second was on June 17, whenthe motion failed by a vote of 52-44; the third was July 29, when the cloture motion failedby a vote of 53 to 43. In addition, on July 30 the Senate rejected by a vote of 51 to 43 amotion to invoke cloture on a motion to proceed to debate S. 3335, Senator Baucus’ energytax bill.

years, raising $103 million in revenues. The latter provision was the only tax increaseon 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 asa result of the implementation of the revised Corporate Average Fuel Economystandards. The decision to strip the much larger $21 billion tax title stemmed froma White House veto threat and the Senate’s inability to get the votes required to enddebate on the bill earlier in the day. Senate Majority Leader Harry Reid’s (D-Nev.)effort to invoke cloture fell short by one vote, in a 59-40 tally.

Since then, the Congress has 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, has lapsed three times only to be reinstated.1 Severalenergy tax bills have passed the House but not the Senate, where on severaloccasions, the failure to invoke cloture failed to bring up the legislation forconsideration. Senate Republicans objected to the idea of raising taxes to offsetextension of expiring energy tax provisions, which they consider to be an extensionof current tax policy rather than new tax policy. In addition, Senate Republicansobjected 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.2 TheBush Administration repeatedly threatened to veto these types of energy tax bills, inpart because of their proposed increased taxes on the oil and gas industry. Frustratedwith the lack of action on energy tax legislation over the last two years, HouseDemocrats introduced and approved several such bills, such as H.R. 5351, which wasapproved by the House on February 27, 2008. House Speaker Pelosi and otherDemocrats sent President Bush a letter February 28, 2008, urging him to reconsiderhis opposition to the Democratic renewable energy plan, arguing that their energy taxplan would “correct an imbalance in the tax code.”3

At this writing, a renewed legislative effort is being made to enact energy taxlegislation, although the two chambers were moving in different directions on how

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4 The House Democratic leadership’s energy proposal is centered around opening the OuterContinental Shelf to oil and gas development. The OCS areas — the Atlantic OCS, Gulf ofMexico (GOM) OCS, Pacific OCS, and Alaska OCS — are the offshore lands under thejurisdiction of the U.S. government. Federal law allows or confirms state boundaries andjurisdiction over the continental shelf areas up to 3 nautical miles from the coastline, exceptthat (in the GOM) Texas and Florida offshore boundaries extend up to 9 nautical miles fromthe coastline. Exclusive federal jurisdiction over resources of the shelf applies from stateboundaries out to 200 miles from the U.S. coastline. For a more detailed definition of theOCS and various governmental jurisdictions see U.S. Library of Congress. CongressionalResearch Service. Offshore Oil and Gas Development: Legal Framework. CRS ReportRL33404, by Adam Vann. May 3, 2006. For a comparison of different proposals see U. S.Library of Congress. Congressional Research Service. Outer Continental Shelf Leasing:Side-by-Side Comparison of Five Legislative Proposals. CRS Report RL34667 by MarcHumphries. September 15, 20085 As noted, the House has approved several energy tax bills over the last two years, only tohave them stall in the Senate. H.R. 6049, for instance, was approved by the House on May21, 2008 only to fail several cloture votes in the Senate (see footnote #3).

to bring the legislation to the floor. In the House, energy tax provisions are part ofH.R. 6899, House Democratic leadership’s latest draft of broad-based energy policylegislation, the Comprehensive American Energy Security and Consumer ProtectionAct. Passed on September 16, 2008, the bill would expand oil and gas drillingoffshore by allowing oil and gas exploration and production in areas of the outercontinental shelf that are currently off limits, except for waters in the Gulf of Mexicooff the Florida coast. Under the bill, states could allow such drilling between 50 and100 miles offshore, while the federal government could permit drilling from 100 to200 miles offshore.4 Revenue from the new offshore leases would be used to assistthe development of alternative energy, and would not be shared by the adjacentcoastal states. The bill would also repeal the current ban on leasing federal lands foroil shale production if states enact laws providing for such leases and production.H.R. 6899 also would enact a renewable portfolio standard, a requirement that powercompanies generate 15% of their energy from renewable sources by 2020.

Energy Tax Provisions in H.R. 6899

The energy tax provisions in H.R. 6899 (Title XIII, the Energy Tax IncentivesAct of 2008) are largely the same as those in H.R. 5351, an approximately $18 billionenergy tax package that was approved by the House on February 27, 2008. They alsoinclude some of the measures in H.R. 6049, another energy tax bill that was alsoapproved by the House.5 H.R. 5351 is, in turn, a smaller version of the energy tax titlethat was dropped from H.R. 3221 in December 2007, but larger than the $16 billionbill approved by the Ways and Means Committee in 2007 (H.R. 2776). However,because H.R. 6899 incorporates some of the incentives of H.R. 6049, its total costis higher than the cost of H.R. 5351: about $19 billion over 10 years, instead of $18billion.

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6 U.S. Congress. Joint Committee on Taxation. Estimated Revenue Effects of Title VIII ofH.R. 6899, The “Energy Tax Incentives Act of 2008,” as Passed by the House ofRepresentatives on September 16, 2008. JCX-68-08. September 17, 2008.7 First enacted in 2004, this provision allows a deduction, as a business expense, for aspecified percentage of the qualified production activity’s income subject to a limit of 50%of the wages paid that are allocable to the domestic production during the taxable year. Thededuction was 3% of income for 2006, is currently 6%, and is scheduled to increase to 9%when fully phased in by 2010. For the domestic oil and gas industry, the deduction appliesto oil and gas or any primary product thereof, provided that such product was“manufactured, produced, or extracted in whole or in significant part in the United States.”Note that extraction is considered to be manufacturing for purposes of this deduction, whichmeans that domestic firms in the business of extracting oil and gas qualify for the deduction.This deduction was enacted under the American Jobs Creation Act of 2004 (P.L. 108-357,also known as the “JOBS” bill).

H.R. 6899 includes several tax incentives for renewable energy that wouldreduce revenue by an estimated $19 billion over 10 years.6 At a cost of $6.9 billionover 10 years, it extends a renewable energy production tax credit, covering windfacilities for one additional year, through 2009, and certain other renewable energyproduction for three years, through 2011, while capping credits for facilities thatcome into service after 2009. The bill extends for eight years, through 2016, a creditfor investing in solar energy and fuel cells, at a cost of $1.8 billion. It also extendsthe energy-efficient commercial building deduction for five years, the credit forefficiency improvements to existing homes for one year, and a credit forenergy-efficient appliances for three years.

The measure provides for the allocation of $2.625 billion in energy conservationbonds, $1.75 billion in clean renewable energy bonds, and $1.75 billion in energysecurity bonds to finance the installation of natural gas pumps at gas stations; allwould be tax-credit bonds, which provide a tax credit in lieu of interest, and projectsfinanced through the bonds would have to comply with Davis-Bacon requirements.It also creates a new tax credit for plug-in electric vehicles, an accelerated recoveryperiod for smart electric meters and grid systems, and provides $1.1 billion in taxcredits for carbon capture and sequestration projects. The tax title also includes onenon-energy tax subsidy: a $1.1 billion provision to restructure the New York LibertyZone tax incentives to allow for new transportation projects.

H.R. 6899 is fully offset, raising $19 billion in taxes, including many of thesame energy tax increases on oil companies also previously approved by the House.The energy tax provisions in H.R. 6899 are entirely offset, mainly by denying theIRC §199 manufacturing deduction to certain major integrated oil companies(including oil companies controlled by foreign governments — including CITGO )and freezing the deduction for all other oil and gas producers at the current rate of6%.7 Earlier §199 repeal proposals had been criticized for seeking to end thededuction only for U.S.-based major companies, while exemptingVenezuelan-controlled CITGO because, not being a crude oil producer, it does notmeet the definition of a “major integrated oil and gas producer.” The entire provisionwould raise $13.9 billion over 10 years. Additional revenue — about $4.0 billionover 10 years — would come from a provision to streamline the tax treatment of

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8 Bureau of National Affairs. Daily Tax Report. “Reid Says ‘Must Pass’ Energy LegislationShould be Handled Before Tax Extenders.” September 15, 2008. P. G-5.

foreign oil-related income so it is treated the same as foreign oil and gas extractionincome.

In addition to the H.R. 6899, the Republican leadership in the House hasintroduced its own energy tax bill, H.R. 6566, which also extends and expands someof the energy tax incentives and contains no tax increases (offsets). The energy taxprovisions in this bill are, however, smaller and somewhat narrower than those inH.R. 6899.

S. 3478

In the Senate, legislative efforts on energy tax incentives and energy taxextenders center around S. 3478, the Energy Independence and Investment Act of2008, a $40 billion energy tax bill offered by Finance Committee Chairman MaxBaucus and ranking Republican Charles Grassley. Senate Majority Leader Harry Reidsaid on September 12 that S. 3478 is “must-pass” legislation. Reid told reporters theenergy tax package, which includes extensions of tax incentives for renewableenergy, should be prioritized even ahead of the broader energy policy bills beingconsidered, and the rest of the non-energy tax extenders package. Reid said he hopesto bring the bill to the floor during the week of September 15, but noted that theschedule depends on whether Senate Republicans will agree to move to thelegislation.8

While most of the tax incentives in the bill are extensions of existing policy andare not controversial, the legislation would need to be paid for through new sourcesof revenue. One proposed offset — which has been previously blocked byRepublicans — would repeal the IRC §199 manufacturing deduction for the fivemajor oil and gas producers, raising $13.9 billion over 10 years. The bill also wouldbe paid for through a new 13% excise tax on oil and natural gas pumped from theOuter Continental Shelf, a proposal to eliminate the distinction between foreign oiland gas extraction income and foreign oil-related income, and an extension andincrease in the oil spill tax through the end of 2017. In total, tax increases on the oiland gas industry would account for $31 billion of the $40 billion total cost of thelegislation. The final major offset would come from a requirement on securitiesbrokers to report on the cost basis for transactions they handle to the InternalRevenue Service, a provision expected to raise about $8 billion in new revenues over10 years.

The tax offsets, or tax increases in S. 3478 are not without controversy,however, particularly the repeal of the IRC §199 manufacturing deduction for the fivemajor oil and gas producers, as discussed previously. Several times the House hasapproved energy tax legislation, and several times in the Senate such legislationfailed a cloture vote and thus could not be brought to the floor for debate.

As noted above, Republicans have in the past objected to the idea of raisingtaxes to offset extension of expiring energy tax provisions, which they consider to be

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9 Bureau of National Affairs. Daily Tax Report. “Plan to Bring Tax Extenders to FloorScraps Section 199 Deduction Repeal for Oil Firms.” September 17, 2008. P. G-13.10 A side-by-side comparison of H.R. 6049 and S. 3478 is in CRS Report RL34669, bySalvatore Lazzari, September 16, 2008.

an extension of current tax policy rather than new tax policy. In addition, someSenate Republicans have objected to raising taxes on the oil and gas industry,particularly by repealing the IRC §199 deduction. The Bush Administrationthreatened to also veto any energy tax bill that would increase taxes on the oil and gasindustry. At this writing, it appears that inclusion of the §199 deduction repeal as anoffset might preclude the energy tax bill from coming to the Senate floor — somebelieve that it would fail another cloture vote — so this provision might not survivethe process.9

Finally, the debate in the Senate over energy tax incentives and energy taxextenders is seen as potentially involving three other separate proposals: (1) TheGang of 20 proposal or “New Energy Reform Act of 2008”(this has not yet beenintroduced); (2) A Bingaman/Baucus bill (also not formally introduced); and (3) theRepublican “Gas Price Reduction Act” (introduced by Senator McConnell as SenateAmendment 5108).

A side-by-side comparison of H.R. 6899 and S. 3478 is in Table 1.10 Revenueestimates were generated by the Joint Committee on Taxation.

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Table 1. Side-by-Side Comparison of S. 3478, and the Energy Tax Provisions of H.R. 6899

FOSSIL FUELS SUPPLYProvision Current Law Senate Bill S. 3478 House Bill H.R. 6899 Comments

PERCENTAGEDEPLETION FORMARGINAL OIL ANDGAS WELLS

Independent producers can claim a higherdepletion rate(up to 25%, rather than thenormal 15%) for up to 15 barrels per day ofoil (or the equivalent amount of gas) frommarginal wells ( “stripper” oil/gas and heavyoil). The percentage depletion allowance islimited to 100% of taxable income from eachproperty, but this limitation is suspendedthrough December 31, 2007 for marginal oiland gas. The percentage depletion allowanceis also limited to 65% of taxable income fromall properties [IRC§613A(c)(6);[IRC§613A(c)(6)(H); [IRC§ 613A(d)].

Sec. 213. The proposal extends forthree years (through December 31,2010) the suspension on thetaxable income limit for purposesof depreciating a marginal oil orgas well. The estimated cost of thisproposal is $364 million over tenyears.

No provision.

PETROLEUMREFINERIES

Assets used in petroleum refining aregenerally depreciated over 10 years. But, atemporary provision allows the expensing of refinery property which either increases totalcapacity by 5% or which processesnonconventional feedstocks at a rate equal orgreater to 25% of the total throughput of therefinery [IRC§168(e)(3)].

Sec. 212. This bill extends therefinery expensing contractrequirement and theplaced-in-service requirement fortwo years. The proposal alsoqualifies refineries directlyprocessing shale or tar sands. Theestimated cost of this proposal is$894 million over ten years.

No provision. This is one of theseveral tax incentivesfor the oil industrycreated by The EnergyPolicy Act of2005(EPACT05, P.L.109-58).

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CARBON MITIGATION AND COAL Provision Current Law Senate Bill S. 3478 House Bill H.R. 6899 Comments

CREDIT FORINVESTMENT INCLEAN COALFACILITIES

A 15% investment credit isprovided for advanced coalprojects and a 20% credit isprovided for qualified coalgasification projects,respectively. The credit is forcoal gasification projects whichmust use an integratedgasification combined cycle(IGCC) technology. The totalcredits available for qualifyingadvanced coal projects is limitedto $1.3 billion, with $800 millionallocated to IGCC projects andthe remaining $500 million toprojects using other advancedcoal-based generationtechnologies [IRC §48A and IRC§48B].

Sec. 111 & 112. The bill provides $2.5 billionin new total tax credits for the creation ofadvanced coal electricity projects and certaincoal gasification projects that demonstrate thegreatest potential for carbon capture andsequestration (CCS) technology. Of these $2.5billion of total incentives, $2 billion would beearmarked for advanced coal electricity projectsand $500 million for coal gasification projects.These tax credits will be awarded by Treasurythrough an application process, with applicantsthat demonstrate the greatest CO2 sequestrationpercentage receiving the highest priority.Projects must capture and sequester at least 65%of the facility’s CO2 emissions or their coalgasification project must capture and sequesterat least 75% of the facility’s CO2 emissions.The estimated cost of this proposal is $2.373billion over ten years.

Sec. 811 & 812. Similar to S.3478, except that the totalcredits are only $1.1 billion:$950 million for advanced coalprojects, and $150 million forcoal gasification projects. Thisproposal is estimated to cost$1.044 billion over 10 years.

This tax credit wasalso one of theseveral energy taxincentives createdby EPACT05.

CO2 CAPTURE TAXCREDIT

No provision. Sec. 115. The proposal provides a $10 creditper ton for the first 75 million metric tons ofCO2 captured and transported from an industrialsource for use in enhanced oil recovery and $20credit per ton for CO2 captured and transportedfrom an industrial source for permanent storagein a geologic formation. Qualifying facilitiesmust capture at least 500,000 metric tons ofCO2 per year. The credit applies to CO2 storedor used in the United States. The estimated costof this proposal is $1.119 billion over ten years.

No provision.

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Provision Current Law Senate Bill S. 3478 House Bill H.R. 6899 Comments

CARBON AUDIT OFTAX CODE

No provision. Sec. 116. The bill directs the Secretary of theTreasury to request that the National Academyof Sciences undertake a comprehensive reviewof the tax code to identify the types of specifictax provisions that have the largest effects oncarbon and other greenhouse gas emissions andto estimate the magnitude of those effects.Authorizes $1.5 million for the study. Thisproposal has no revenue effect.

Sec. 815. Identical to S. 3478.

Other Coal Tax Provisions Provision Current Law Senate Bill S. 3478 House Bill H.R. 6899 Comments

BLACK-LUNG EXCISETAX

An excise tax is imposed on coal mined domesticallyand sold by the producer, at the rate of $1.10 per tonfor coal from underground mines and $0.55 per ton forcoal from surface mines (the aggregate tax per ton iscapped at 4.4% of the amount sold by the producer).Reduced tax rates apply after the earlier of December31, 2013 or the date on which the Black LungDisability Trust Fund has repaid, with interest, allamounts borrowed from the general fund of theTreasury. Tax receipts are deposited in the Black LungDisability Trust Fund, and used to pay compensation,medical and survivor benefits to eligible miners andtheir survivors and to cover costs of programadministration. The Trust Fund is permitted to borrowfrom the General Fund any amounts necessary to makeauthorized expenditures if excise tax receipts do notprovide sufficient funding [IRC§4121].

Sec. 113. The bill would enact thePresident’s FY2009 proposal to bringthe Black Lung Disability Trust Fundout of debt. The President’s Budgetproposes that the current excise taxrate should continue to apply beyond2013 until all amounts borrowed fromthe general fund of the Treasury havebeen repaid with interest. Afterrepayment, the reduced excise taxrates of $0.50 per ton for coal fromunderground mines and $0.25 per tonfor coal from surface mines wouldapply (aggregate tax per ton capped at2% of the amount sold by theproducer). Rates are extended through2018. The proposal is estimated toraise $1.287 billion over ten years.

Sec. 813. The Housebill in identical to theSenate bill. Theproposal is estimated toraise $1.287 billionover ten years.

See CRS ReportRS21935.

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BLACK-LUNG EXCISETAX ON EXPORTEDCOAL

Since 2000 (which is when the IRS issued Notice2000-28), the black lung excise tax has not beenimposed on exported coal (i.e., domestically producedcoal sold and destined for export). The courts havedetermined that the Export Clause of the U.S.Constitution prevents the imposition of the coal excisetax on exported coal and, therefore, any taxes collectedon such exported coal in the past are subject to a claimfor refund. [IRC§4121.

Sec. 114. The bill creates a newprocedure under which certain coalproducers and exporters may claim arefund of these excise taxes that wereimposed on coal exported from theUnited States. Under this procedure,coal producers or exporters thatexported coal during the periodbeginning on or after October 1, 1990and ending on or before the date ofenactment of the bill, may obtain arefund from the Treasury of excisetaxes paid on such exported coal andany interest accrued from the date ofoverpayment. The estimated cost ofthis proposal is $199 million over tenyears.

Sec. 814. Thisprovision is identical to that in the Senatebill. The estimated costof this proposal is $199million over ten years.

See CRS ReportRS22881.

ELECTRICITY RESTRUCTURING PROVISIONSProvision Current Law Senate Bill S. 3478 House Bill H.R. 6899 Comments

SALE OR DISPOSITIONOF TRANSMISSIONASSETS

Under present tax law, the sale ofelectricity transmission ordistribution facilities is generally considered to be an involuntaryconversion, and gain from thesale or disposition of such assetsis recognized over eight years,rather than taxed all at once in theyear of the sale [IRC §§451,1033, 1245, 1250].

Sec. 401. The bill extends thepresent-law eight-year deferral ofgain on sales of transmissionproperty by vertically integratedelectric utilities toFERC-approved independenttransmission companies. The ruleapplies to sales before January 1,2010. This proposal is revenueneutral over ten years.

Sec. 805. Identical to the Senatebill. This proposal is revenueneutral over ten years.

The eight-year recognition rulewas introduced by EPACT05.

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RENEWABLE AND ALTERNATIVE FUELS


ELECTRICITYFROMRENEWABLEFUELS

Electricity producers may claim a taxcredit of 1.5¢/kWh (in 1992 dollars;generally 2.0¢ in current dollars) forelectricity produced from windenergy, “closed-loop,” and open-loopbiomass, and other renewableresources as well as for refined coal.Placed-in-service date is December31, 2008 [IRC§45].

Sec. 101 &102. The Senate bill extends theplaced-in-service date by three years, throughDecember 31, 2011. The bill expands thetypes of facilities qualifying for the credit tonew biomass facilities and those that generateelectricity from marine renewables (e.g.,waves and tides). The bill updates thedefinition of an open-loop biomass facility,the definition of a trash combustion facility,and the definition of a non-hydroelectric dam.The bill also extends the refined coal credit,while removing the market value test andincreasing coal emissions standards. Theestimated cost of this proposal is $15.414billion over ten years.

Sec. 801 &802. The House bill also hasa three-year extension of theplaced-in-service date throughDecember 31, 2011, but for wind, theextension is for only one year through12-31-2009. It also adds marinerenewables (e.g., waves and tides) andhydrokinetic energy as a qualifiedresource. The bill would repeal thecurrent phase-out mechanism,replacing it with a cap on the presentvalue of the credits, which cannotexceed 35% of the facility’s cost. Thebill clarifies the availability of theproduction tax credit with respect tocertain sales of electricity to regulatedpublic utilities and updates thedefinition of an open-loop biomassfacility, trash combustion facility, and nonhydroelectric dam. This proposal isestimated to cost $6.893 billion overten years.

Current tax credit isgenerally availablefor 10 years afterplaced-in-service, butnew equipment hasto be placed-in-service by 12-31-2008. So this taxcredit would not beavailable on newinvestments after 12-31-2008, unless it isextended.

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BUSINESSSOLAR,GEOTHERMAL,FUELS CELLS,AND OTHERRENEWABLETECHNOLOGIES

A permanent 10% tax credit isprovided for investments in solar andgeothermal equipment used togenerate electricity (includingphotovoltaic systems), or solarequipment used to heat or cool astructure, and for process heat. The30% credit for solar, fuel cells and the10% credit for micro-turbines isavailable through 12-31-2009. Geothermal energy reservoirs alsoqualify for a 15% percentagedepletion allowance. Depreciation recovery period for renewabletechnologies is five years. Fuel cellsdo not qualify for tax subsidies[IRC§45,46,48, 613(e)].

Sec. 103 & 107. S. 3478 extends the 30%investment tax credit for solar energyproperty and qualified fuel cell property, aswell as the 10% investment tax credit formicro turbines, for eight years (through 12-31-2016). The bill adds small commercialwind, geothermal heat pumps, and combinedheat and power systems (at a 10% credit rate)as a category of qualified investment. The billalso increases the $500 per half kilowatt ofcapacity cap for qualified fuel cells to $1,500per half kilowatt and allows these credits tobe used to offset the alternative minimum tax(AMT). The estimated cost of this proposal is$1.919 billion over ten years.

Sec.803. This provision is similar tothe Senate’s. This proposal is estimatedto cost $1.765 billion over ten years.

Under current law,energy-relatedincome tax credits,and many of the non-energy tax credits,are aggregated andclaimed as onegeneral businesscredit, which is alsosubject to severallimitations, includingthe alternativeminimum taxlimitation.[IRC§38]

RESIDENTIALSOLAR ANDOTHERRENEWABLESUSED INRESIDENCES

A 30% tax credit is provided forresidential applications of solargenerated electricity (photovoltaics)as well for solar water heating. Thiscredit is available through 12-31-2008(IRC§25D).

Sec. 104. The bill extends the credit forresidential solar property for eight years(through 2016), and doubles it from $2,000 to$4,000. The bill adds residential small windinvestment, capped at $4,000, and geothermalheat pumps, capped at $2,000, as qualifyingproperty. The bill also allows the credit to beused to offset the AMT. The estimated cost ofthis proposal is $907 million over ten years.

Sec.804. This provision is the same asin the Senate bill. This proposal isestimated to cost approximately $907million over ten years.

The payment of theAMT maysubstantially reduce,or even eliminate,this (as well as other)energy tax credits.

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CLEANRENEWABLEENERGY BONDS

State and local governments mayissue clean renewable energy bonds(“CREBS”) in order to financerenewable projects (wind, closed-loopbiomass, open-loop biomass,geothermal, small irrigation, qualifiedhydro-power, landfill gas, marinerenewable and trash combustionfacilities). Unlike other state and localbonds, which are exempt from federaltaxation, these bonds provide a taxcredit to the holding taxpayer. Only$1.2 billion of such bonds may beissued nationally; $0.75 billion bygovernmental bodies. CREBS mustbe issued before 12-31-2008 [IRC§54].

Sec. 105. The Senate bill increases themaximum authorized amount of CREBSissues to $2 billion to finance facilities thatgenerate electricity from renewables. This $2billion authorization is subdivided into thirds:1/3 for qualifying projects of state/local/tribalgovernments; 1/3 for qualifying projects ofpublic power providers; and 1/3 forqualifying projects of electric cooperatives.The bill also provides an additional year forcurrent allocations to issue bonds. Theestimated cost of this proposal is $551 millionover ten years.

Sec. 806. The House bill is similar to the Senate bill, but the nationallimitation is $1.75 billion instead of$2.0 billion. This proposal is estimatedto cost $497 million over ten years.

NUCLEARELECTRICITYPRODUCTIONTAX CREDIT

A taxpayer producing electricity at aqualifying advanced nuclear powerfacility can claim a credit equal to1.8¢/kilowatt hour of electricityproduced for the eight-year periodstarting when the facility is placed inservice. The aggregate amount ofcredit that a taxpayer may claim inany year during the eight-year periodis subject to limitation based onallocated capacity and an annuallimitation. A qualifying advancednuclear facility is one that is placed inservice before January 1, 2021. TheSecretary of Treasury may allocate upto 6,000 megawatts of capacity [IRC§45I].

Sec. 402. This proposal increases themaximum allocation amount to 8,000megawatts. Public-private partnerships willalso be allowed to utilize the credit. Thisproposal has no revenue effect.

No provision. A qualifyingadvanced nuclearfacility is one forwhich the taxpayerhas received anallocation ofmegawatt capacityfrom the Secretary ofthe Treasury, inconsultation with theSecretary of Energy. See CRS ReportRL33558.

CRS-14

ENERGY CONSERVATION AND ENERGY EFFICIENCY

Business Sector


ENERGY EFFICIENCYIN COMMERCIALBUILDINGS

The tax code provides a formula-basedtax deduction, subject to a limit equalto $1.80 per sq.ft. of the building, forall or part of the cost of energy efficientcommercial building property (i.e.,certain major energy-savingsimprovements made to domesticcommercial buildings) placed in serviceafter December 31, 2005 and beforeJanuary 1, 2009 [IRC §179D].

Sec. 303. The bill extends theenergy-efficient commercialbuildings deduction for five years,through December 31, 2013. Theestimated cost of this proposal is$891 million over ten years.

Sec. 843. Same as the Senatebill. The estimated cost of thisproposal is $891 million overten years.

Qualifying property must beinstalled as part of: (1) theinterior lighting system, (2)the heating, cooling,ventilation and hot watersystems, or (3) the buildingenvelope, and it must reduce total annual energy and powercosts of the building by 50%or more in comparison to areference building that meetsthe minimum requirements ofbuilding standards by thesociety of engineers.

BONDS FOR GREENBUILDINGS ANDSUSTAINABLE DESIGNPROJECTS

State and local governments have theauthority to issue tax-exempt bonds forgreen buildings and sustainable designprojects [IRC§142].

Sec. 307. The bill extends theauthority to issue qualified greenbuilding and sustainable designproject bonds through the end of2012. The bill also clarifies theapplication of the reserve accountrules to multiple bond issuances.The estimated cost of this proposalis $45 million over ten years.

Sec. 846. Identical to the Senateprovision. The estimated cost ofthis proposal is $45 million overten years.

CRS-15


ENERGYMANAGEMENTDEVICES

Current law provides no special taxincentives for meters, thermostats, andother energy management devices thatallow utilities or consumers to monitor,control energy use; such property isdepreciable over 20 years if used in abusiness [IRC §168].

Sec. 306. The bill providesaccelerated depreciation for smartelectric meters and smart electricgrid systems, allowing taxpayersto recover the cost of this propertyover seven years. The estimatedcost of this proposal is $1.716billion over ten years.

Sec. 845. Similar to the Senatebill except that the recoveryperiod would 10 years instead ofseven years. The estimated costof this proposal is $921 millionover ten years.

Residential Sector


ENERGY-EFFICIENCYRETROFITS TO EXISTING HOMES

There is a 10% credit, up to a $500maximum lifetime credit,- forenergy efficiency improvements inthe building envelope of existinghomes and for the purchase ofhigh-efficiency heating, cooling,and water heating equipment.Efficiency improvements and/orequipment must be placed in servicebefore December 31, 2007. Selectedenergy efficiency equipment anditems qualify for specific tax creditsranging from $50-$300 [IRC §25C].

Sec. 302. The billretroactively extends the taxcredits for energy-efficientretrofits to existing homes for2009, 2010 and 2011, andincludes energy-efficientbiomass fuel stoves as a newclass of energy-efficientproperty eligible for aconsumer tax credit of $300.The proposal also clarifies theefficiency standard for waterheaters. The estimated cost ofthis proposal is $2.509 billionover ten years.

Sec. 842. The billretroactively extends the taxcredits for energy-efficientexisting homes for twoyears (through December31, 2009) and includesenergy-efficient biomassfuel stoves as a new class ofenergy-efficient propertyeligible for a consumer taxcredit of $300. Thisproposal is estimated to cost$1.067 billion over tenyears.

This credit was enacted as part ofEPACT05, but it expired at the end of2007.

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CONSTRUCTION OFENERGY-EFFICIENTNEW HOMES

A tax credit as high as $2,000 isavailable to eligible contractors forthe construction of qualified newenergy-efficient homes if the homesachieve an energy savings of 50%over the 2003 International EnergyConservation Code (IECC). Theamount of the new energy-efficienthome credit depends on the energysavings achieved by the homerelative to that of a 2003 IECCcompliant comparable dwelling unit.The credit expires at the end of2008. [IRC §45L]

Sec. 304. The bill extends thenew energy efficient home taxcredit for three years, throughDecember 31, 2011. Theestimated cost of the proposalis $143 million over ten years.

No provision.

CRS-17


MANUFACTURE OFENERGY-EFFICIENT HOME APPLIANCES

A credit is available for the eligibleproduction (manufacture) of certainenergy-efficient dishwashers,clothes washers, and refrigerators.The total credit amount is equal tothe sum of the credit amountseparately calculated for each of thethree types of qualifiedenergy-efficient appliance. Thecredit for dishwasher is $3multiplied by the percentage bywhich the efficiency of the 2007standards (not yet known) exceedsthat of the 2005 standards (the creditmay not exceed $100 perdishwasher). The credit for clotheswashers is $100 for clothes washersthat meet the requirements of theEnergy Star program in effect forclothes washers in 2007. The creditfor refrigerators ranges from $75-$175 each [IRC §45M].

Sec. 305. The bill modifies theexisting energy-efficientappliance credit and extendthis credit for three years,through the end of 2010. Theestimated cost of this proposalis $322 million over ten years.

Sec. 844. This provision is identical to that in S. 3478.The estimated cost of thisproposal is $322 millionover ten years.

The maximum amount of the new creditallowable to a taxpayer is capped at $75million per tax year for all qualifyingappliances manufactured during that year .In each subsequent year the cap is reducedby the amount (if any) of the credit used inany prior tax year. Of that $75 million (orreduced) cap, no more than $20 million ofcredit amount in a single tax year mayresult from the manufacture ofrefrigerators to which the $75 applicableamount applies (i.e., refrigerators whichare at least 15 percent but no more than 20percent below 2001 energy conservationstandards). In addition to the $75 millioncap on the credit allowed, the overallcredit amount claimed for a particular taxyear may not exceed 2% of the taxpayer’saverage annual gross receipts for thepreceding three tax years.

QUALIFIED ENERGYCONSERVATIONBONDS

No provision. Sec. 301. The bill creates anew category of tax creditbonds to finance state andlocal government initiativesdesigned to reducegreenhouse emissions. Thereis a national limitation of $3billion, allocated to states,municipalities and tribalgovernments. The estimatedcost of this proposal is $1.025billion over ten years.

Sec. 841. The provision issimilar to that in S. 3478,except that the nationallimitation is $2.625 billion.This proposal is estimatedto cost $895 billion over tenyears.

CRS-18

TRANSPORTATION SECTOR

Advanced Technology Vehicles


NEW PLUG-IN HYBRIDVEHICLES

The Energy Policy Act of2005 (P.L. 109-58) created anew system of tax credits forfour types of advanced-technology vehicles (ATVs):hybrid vehicles, fuel cellvehicles, advanced lean-burnvehicles, and other alternativefuel vehicles. The credit forhybrids range from $250 to$3,400 per vehicle and areavailable through December31, 2009, but eachmanufacturer has a 60,000lifetime vehicle limit. [IRC§30B].

Sec. 204 & 205. The Senate billestablishes a new credit for qualifiedplug-in electric drive vehicles. Thebase amount of the credit is $2,500. Ifthe qualified vehicle draws propulsionfrom a battery with at least 6 kWhours of capacity, the credit amount isincreased by $400, plus another $400for each kW hour of battery capacityin excess of 6 kWhours. Taxpayersmay claim the full amount of theallowable credit up to the end of thefirst calendar quarter after the quarterin which the total number of qualifiedplug-in electric drive vehicles sold inthe U.S. is at least 250,000. The creditis available against the alternativeminimum tax (AMT). The estimatedcost of this proposal is $755 millionover ten years.

Sec. 824. The bill establishes a new credit foreach qualified plug-in electric drive vehicleplaced in service during each taxable year by ataxpayer. The base amount of the credit is$3,000. If the qualified vehicle drawspropulsion from a battery with at least 5kilowatt hours of capacity, the credit amount isincreased by $200, plus another $200 for eachkilowatt hour of batter/capacity in excess of 5kilowatt hours up to 15 kilowatt hours.Taxpayers may claim the full amount of theallowable credit up to the end of the firstcalendar quarter after the quarter in which themanufacturer records 60,000 sales. The creditis reduced in following calendar quarters. Thecredit is available against the alternativeminimum tax (AMT). This proposal isestimated to cost $1.056 billion over ten years.

Toyota reached itslimit in 2006; Hondain 2007. Thus,purchasers of hybridvehicles from thesemanufacturers nolonger qualify for thetax credits. The twobills essentially addplug-in hybridvehicles as a newtechnology to theexisting system oftax credits, but withtheir own separatetax credit structure.

CRS-19


OTHER ALTERNATIVETECHNOLOGYVEHICLES

The tax credits for advancedlean-burn vehicles is the sameas for hybrids; the credit forfuel cell vehicles may be ashigh as $4,000 for cars, and$40,000 for heavy-duty trucks;the credit for advancedalternative fuel vehicles is upto 80% of marginal costs,limited to $32,000. [IRC§30B]

Sec. 205. The bill extends the leanburn, heavy hybrid, and alternativefuel vehicle tax credit through2011,and reduces the fuel cell creditto $7,500 at the end of 2009. Thecredit is available against thealternative minimum tax (AMT). Theestimated cost of this proposal is $527million over ten years.

No provision.

ALTERNATIVE-FUELREFUELING STATIONS

A tax credit is provided equalto 30% of the cost of anyqualified alternative fuelvehicle refueling propertyinstalled to be used in a tradeor business or at the taxpayer’sprincipal residence. The creditwould be limited to $30,000for retail clean-fuel vehiclerefueling property, and $1,000for residential clean-fuelvehicle refueling property. Theproperty must be placed inservice before1-1-2010 (1-1-2015 for hydrogen property)[IRC§30C.]

Sec. 208. The bill extends the 30%alternative refueling property credit(capped at $30,000) for three years,through 2012. The provision providesa tax credit to businesses (e.g., gasstations) that install alternative fuelpumps, such as fuel pumps thatdispense fuels such as E85,compressed natural gas and hydrogen.The bill also adds electric vehiclerecharging property to the definitionof alternative refueling property. Theestimated cost of this proposal is $256million over ten years.

Sec. 828. The provision in H.R. 6899 is similarto the provision in S. 3478. The bill increasesthe 30% alternative refueling property credit(capped at $30,000) to 50% (capped at$50,000). The bill also extends this creditthrough the end of 2010, 2017 for certainnatural gas type fuels. The estimated cost ofthis proposal is $226 million over ten years.

The credit provides atax credit tobusinesses (e.g., gasstations) that installalternative fuelpumps, such as fuelpumps that dispenseE85 fuel.

CRS-20


ENERGY SECURITYBONDS

No provision No provision. Sec. 828. The bill creates a new type oftax-credit bond known as “energy security”bonds and provides for the allocation of $1.75billion in bonding authority. The bill requires100% of the available project proceeds to beused for “qualfied purposes,” which wouldinclude the making of grants and low-interestloans for natural gas refueling properties atretail gas stations. The bill stipulates that a loancould be no more than $200,000 for a propertylocated at any one retail gas station andstipulates that loans could not cover more than50% of the cost of the property and itsinstallation. Allocations would be made bythe Treasury Department among qualifiedissuers, including states and politicalsubdivisions or instrumentalities thereof. Thebill requires that 50% of the limitation beallocated only for loans for natural gasrefueling property in metropolitan statisticalareas. The measure also directs the departmentto attempt to ensure that at least 10% of themotor fuel stations receive loans from theproceeds of the bonds. The measure’sprovisions would apply to bonds issued byDec. 31, 2017. It also coordinates the energysecurity tax-credit bonds with the refuelingcredit. This proposal is estimated to cost $76million over ten years.

CRS-21

Biofuels


CELLULOSIC FUELALCOHOLPRODUCTION

Alcohol fuels qualify forproduction and blending taxcredits (either income or excise taxcredits) and refunds. The credit forethanol is $0.51per gallon. Inaddition, there is an ethanol smallproducer credit of $0.10 pergallon, up to 15 million gallonsannually. Facilities that producecellulosic ethanol are also allowedthe 50% bonus depreciation ifsuch facilities are placed in servicebefore January 1, 2013. The farmbill (P.L. 110-246) also included anew, temporary cellulosic bio-fuels production tax credit for upto $1.01 per gallon, availablethrough December 31, 2012 [IRC§168].

Sec. 201. The bill makes this benefitavailable for the production of othercellulosic biofuels in addition to cellulosicethanol. This proposal is estimated to berevenue neutral over ten years.

Sec. 821. The House bill provision isidentical to that in the Senate bill.

CRS-22


ALTERNATIVEFUELS EXCISE TAXCREDITS

The tax code imposes excise taxeson motor fuels at varying rates, butalso provides tax credits (atvarying amounts) against thesetaxes for various types ofalternative fuels; it also providessmall producer tax credits forsome of the fuels such as ethanoland bio-diesel. The creditsgenerally expire at the end of 2008[IRC §6426, §6427].

Sec. 207. The bill extends the alternativefuel excise tax credit through December31, 2011 for all fuels except for hydrogen(which maintains its current-law expirationdate of September 30, 2014). Upon date ofenactment, for liquid fuel derived from coalthrough the Fischer-Tropsch process(“coal-to-liquids”), to qualify as analterative fuel, the fuel must be produced ata facility that separates and sequesters atleast 50% of its CO2 emissions. Thesequestration requirement increases to 75%on December 31, 2011. This 75% standardmay be implemented prior to December 31,2011, subject to certification of feasibility.The proposal further provides that biomassgas versions of liquefied petroleum gas andliquefied or compressed natural gas, andaviation fuels qualify for the credit. Theproposal is estimated to cost $569 millionover ten years.

No provision.

CRS-23


VOLUMETRICEXCISE TAXCREDIT (VEETC)FOR FUELETHANOL

Fuel ethanol qualifies for excisetax credits (or refunds), at the rateof $0.51/gallon of ethanol; and asmall producer tax credit of$0.10/gallon. The excise tax creditwas established in the AmericanJobs Creation Act of 2004. Per the2008 farm bill, starting the yearafter which 7.5 billion gallons ofethanol are produced and/orimported in the United States, thevalue of the credit is reduced to$0.45/gallon. The credit iscurrently authorized throughDecember 31, 2010[IRC§40, 6426, §6427]].

Sec. 210. This bill extends VEETC,including the 10¢/gallon small producercredit, through 12/31/2011. The estimatedcost of this proposal is $4.978 billion overten years.

No provision.

SMALL PRODUCERTAX CREDIT FORFUEL ETHANOL

As noted above, in the case ofethanol, the tax code also providesa small producer tax credit of$0.10/gallon, up to 15 milliongallons [IRC §40A].

Sec. 211. S. 3478 creates a new smallproducer alcohol credit of 10 cents pergallon for facilities that produce ethanolthrough a process that does not use afossil-based resource. The credit isavailable through December 31, 2011. Theestimated cost of this proposal is $210million over ten years.

No provision.

CRS-24


BIODIESELBLENDER’S TAXCREDIT and SMALLBIODIESELPRODUCERCREDIT

Refundable income tax credits andexcise tax credits are available forthe blending and production ofbiodiesel. The basic credit is$0.50/gallon ($1.00/gallon forvirgin or “agri” biodiesel) and isalso provided on a volumetricbasis. Production of biodiesel by asmall producer qualifies for a$0.10/gallon credit up to 15million gallons. These creditsexpire at the end of 2008 [IRC§40A, 6426, and 6427].

Sec. 202 & 203.The bill extends for threeyears (through December 31, 2011) the$1.00 per gallon production tax credits forbiodiesel and the small biodiesel producercredit of 10¢ per gallon. The bill extendsthe $1.00 tax credit for virgin biodiesel torecycled biodiesel. Biodiesel that isimported and sold for export will not beeligible for the credit effective May 15,2008. The combined cost of the biodieselproposal and the renewable diesel provision(please see the next item) is $2.256 billionover ten years.

Sec. 822 & 823. The bill extends forone year (through December 31, 2009)the $1.00/gallon production tax creditsfor biodiesel and the small biodieselproducer credit of 10 ¢/ gallon, butdoes not eliminate the current-lawdisparity in credit for biodiesel andagri-biodiesel. The bill also clarifiesthat certain fuel-related tax credits aredesigned to provide an incentive forU.S. production, which would apply toclaims for credit or payment made afterMay 15. The combined cost of thisproposal and the renewable dieselproposal (discussed in the next itembelow) is estimated be $401 millionover 10 years.

CRS-25


RENEWABLEDIESELPRODUCTION TAXCREDIT

Refundable income tax credits andexcise tax credits are available forthe blending and production ofrenewable biodiesel. The basiccredit is $1.00/gallon. Renewablediesel is diesel fuel derived frombiomass using a “thermaldepolymerization process”(TDP).TDP is a new technology that usesheat and pressure to change themolecular structure of wastes,plastics, and food wastes such aspoultry carcasses and offal, andturn it into a boiler fuel. In order toqualify for the $1.00/gallon taxcredits, the fuel must meet EPA’srequirements for fuels and fuelsadditives under §211 of the CleanAir Act, and the requirements ofthe ASTM D975 and D396. Thesecredits expire at the end of 2008[IRC §40A, 6426, and 6427].

Sec. 202. The Senate bill extends for threeyears (through December 31, 2011) the$1.00 per gallon production tax credit fordiesel fuel created from biomass. Iteliminates the requirement that renewablediesel fuel must be produced using athermal depolymerization process. As aresult, the credit will be available for anydiesel fuel created from biomass withoutregard to the process used so long as thefuel is usable as home heating oil, as a fuelin vehicles, or as aviation jet fuel. The billcaps the $1 per gallon production credit forrenewable diesel for facilities thatco-process with petroleum to the first 60million gallons per facility. The estimatedcost of the combined biodiesel proposal(previous item) and this proposal is $2.256billion over ten years.

Sec. 822. The bill extends for one year(through December 31, 2009) the$1.00 per gallon production tax creditfor diesel fuel created from biomass. Italso eliminates the requirement thatrenewable diesel fuel must be producedusing a thermal depolymerizationprocess. As a result, the credit will beavailable for any diesel fuel createdfrom biomass without regard to theprocess used so long as the fuel isusable as home heating oil, as a fuel invehicles, or as aviation jet fuel. The billalso clarifies that the $1 per gallonproduction credit for renewable dieselis limited to diesel fuel that is producedsolely from biomass. Diesel fuel that iscreated by co-processing biomass withother feedstocks (e.g., petroleum) willbe eligible for the 50¢/gallon tax creditfor alternative fuels. This provision isestimated to raise $77 million over 10years.

Some oil companies areadding animal fat orvegetable (soybean) oilas feedstocks along withcrude oil in aconventional refinery toproduce such fuels.Unlike biodiesel whichblends the soybean oilester after the diesel ismade, the oil is addedbefore as a feedstock.The resulting “co-produced fuel” comesout of the refinery aspart of the regular dieselfuel mix, distributedthrough pipelines(unlike biodiesel), andsold as regular dieselfuel.

CRS-26


TAX SHELTERSFORALTERNATIVEFUELS

Under current tax law, publiclytraded partnerships are treated ascorporations for tax purposes,unless they have passive income(dividend, rents, etc.) and incomefrom certain mineral explorationand production, timber, and otheractivities [IRC §7704].

Sec. 209. The bill allows publicly tradedpartnerships to treat income derived fromthe transportation and storage of certainalternative fuels as “qualifying income” forincome tests used to determine whether anentity qualifies as a publicly tradedpartnership. Currently, 90% of the incomeof a publicly traded partnership must bequalifying income, or the entity is taxed asa corporation, to which higher rates apply.The bill covers fuels such as alcohol fuelsand mixtures, biodiesel fuels and mixtures,and alternative fuels and mixtures. The billapplies to taxable years that begin after themeasure is enacted. The estimated cost ofthis proposal is $78 million over ten years.

Sec. 830. This provision appears to bethe same as the Senate bill’s provision.The estimated cost of this proposal is$76 million over ten years.

The measure ensuresthat income derivedfrom those fuels wouldreceive treatment similarto income from oil andgas.

CRS-27

Miscellaneous Transportation and Energy ProvisionsProvision Current Law Senate Bill S. 3478 House Bill H.R. 6899 Comments

TRUCK IDLING UNITSAND ADVANCEDINSULATION

A 12% tax is imposed on the saleprice of the first retail sale of (1)truck bodies and chassis suitablefor use with a vehicle having agross vehicle weight of over33,000 pounds, (2) truck trailerand semitrailer bodies and chassissuitable for use with a vehiclehaving a gross vehicle weightover 26,000 pounds, and (3)tractors of the kind chiefly usedfor highway transportation incombination with a trailer orsemitrailer. The retail tax alsogenerally applies to the price andinstallation of parts or accessoriessold on or in connection with, orwith the sale of, a taxable vehicle[IRC §4051].

Sec. 206. The bill provides anexemption from the heavy vehicleexcise tax for the cost of idlingreduction units, such as auxiliarypower units (APUs), which aredesigned to eliminate the need fortruck engine idling (e.g., toprovide heating, air conditioning,or electricity) at vehicle rest stopsor other temporary parkinglocations. The bill also exemptsthe installation of advancedinsulation, which can reduce theneed for energy consumption bytransportation vehicles carryingrefrigerated cargo. Both of theseexemptions are intended to reducecarbon emissions in thetransportation sector. Theestimated cost of this proposal is$95 million over ten years.

Sec. 825. This provision isidentical to that in S. 3478.

TRANSPORTATIONFRINGE BENEFITS

Gross income includes anyincome from whatever source,including income in kind, such asfringe benefits, unless specificallyexcluded. Certain employer-provided transportation fringebenefits are excluded up to certainamounts: up to $220/month forparking and van pool benefits, andup to $115/month of transit passes[IRC §132].

No provision. Sec. 827. The bill allowsemployers to provide employeesthat commute to work using abicycle limited fringe benefits tooffset the costs of suchcommuting (e.g., bicycle storage).This proposal is estimated to cost$10 million over 10 years.

CRS-28


RECYCLINGPROPERTY

Investments in recycling propertyreceive no special tax incentivesand are generally treated the sameas other assets under the ModifiedAccelerated Depreciation System,which allows for shortenedrecovery periods, bonusdepreciation, and expensing undercertain conditions [IRC §168,179].

Sec. 308. S. 3478 allows recyclingproperty to qualify for the 50%special depreciation allowance,basically equivalent to expensingof 1/2 of the investment in suchproperty. The estimated cost ofthis proposal is $162 million overten years.

No Provision. Under the Crude Oil WindfallProfits Tax of 1980 (P.L. 96-223,recycling equipment qualified fora 10% investment tax credit, butthese generally expired at the endof 1982.

TAX INCREASES (OFFSETS) AND OTHER PROVISIONS


DOMESTIC ACTIVITIESMANUFACTURINGDEDUCTION UNDERTHE CORPORATEINCOME TAX

Beginning on 1-1-2005, qualified “manufacturing” businesses in theUnited States can claim a deductionfor a certain percentage of theirtaxable incomes, subject to certainlimits. The deduction was initially 3%,is now 6%, and is scheduled toincrease to 9% in 2010. The definitionof a domestic manufacturing activityis very broad and generally includesall energy market activities except forthe transmission and distribution ofelectricity and natural gas. Inparticular, it includes oil and gasextraction and production [IRC §199].

Sec. 501. The bill repeals the IRC §199manufacturing deduction for majorintegrated and state-owned oil and gascompanies, beginning on 1-1-2009. Itmaintains the 6% deduction rate forother oil and gas companies. Theproposal is estimated to raise $13.904billion over ten years.

Sec. 851. The provision in H.R.5351 is identical to that in S.3478. The proposal is estimatedto raise $13.904 billion over tenyears.

The inclusion of state-owned companies isintended to extend thedenial of the §199deduction to foreignowned oil companies(such as CITGO, whichis owned by thegovernment ofVenezuela). Suchcompanies are large butare not “integrated” oilcompanies — they donot produce sufficientamounts of crude oil — and thus wouldotherwise continue toreceive the deduction.

CRS-29


EXCISE TAXES ON OILAND NATURAL GAS

At the federal level there is no excisetax on domestic (or imported) oil andnatural gas, including oil and gasproduced from the Outer ContinentalShelf. Oil and gas companies areassessed excise taxes on oil purchasedfor refining (a 5¢/barrel tax that fundsthe Oil Spill Liability Trust Fund), andmotor fuels excise taxes on refinedpetroleum products that fund varioustransportation and environmental trustfunds. In addition, oil companies payseverance taxes to some states wherethey extract minerals, and payroyalties (which are factor payments,not taxes) to landowners including thefederal government [IRC §4041,§4081, §4611].

Sec. 502. The proposal establishes a13% excise tax on the removal price ofany taxable crude oil or natural gasproduced from federal submerged landson the OCS in the Gulf of Mexicopursuant to a federal OCS lease. Theremoval price is defined as the amountfor which the barrel of taxable crude oilor barrel-of-oil equivalent of natural gasis sold by the taxpayer. In the case ofsales between related parties, theremoval price is the constructive salesprice of the oil or natural gas. Theproposal allows as a credit against theexcise tax an amount equal to royaltiespaid under federal law with respect totaxable crude oil or natural gas, with thecredit not to exceed the tax paid. Theexcise tax would apply to crude oil ornatural gas removed after the date ofenactment. The proposal is estimated toraise $11.663 billion over ten years.

No provision. A type of windfall profittax on domestic crudeoil production was ineffect from April 1980to August 1988. Thistax, which was actuallyan excise tax, not aprofits or income tax,was part of acompromise between theCarter Administrationand the Congress overthe decontrol of crudeoil prices. It is discussedand analyzed in detail inCRS Report RL33305.

CRS-30


FOREIGN TAXCREDITS ON OILCOMPANIES

United States businesses operatingabroad generally pay taxes to foreigngovernments as well as United Statestaxes, which are generally assessed onworldwide income. A tax credit isallowed, subject to various limitations,against U.S. taxes for the amounts ofthese foreign taxes. Domestic oilcompanies operating abroad are alsosubject to additional limitation on their foreign oil and gas extraction income(“FOGEI”) and foreign oil relatedincome (“FORI”) [IRC §§901-907].

Sec. 503. The proposal eliminates thedistinction between FOGEI and FORI.FOGEI relates to upstream productionto the point the oil leaves the wellhead.FORI is defined as all downstreamprocesses once the oil leaves thewellhead (i.e., transportation, refining).Currently, FOGEI and FORI haveseparate foreign tax credit limitations.This proposal combines FOGEI andFORI into one foreign oil basket andapplies the existing FOGEI limitation.The proposal is estimated to raise $2.23billion over ten years.

Sec. 852. The House bill, whichis broader than the Senate bill)makes two specific changes tothe calculation of such income. Itbars the use of twomethodologies established undera 2004 IRS field directive forcalculating FOGEI and FORI,and would instead requirecompanies to use an “arm’slength” price by using theindependent market value at thepoint nearest to the well at whichan independent market existswhen calculating such income.The bill also requires companies,when they pay foreign taxes thatare limited to oil and gascompanies, to treat the entireamount of their taxes on oil andgas extraction as applying to theirFOGEI, rather than dividing thetaxes between their FOGEI andtheir FORI. Because thisprovision would subject suchincome to the FOGEI limitationfor foreign-tax credits, it wouldlimit the credits claimed, and thusincrease the revenue raised. Thisprovision is effective for taxyears that begin after themeasure’s enactment date. Thesechanges would raise an estimated$3.84 billion over 10 years.

Multinational oilcompanies currentlyallocate their incomebetween FOGEI andFORI, which are subjectto different taxationrules.

CRS-31


OIL SPILL LIABILITYTRUST FUND EXCISETAX

A 5¢-per-barrel excise tax is imposedon domestic and imported crude oiland petroleum products. The revenuesfrom this tax go into the Oil SpillLiability Trust Fund and are used toclean up offshore oil spills [IRC§4611].

Sec. 505. The proposal extends the oilspill tax through December 31, 2017,increases the per barrel tax from 5 centsto 12 cents, and repeals the requirementthat the tax be suspended when theunobligated balance exceeds $2.7billion. The proposal is estimated toraise $3.4 billion over ten years.

No provision. Although the tax hadexpired at the end of1994, Congressreinstated the 5¢ perbarrel tax effective onApril 1, 2006(EPACT05, P.L.109-58). The tax willremain in effect fromthis date until the OilSpill Liability TrustFund reaches anunobligated balance of$2.7 billion. Thereafter,the oil spill tax will bereinstated 30 days afterthe last day of anycalendar quarter forwhich the IRS estimatesthat, as of the close ofthat quarter, theunobligated balance ofthe Oil Spill LiabilityTrust Fund is less than$2 billion. The oil spilltax will cease to applyafter December 31,2014, regardless of theOil Spill Trust Fundbalance.

CRS-32


ESTIMATEDCORPORATE TAXPAYMENTS

Under current law, corporations withassets of at least $1 billion are requiredto adjust their quarterly estimatedcorporate tax payments for certainquarters, including for July, August,and September of 2013, which is thelast quarter of FY2013. Affected firmsreduce their payments in the followingquarter by a corresponding amount.

No provision.

Sec. 853. The bill furtherincreases the payments due inJuly, August, or September 2013by an additional 40 percentagepoints, but only for companiesthat had any significant incomefor the preceding taxable yearfrom the extraction, production,processing, refining,transportation, distribution, orretail sale of fuel or electricity.

These provisions aregenerally used to shiftanticipated revenue fromone quarter to another inorder to make measurescomply with thepay-as-you-go budgetrule.

INCOME RECEIVED ASDAMAGES FROM THEEXXON-VALDEZLITIGATION

Sec. 403. The bill would allowcommercial fishermen and otherindividuals whose livelihoods werenegatively impacted by the 1989 ExxonValdez oil spill to average anysettlement or judgment-related incomethat they receive in connection withpending litigation in the federal courtsover three years for federal taxpurposes. The bill would also allowthese individuals to use these funds tomake contributions to retirementaccounts. The estimated cost of thisproposal is $49 million over ten years.

No provision.

Documents

Side-by-Side Comparison of Energy Tax Provisions of H.R