Energy Tax Policy

Publication Date: April 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Energy

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Abstract:

Historically, U.S. federal energy tax policy promoted the supply of oil and gas. However, the 1970s witnessed (1) a significant cutback in the oil and gas industry’s tax preferences, (2) the imposition of new excise taxes on oil, and (3) the introduction of numerous tax preferences for energy conservation, the development of alternative fuels, and the commercialization of the technologies for producing these fuels (renewables such as solar , wind, and biomass, and nonconventional fossil fuels such as shale oil and coalbed methane).

The Reagan Administration, using a freemarket approach, advocated repeal of the windfall profit tax on oil and the repeal or phase-out of most energy tax preferences — for oil and gas, as well as alternative fuels. Due to the combined effects of the Economic Recovery Tax Act and the energy tax subsidies that had not been repealed, which together created negative effective tax rates in some cases, the actual energy tax policy differed from the stated policy.

The George H. W. Bush and Bill Clinton years witnessed a return to a much more activist energy tax policy, with an emphasis on energy conservation and alternative fuels. While the original aim was to reduce demand for imported oil, energy tax policy was also increasingly viewed as a tool for achieving environmental and fiscal objectives.

The Clinton Administration’s energy tax policy emphasized the environmental benefits of reducing greenhouse gases and global climate change, but it will be remembered for its failed proposal to enact a broadly based energy tax based on Btu’s (British Thermal Units) and its 1993 across-the-board increase in motor fuels taxes by 4.3¢/gallon. The George W. Bush Administration has proposed a limited number of energy tax measures, but the 106th-108th Congresses have considered comprehensive energy legislation, which included numerous energy tax incentives to increase the supply of, and reduce the demand for, fossil fuels and electricity, and for energy efficiency in residential and commercial buildings as well as for more energy efficient vehicles. They also included tax incentives for several types of alternative and renewable resources such as solar and geothermal. Because of controversy over either corporate average fuel economy standards, the Alaskan national wildlife refuge, or methyl-tertiary butyl ether, each of these attempts failed.

The Working Families Tax Relief Act of 2004 (P.L. 108-311), which was signed into law by the President on October 4, 2004, retroactively extended four energy tax subsidies. The American Jobs Creation Act of 2004 (P.L. 108-357), signed on October 22, 2004, contains several energy-related tax breaks that were in the comprehensive energy bills. The current energy tax structure is dominated by revenues from a long-standing gasoline tax, and tax incentives for alternative and renewable fuels supply relative to energy from conventional fossil fuels.

The House and Senate have approved the conference report on H.R. 6, which provides for a net energy tax cut of $11.5 billion ($14.5 billion gross energy tax cuts, less $3 billion of energy taxes). This bill was signed by President Bush on August 8, 2005 (P.L. 109-58). Tax reconciliation bills and hurricane relief tax bills include some relatively minor energy tax provisions, such as additional incentives and tax increases on major integrated oil companies.