Report Contents
Report#:SR/OIAF/1999-03

Preface

Executive Summary

Introduction

Tax Expenditures

Federal Energy Research and Development

Trust Funds and Energy Excise Taxes

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1. Energy Information Administration, Federal Energy Subsidies: Direct and Indirect Interventions in Energy Markets, SR/EMEU/92-02 (Washington, DC, November 1992).

2. U.S. House of Representatives, Appropriations Committee Report: Department of Interior and Related Agencies Appropriation Bill, Report 102-116 (June 19, 1991), p. 115.

3. See C. Shoup, Public Finance (Chicago, IL: Aldine Publishing Company, 1969), p. 145.

4. Amory Lovins, in "Four Revolutions in Electric Efficiency," Contemporary Policy Issues, Vol. VIII (July 1990), p. 123, states: "[E]lectricity is about eleven times as heavily subsidized as direct fuels (as of 1984) . . . ."

5. For example, this argument is made by H.R. Heede et al., in The Hidden Costs of Energy (Washington, DC: Center for Renewable Resources, October 1985).

6. M. Kosmo, Money to Burn? The High Costs of Energy Subsidies (Washington, DC: World Resources Institute, 1987).

7. J.B. Wahl, Oil Slickers: How Petroleum Benefits at the Taxpayer's Expense (Washington, DC: Institute for Local Self-Reliance, 1996), web site www.ilsr.org.

8. Excise taxes are reviewed in Chapter 4. Because the partial exemption of alcohol fuels from excise taxes on transportation fuels is closely related to energy tax expenditures, it is reviewed in this chapter.

9. Some of the factors related to the two approaches are discussed in M. Feldstein, "A Contribution to the Theory of Tax Expenditures: The Case of Charitable Giving," in H.J. Aaron and M.J. Boskin, eds., The Economics of Taxation (Washington, DC: The Brookings Institution, 1980), pp. 99-122.

10. Intangible drilling costs are defined as oil and gas well drilling expenses that do not have salvage value and are "incident to and necessary for the production of oil and gas." Typical intangible costs--well logging, labor, fuels, and site preparation expenses--usually account for about 70 percent of the cost of drilling wells. A textbook discussion of intangible drilling costs can be found in R.A. Gallun and J.W. Stevenson, Fundamentals of Oil and Gas Accounting, 2nd edition (Tulsa, OK: PennWell Books, 1988), pp. 224-227.

11. Although accelerated writeoffs have no effect on the value of after-tax profits, they allow profits to be realized earlier and give companies the opportunity to take advantage of intertemporal interest rate effects.

12. Each tax expenditure category, including those that relate to intangible drilling costs and percentage depletion, is discussed later in the report and in detail in the Fact Sheets in Appendix B.

13. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2000 (Washington, DC, 1999), and earlier editions. Treasury's compilation of tax expenditures is limited to special exceptions in the Federal income tax code that serve specific programs listed in the budget, such as energy, health, and defense.

14. The basic rationale against including preferential energy excise taxes in formulations of tax expenditures is that excise taxes lack a basic structure against which deviations (preferences) can be measured. See P.R. McDaniel and S.S. Surrey, "Tax Expenditures: How To Identify Them; How To Control Them," Tax Notes (May 24, 1982), p. 610.

15. The Commerce and Housing income tax credit provides incentives to encourage business investment. It allows capital gains to be taxed at a lower rate than other income.

16. The Income Security tax credit provision benefits certain classes of retirement savings.

17. The Health and Medicare tax allows employers to exclude contributions for health insurance from taxable income.

18. The tax expenditures in these tables are net of the effects of the Alternative Minimum Tax.

19. The credit was extended to production from biomass and liquid, gaseous, or solid synthetic fuels produced before January 1, 1997, and production through January 1, 2008. These fuels are relatively minor recipients of the Alternative Fuel Production Credit.

20. Technically, this is referred to either as a reversal or a turnaround of deferred taxes, depending on whether the emphasis is on all loans or individual loans.

21. IDCs include costs such as labor, fuels, and site preparation. They exclude the cost of acquiring the property itself, as well as costs such as pipelines and other tangible facilities to control and transport the oil and gas produced.

22. A major oil company is one that has integrated operations from exploration and development through refining or distribution to end users.

23. Mine development expenses can be written off immediately. Typically, exploration costs can also be written off immediately, but the benefits of the early writeoff are nullified if the mines become profitable. See National Research Council, Energy Taxation: An Analysis of Selected Taxes, DOE/EIA-0201/14, prepared for the Energy Information Administration (Washington, DC, September 1980), pp. 78-79.

24. A working interest is an interest in a mineral property that entitles the owner to explore, develop, and operate a property. The owner of the working interest bears the costs of exploration, development, and operation of the property and any liabilities arising from those activities. In return, the owner is entitled to a share of the mineral production from the property or to a share of the proceeds.

25. The passive loss rules generally apply to individuals, trusts, estates, personal service corporations, and closely held corporations.

26. The Section 43 tax credit is phased out when the average unregulated wellhead price per barrel of crude oil exceeds $28 in inflation-adjusted dollars. In 1999 dollars this value was $32.83, after adjusting for inflation using the 1992 GDP inflator (GDP92 = 1.00). Source: Joint Committee on Taxation.

27. Tertiary injectants can also be expensed under Section 193 of the U.S. tax code. The value of this tax expenditure fell beneath the U.S. Treasury's de minimis amount ($5 million) over fiscal years 1999-2004 and thus was not reported.

28. Energy Information Administration, Annual Energy Outlook 1999, DOE/EIA-0383(99) (Washington, DC, December 1998), Table A15.

29. The credit is offset by any benefits received from energy investment credits, tax-exempt financing, and benefits received from Government grants.

30. The tax expenditure "New Technology Credit" is an aggregation of the investment tax credit for solar and geothermal energy coupled with the renewable resource production tax credit directed at wind and biomass energy. These values are not reported separately in U.S. budget documents. The U.S. Treasury does not disaggregate these items separately as tax expenditures. They provided estimates of the production tax credit for wind and investment tax credit for solar and geothermal for 1999 to 2004. See the fact sheet "New Technology Credit: Investment Energy Tax Credit" in Appendix B.

31. Solar property eligible for the investment credit uses solar energy to generate electricity or to heat or cool.

32. Energy Information Administration, Renewable Energy Annual 1998: Issues and Trends, DOE/EIA-0628(98) (Washington, DC, March 1999), p. 7.

33. An eligible small producer of ethanol generally is a person who, at all times during a year, has a productive capacity for alcohol not in excess of 30 million gallons.

34. Ethanol is an alcohol that, when blended with gasoline, provides an effective fuel additive. Gasohol commonly is a blend of 10 percent ethanol and 90 percent gasoline.

35. One study has estimated that approximately 7 percent of the U.S. corn crop was used for ethanol production in 1997, and that the subsidy raised corn prices by 45 cents per bushel. See M. Evans, The Economic Impact of the Demand for Ethanol (Lombard, IL: Midwestern Governors' Conference, February 1997).

36. The excess depletion allowance is classified as a deduction because it permanently reduces income tax expense. If it merely deferred the expense it would be classified as a tax deferral.

37. Specifically, the annual deduction is equal to the unrecovered cost of acquisition and development of the resource times the proportion of the resource removed during that year.

38. Gross income amounts to oil and gas revenues, less transportation costs to the point of sale and any allocable lease bonus payments.

39. For purposes of percentage depletion, an independent producer is defined, in general, as one who does not retail petroleum or petroleum products or refine crude oil. However, if the aggregate retail sales of the oil, natural gas, and products do not exceed $5 million per year, and if refinery runs do not exceed 50,000 barrels a day on any day during a tax year, the producer still is classified as an independent.

40. Generally, for purposes of this provision, a marginal well property is one that produces a daily average of 15 barrels of oil equivalent or less per producing well over the course of a calendar year. Marginal wells include stripper wells.

41. Energy Information Administration, Performance Profiles of Major Energy Producers 1992, DOE/EIA-0206(92) (Washington, DC, January 1994), p. 17.

42. Several studies suggest that the return on Federal R&D investment is much lower than the return on private-sector R&D, implying relatively high failure rates. See N. Terlecyyj, Effects of R&D on the Productivity Growth of Industries: An Exploratory Study (Washington, DC: National Planning Association, 1974), and Z. Griliches, "Returns to R&D in the Private Sector," in J. Kendrick and B. Vaccara (eds.), New Developments in Productivity Measurement and Analysis, NBER Studies in Income and Wealth No. 44 (Chicago, IL: University of Chicago Press, 1980), pp. 419-454. This result need not be surprising, as the Federal Government's research portfolio may be much riskier than that chosen by the private sector.

43. U.S. Department of Energy, United States Department of Energy Posture Statement and Fiscal Year 1993 Budget Overview (Washington, DC, February 1992).

44. The nuclear waste fee payments are projected to decline gradually from current levels (estimated at $642 million in fiscal year 1999), reflecting a reduction in electricity generation from nuclear plants.

45. The potential liabilities from under-accrued trust funds can be large. Annual outlays from general revenues to supplement the Black Lung Disability Trust Fund are $362 million in fiscal year 1999. The Black Lung Trust Fund is in deficit because, in the past, benefits paid out exceeded tax receipts credited to it. Under present law, the trust fund owes interest on past borrowings. Under Part B of Title IV of the Federal Coal Mine Health and Safety Act of 1969, as amended, the Federal Government also assumed responsibility (without offsetting excise taxes) for payments to disabled coal miners whose claims were filed before July 1, 1973. This program, administered by the Social Security Administration, has outlays of $560 million in fiscal year 1999. Source: Office of Management and Budget, Budget of the United States Government, Appendix 2000 (Washington, DC, 1999), p. 1095.

46. The Department of Energy is required to evaluate periodically the adequacy of the Nuclear Waste Fund fee. A recent assessment report concludes that: "The U.S. Department of Energy (DOE), referred to as the Department, finds that the current 1.0 mill ($0.001) per kilowatt-hour fee charged on generators of spent nuclear fuel (SNF) is adequate, and recommends that the fee not be changed. "U.S. Department of Energy, Office of Civilian Radioactive Waste Management, Nuclear Waste Fund Fee Adequacy: An Assessment, DOE/RW-0509 (Washington, DC, December 1998).

47. Other independent cost estimates state that program cost escalation and a potentially greater number of early retirements may necessitate a significantly higher fee (ranging from 2.6 to 4.5 mills per kilowatthour) to fund the program fully. See B. Biewald and D. White, Stranded Nuclear Waste (Cambridge, MA: Synapse Energy Economics, Inc., 1999).

48. A separative work unit is the standard measure of enrichment services.

49. In most cases, there will be an identifiable responsible party, and the cost will be borne by the industry. A 1991 research report estimates that remediation of underground storage tanks will cost $32 billion to $67 billion (1990 dollars); however, that estimate does not distinguish between private requirements and Federal requirements. See M. Russell, E.W. Colglazier, and M.R. English, Hazardous Waste Remediation: The Task Ahead (Knoxville, TN: Waste Management Research and Education Institute, December 1991), pp. A-3.26-A-3.30.

50. See M. Pasqualetti and G. Rothwell, "Nuclear Decommissioning Economics: Estimates, Regulation, Experience and Uncertainties," The Energy Journal, Vol. 12, Special Issue (1991), which contains 24 articles on various aspects of nuclear power plant decommissioning.

51. U.S. General Accounting Office, Nuclear Regulation: Better Oversight Needed To Ensure Accumulation of Funds To Decommission Nuclear Power Plants, GAO/RCED-99-75 (Washington, DC, May 1999).

52. EIA's Annual Energy Outlook 1999 projects that the national average price of electricity to all sectors will be 6.9 cents (nominal dollars) in 1999.

53. Taxpayer Relief Act of 1997.

54. State oil and gas severance tax collections totaled $4.6 billion in 1993, and coal severance taxes totaled $559 million. State motor fuels sales and gross receipts were $28.33 billion in 1998. Source: U.S. Department of Commerce, web site www.census.gov/govs/ statetax/98tax.txt.

55. State and local severance taxes are discussed in Energy Information Administration, State Energy Severance Taxes, 1985-1993, DOE/EIA-TR/0599 (Washington, DC, September 1995).

56. Joint Committee on Taxation, Schedule of Present Federal Excise Taxes (as of January 1, 1999) (Washington, DC, March 29, 1999).

57. U.S. Nuclear Regulatory Commission, The Price-Anderson Act: The Third Decade, NUREG-0957 (Washington, DC, 1983).

58. J.A. Dubin and G.S. Rothwell, "Subsidy to Nuclear Power Through Price-Anderson Liability Limit," Contemporary Policy Issues, Vol. 8 (1990), pp. 73-79.

59. U.S. Nuclear Regulatory Commission, The Price-Anderson Act--Crossing the Bridge to the Next Century: A Report to Congress, NUREG/CR-6617 (Washington, DC, August 1998).

60. Energy Information Administration, Annual Energy Review 1998, DOE/EIA-0384(98) (Washington, DC, August 1999), pp. 241-243.

61. Table A3 displays tax expenditures explicitly quantified in EIA's 1992 Service Report, its 1999 update (this report), and the various reports reviewed. Table A4 displays direct expenditures (and selected Federal programs), including several that fall outside the primary energy scope of this report. All dollar values have been converted to 1999 dollars, except where values are cumulative or projected. Note that various reports may reference specific programs and line items differently, making direct comparisons difficult.

62. For example, the imposition of oxygenate requirements for gasoline in the winter of 1992 stimulated demand for alcohol-based additives.

63. Energy Information Administration, Federal Energy Subsidies: Direct and Indirect Interventions in Energy Markets, SR/EMEU/92-02 (Washington, DC, November 1992), pp. 71-80.

64. D.N. Koplow and The Alliance to Save Energy, Federal Energy Subsidies: Energy, Environmental, and Fiscal Impacts (Lexington, MA: The Alliance to Save Energy, 1993), pp. 9-10. See also p. 76, Appendix A-10, which discusses dozens of regulations, their points of intervention in energy markets, and their consequent effects.

65. J.B. Wahl, Oil Slickers: How Petroleum Benefits at the Taxpayer's Expense (Washington, DC: Institute for Local Self-Reliance, 1996).

66. H.R. Heede, R.E. Morgan, and S. Ridley, The Hidden Costs of Energy (Washington, DC: Center for Renewable Resources, October 1985), p. 7.

67. J.C. Ryan, Hazardous Handouts: Taxpayer Subsidies to Environmental Degradation (Seattle WA: Northwest Environmental Watch, 1995).

68. In practice, however, transportation energy use is dominated by petroleum products.

69. D.N. Koplow and The Alliance to Save Energy, Federal Energy Subsidies: Energy, Environmental, and Fiscal Impacts (Lexington, MA: The Alliance to Save Energy, 1993), p. 74.

70. H.R. Heede, R.E. Morgan, and S. Ridley, The Hidden Costs of Energy (Washington, DC: Center for Renewable Resources, October 1985), p. 26.

71. D.M. Roodman, Paying the Piper: Subsidies, Politics, and the Environment (Washington, DC: Worldwatch Institute, 1996), p. 42. Roodman cited U.S. Department of Transportation, Highway Statistics 1994, and McKenzie et al., The Going Rate: What It Really Costs To Drive (Washington, DC: World Resources Institute, 1992).

72. D.N. Koplow and The Alliance to Save Energy, Federal Energy Subsidies: Energy, Environmental, and Fiscal Impacts (Lexington, MA: The Alliance to Save Energy, 1993), p. 10.

73. H.R. Heede, R.E. Morgan, and S. Ridley, The Hidden Costs of Energy (Washington, DC: Center for Renewable Resources, October 1985), p. 26.

74. G.M. Brannon, Energy Taxes and Subsidies (Cambridge, MA: Ballinger, 1974).

75. Pacific Northwest Laboratory, An Analysis of Federal Incentives Used To Stimulate Energy Production, PNL-2410 REV.II, prepared for DOE under contract EY-76-C-06-1830 (February 1980).

76. Energy Information Administration, Annual Energy Review 1997, DOE/EIA-0384(97) (Washington, DC, July 1998), Table 10, p. 92.

77. Congressional Budget Office, Energy Use and Emissions of Carbon Dioxide: Federal Spending and Credit Programs and Tax Policies (Washington, DC, December 1990).

78. D.N. Koplow, Federal Energy Subsidies: Energy, Environmental, and Fiscal Impacts (Lexington, MA: Alliance To Save Energy, 1993).

79. That is, all expenditures to energy and all tax breaks constitute subsidy to the recipient.

80. Other quantified market interventions were two, the Price-Anderson assumption of nuclear liability and the under-accrual of funds necessary for nuclear decommissioning.

81. Besides accelerated depreciation, investment tax credits for new machinery and equipment ($2.5 billion) and tax-exempt bonds for pollution control equipment ($716 million) were also important residual items.

82. For example, the 1989 revenue foregone from oil and gas percentage depletion exemption was estimated by Treasury at $496 million (ASE's low estimate of the tax expenditure), but since the tax expenditure increases taxable income, a grant of $674 million (ASE's high estimate) would be needed to produce a $390 million benefit after taxes.

83. Energy Information Administration, Federal Energy Subsidies: Direct and Indirect Interventions in Energy Markets, SR/EMEU/92-02 (Washington, DC, November 1992).

84. Management Information Services, Inc., Federal Subsidies and Incentives for the Energy Industries (Washington, DC, December 1998).

85. Organizations, taxes, fees, disbursements, requirements, traditional and nontraditional Government services, and market activity, the same categories identified by the Pacific Northwest Laboratory report delivered under contract to DOE in 1980.

86. MISI included subsidies estimated at $62.5 billion cumulatively to hydroelectricity in the renewable total of $90 billion.

87. Friends of the Earth, Green Scissors 98: Cutting Wasteful and Environmentally Harmful Spending (Washington, DC, 1998).

88. Subsidy estimated as $400 million annually.

89. $1.5 billion since 1984.

90. $107 million, FY 1998.

91. $48.5 million, FY 1998.

92. Estimated at $60 million annually.

93. H.R. Heede, R.E. Morgan, and S. Ridley, The Hidden Costs of Energy (Washington, DC: Center for Renewable Resources, October 1985).

94. M. Kosmo, Money to Burn? The High Costs of Energy Subsidies (Washington, DC: World Resources Institute, 1987).

95. Ten years later, the falling cost of bulk power generation has produced the phenomenon of "stranded costs," in many areas, suggesting that marginal costs are now lower than regulated prices in many areas. This, of course has given impetus to the restructuring initiative.

96. J.J. Romm and A.B. Lovins, "Fueling a Competitive Economy," Foreign Affairs (Winter 1992/1993), pp. 44-62.

97. J.B. Wahl, Oil Slickers: How Petroleum Benefits at the Taxpayer's Expense (Washington, DC: Institute for Local Self-Reliance, 1996), web site www.ilsr.org.

98. S. Moore, Welfare for the Well-Off: How Business Subsidies Fleece Taxpayers (Stanford, CA: Hoover Institute, 1999).

99. J.C. Ryan, Hazardous Handouts. Taxpayer Subsidies to Environmental Degradation (Seattle, WA: Northwest Environmental Watch, 1995).

100. Organization for Economic Cooperation and Development, Improving the Environment Through Reducing Subsidies (Paris, France, 1998).

101. D.M. Roodman, Paying the Piper: Subsidies, Politics, and the Environment (Washington, DC: Worldwatch Institute, 1996).

102. Energy Information Administration, Annual Energy Outlook 1999, DOE/EIA-0383(99) (Washington, DC, December 1998), p. 132.

103. Energy Information Administration, Performance Profiles of Major Energy Producers 1993, DOE/EIA-0206(93) (Washington DC, January 1995), p. 17.

104. Solar property eligible for the investment credit uses solar energy to generate electricity, to heat, cool, or provide hot water for use in a structure, or to provide process heat.

105. The Federal Government also offers a Modified Accelerated Cost Recovery System (MACRS), which allows for a 5-year accelerated depreciation for all solar energy equipment (U.S. Code Citation: 26 USC Sec. 168). Without MACRS, depreciation for such equipment would be done over the standard 20-year period.

106. These tax expenditures include a production tax credit for wind-generated electricity. See the next Fact Sheet, "New Technology Credit: Production Tax Credit."

107. Initially, the areas affected included 19 States and 22 designated high-pollution geographic areas.

108. Although the ATS program will demonstrate performance with natural gas fuel, advanced turbine design systems will make use of fuels other than natural gas, such as coal and renewable biomass.

109. U.S. Department of the Interior, Office of Surface Mining, 1998 Annual Report (Washington, DC, 1999).

110. Energy Information Administration, Annual Energy Review 1998, DOE/EIA-0384(98) (Washington, DC, August 1999).

111. U.S. Nuclear Regulatory Commission, The Price-Anderson Act--Crossing the Bridge to the Next Century: A Report to Congress, NUREG/CR-6617 (Washington, DC, August 1998).