Energy Tax Policy: Historical Perspectives On and Current Status of Energy Tax Expenditures

By providing a longitudinal perspective on energy tax policy and expenditures, this report examines how current revenue losses resulting from energy tax provisions compare to historical losses and provides a foundation for understanding how current energy tax policy evolved.  Further, this report compares the relative value of tax incentives given to fossil fuels, renewables, and energy efficiency.

Examining trends in revenue losses associated with energy tax provisions provides insight into the actual direction of energy tax policy. In inflation-adjusted terms, revenue losses associated with energy tax provisions in the late 1970s and early 1980s are similar to revenue losses in the late 2000s. The composition of these revenue losses, however, has changed significantly. In the late 1970s nearly all revenue losses associated with energy tax provisions were the result of two tax preferences given to the oil and gas industry. In the early 1980s, revenue losses associated with special treatment for the oil and gas industry accounted for more than three quarters of all federal revenue losses associated with energy tax expenditures. Changes in policy, coupled with declining oil prices in the late 1980s, dramatically reduced revenue losses associated with oil and gas tax policy. Throughout the 1990s, the bulk of revenue losses associated with energy tax provisions were attributable to the tax credit for unconventional fuels. In the 2000s, revenue losses associated with renewable energy production incentives began to make up a larger portion of energy tax expenditure revenue losses, reaching an estimated 21% in 2006. Revenue losses associated with tax provisions benefitting fossil fuels also remained important into the 2000s, with a large proportion of revenue losses in the mid-to-late 2000s associated with the unconventional fuel production credit, benefitting synthetic coal producers. In the late 2000s, the majority of revenue losses have been associated with incentives designed to promote biofuels.

The federal government also loses significant revenue from excise tax credits given to alcohol fuel blenders (specifically, the volumetric ethanol excise tax credit (VEETC)).