Infrastructure, Energy and Natural Resources: Senate Finance Committee Staff Tax Reform Options for Discussion

Agriculture (USDA)Energy (DOE)Environmental Protection Agency Federal Agency/Executive Branch Federal Legislation Funding/Financing/Investing grants Internal Revenue Service Opinions Policy State Department Sustainability Transportation (DOT)

April 26, 2013

Print This Article Share it With Friends

(US Senate Finance Committee) This document is the fourth in a series of papers compiling tax reform options that Finance Committee members may wish to consider as they work towards reforming our nation’s tax system. This compilation is a joint product of the majority and minority staffs of the Finance Committee with input from Committee members’ staffs. The options described below represent a non-exhaustive list of prominent tax reform options suggested by witnesses at the Committee’s 30 hearings on tax reform to date, bipartisan commissions, tax policy experts, and members of Congress.

Excerpts:

4. Establish new user fees and taxes to replace or supplement current user fee system

a. Replace the current gas tax with a hybrid tax structure designed to provide relief when gas prices increase by lowering taxes, and then to increase taxes when gas prices fall (Carnegie Endowment, “Road to Recovery: Transforming America’s Transportation,” 2011)

i. Hybrid structure would combine a variable fuel tax with a per barrel fee on domestic and imported oil

1. Gasoline and diesel taxes would increase when oil prices were low and decrease when oil prices increased

2. Per barrel fee on oil (at production or importation) would vary inversely

b. Institute a vehicle-miles-traveled tax

i. Tax would be a certain amount per mile travelled and could be adjusted based on the type of vehicle and the time and place of travel

ii. Could be used to replace the existing system or could be adopted in certain parts of the country (potentially as pilots) to supplement existing fees and taxes; Oregon state has been conducting a pilot program since 2006 (National Surface Transportation Infrastructure Financing Commission, “Paying Our Way, A New Framework for Transportation Finance,” 2009)

c. Establish surcharges on drivers’ licenses and vehicle registration (National Surface Transportation Infrastructure Financing Commission, “Paying Our Way, A New Framework for Transportation Finance,” 2009)

d. Set new fees for hybrid and other efficient vehicles (E.H.B.2660, Addressing Transportation Revenue, sponsored by Washington State Rep. Clibborn; H.B.2313, Revenues and Appropriations of State, sponsored by Virginia State Rep. Howell)

e. Establish an annual user fee for commercial shippers utilizing inland waterways

i. For example, establish a lock usage fee to replace the current barge fuel tax (FY14 Administration Budget Proposals, estimated in 2012 to raise $1 billion over 10 years)

ii. Commercial vessels using only inland waterways could pay one rate while commercial shippers using inland waterways and locks would pay a higher fee (The President’s Plan for Economic Growth and Deficit Reduction, September 2011)

f. Expand use taxes to bicyclists, for example, through an excise tax on bicycles (H.B.1954, Addressing Transportation Revenue, sponsored by Washington State Rep. Clibborn)

g. Repeal existing taxes and fees that support one or more infrastructure trust funds, and replace with revenue from a carbon tax on transportation fuels (discussed on p. 15 below) (National Surface Transportation Infrastructure Financing Commission, “Paying Our Way, A New Framework for Transportation Finance,” 2009)

5. Designate other sources of revenue for Highway Trust Fund

a. Increase leases for oil and gas production and dedicate revenue to the Highway Trust Fund (S.17 (113^th Congress), Energy Production and Project Delivery Act of 2013, sponsored by Sen. Vitter) (Note: This proposal would not be in Finance Committee jurisdiction)

...

Accounting for externalities: Measuring externalities is difficult and imprecise. Especially in the area of carbon, estimates of externalities are wide-ranging. Some economists believe that energy tax expenditures enhance economic efficiency to the extent that they address externalities associated with pollution. Specifically, they believe that the lack of a price on pollution, such as emissions of CO₂and other harmful greenhouse gases, is a market failure because pollution produces costs that are not borne by the polluter (e.g., detrimental effects on human health, agricultural productivity, and coastal infrastructure). Further, some economists find that market-based measures, such as taxes, are a more efficient way to correct for this market failure than regulation. Others are concerned that taxing pollution or carbon could adversely affect U.S. competiveness if other countries are not taking similar measures. They are also concerned about the potential impact of such taxes on economic growth and jobs. However, the revenue raised by such a tax could be used to reduce other taxes or to make public investments.

...

B. REFORM OPTIONS

1. Eliminate all existing tax expenditures for the energy sector

a. Eliminate some or all existing tax expenditures, including the following (H.R.259, (113^thCongress), S.2064 (112^th Congress), The Energy Freedom & Economic Prosperity Act, sponsored by Rep. Mike Pompeo and Sens. DeMint and Lee; S.329 (113th Congress), the Sustainable Energy Act, sponsored by Sens. Sanders and Boxer; proposal by Rep. Fred Upton in October 2012)

i. Permanent tax expenditures

1. Oil- and gas-specific tax expenditures, such as expensing of intangible drilling costs

2. Accelerated depreciation for alternative energy assets

3. Investment tax credit for solar and geothermal electricity

ii. Temporary tax expenditures

1. Electricity: Investment tax credit for solar and other resources (expire at the end of 2016) and production and investment tax credits for wind and other resources (expire at the end of 2013)

2. Biofuels: Tax credits for biodiesel and advanced ethanol (expire at the end of 2013) and for liquefied hydrogen and hydrogen refueling property (expire at the end of 2014)

3. Vehicles: Tax credits for vehicles utilizing fuel cell technology (expire at the end of 2014) and plug-in electric drive motor vehicles (phase-out after a manufacturer sells 200,000 vehicles)

2. Replace existing energy tax expenditures with technology-neutral tax expenditures

a. Repeal existing energy tax expenditures for targeted industries or technologies and replace them with one or more technology-neutral tax incentives such as the following (Testimonies of Dr. Gilbert Metcalf and Dr. David Greene before the Committee on Finance, April 23, 2009):

i. Establish a new, performance-based tax credit for residential energy efficient retrofits of, for example, $2,000 if the retrofit makes the home 20% more efficient, regardless of what technology is used (S.1914 (112^th Congress), Cut Energy Bills at Home Act, sponsored by Sens. Bingaman, Snowe, and Feinstein)

ii. Create a new tax credit for transportation-quality biofuel based on the total carbon reduction of the fuel compared to gasoline or diesel fuel (S.3338 (111^th Congress), Advanced Biofuel Investment Act of 2010, sponsored by Sen. Nelson; Union of Concerned Scientists, “The Billion Gallon Challenge,” 2010)

iii. Establish a new tax credit for the purchase of energy efficient vehicles based on fuel efficiency alone compared to the corporate average fuel economy (CAFE) for the vehicle’s class instead of the existing credits for specific types of fuel efficient technology, such as plug-in hybrid cars or fuel cell vehicles (S.1620 (111th Congress), Efficient Vehicle Leadership Act of 2009, sponsored by Sens. Bingaman, Kerry, Snowe, and Lugar)

iv. Create a new production tax credit for electricity based on the energy content (in British thermal units or BTUs) of the energy source; could be based on the pollution or carbon content instead of BTUs (S.306 (111^th Congress), Biogas Production Incentive Act of 2009, sponsored by Sens. Nelson, Brown, Crapo, Hatch, Isakson, Stabenow, Thune, Wyden, and others)

v. Create a program that allocates tax credits on a technology-neutral basis, such as the Section 48C program which provided a 30% investment tax credit for advanced manufacturing facilities (S.1764 (112th Congress), Make it in America Tax Credit Act, proposed by Sen. Stabenow)

...

4. Equalize tax treatment of master limited partnerships (MLPs) in the energy sector

a. Extend the ability of certain MLPs to pay tax on a pass-through basis to MLPs in the renewable energy sector(S.3275 (112th Congress), Master Limited Partnership Parity Act, sponsored by Sen. Coons)

i. Current law allows certain publicly-traded businesses in the oil, gas, mineral and real estate sectors to pay tax on a pass-through basis; most publicly-traded businesses must pay the corporate income tax

b. Alternatively, deny pass-through tax treatment to all MLPs in the energy sector, thereby treating fossil fuel and renewable energy producers equally in this regard (S.3080 (112th Congress), End Polluter Welfare Act of 2012, sponsored by Sen. Sanders)

5. Establish a carbon tax or cap and dividend approach while eliminating most or all other existing energy tax expenditures

a. Eliminate most or all existing tax expenditures for the energy sector and create a new federal excise tax on the sale or importation of fossil fuels (H.R.3242, (112^th Congress), Save Our Climate Act of 2011, sponsored by Rep. Stark; S.332 (113^th Congress), Climate Protection Act of 2013, sponsored by Sens. Sanders and Boxer; National Surface Transportation Infrastructure Financing Commission, “Paying Our Way, A New Framework for Transportation Finance,” 2009; Mankiw, “One Answer to Global Warming: A New Tax,” 2007; Shultz and Becker, “Why We Support a Revenue-Neutral Carbon Tax,” 2013)

i. Design issues to consider include: Whether to impose the tax upstream or downstream, how to set the price, whether and how to phase-in the tax, how to deal with cross-border issues, and whether to include an adjustment mechanism for taxpayers that invest in CO₂ capture and sequestration or energy efficiency

ii. If policymakers decide to maintain the current level of progressivity, a challenge with this option would be how to do so

b. Alternatively, follow a cap and dividend approach (S.2877 (111^th Congress), Carbon Limits and Energy for America’s Renewal Act, sponsored by Sen. Cantwell)

6. Modify conservation easements

a. Make permanent the expansion of the charitable deduction for contributions of conservation easements (S.526 (113th Congress), The Rural Heritage Conservation Extension Act of 2013, sponsored by Sens. Baucus, Hatch, Collins, Heinrich, Heller, Shaheen, Stabenow, Tester, Udall and Whitehouse)

b. Increase the limitation on the estate tax exclusion for land subject to a qualified conservation easement (S.1901 (112th Congress), American Family Farm and Ranchland Protection Act of 2011, sponsored by Sens. Udall and Crapo)

c. Repeal the deduction for contributions of conservation easements and replace with a refundable tax credit capped at a limited dollar amount (Halperin, “A Better Way to Encourage Gifts of Conservation Easements,” Tax Notes 307, 2012)

READ MORE and MORE and MORE (Ethanol Producer Magazine) and MORE (Platts) and MORE (Reuters)