Joint Committee on Taxation

US Internal Revenue Service logo
US Internal Revenue Service logo

The optimal position for your industry in any tax reform is to see general tax rates drop while also keeping all of your old subsidies.  The political lobbying on these bills is enormous, and given the scale of the energy sector in the US economy, and the need to transition towards lower carbon fuel sources, it seemed important to look at the tax reform proposals through the lens of energy.

When the Joint Committee on Taxation assesses the cost to Treasury from the proposal, they are focused on the new rules or repealed line items a particular bill may put forward.  But the economic impacts of a new tax regime is affected by three major threads:  whether general changes in tax rules disproportionately affect some energy resources relative to others; energy-specific line items being repealed, changed, or added; and whether political power among particular industry-subsectors has enabled them to have their cake and eat it too by keeping their old subsidies while also getting lower top tax rates.

This working paper is a first cut at doing this.  I've no illusions I'veworking paper cover extract captured everything, or mapped out all of the interactions.  But even the first order effort to combine these three main threads is important in gauging winners and losers under the proposals.  This is a discussion draft, so email your comments, concerns or corrections if you've got them. 

To better see patterns, the tax line items have been grouped into three general energy categories:  conventional energy (mainly fossil); emerging resources; and mixed (which includes the grid and transport policy).  Both new and (apparently) surviving tax expenditures are included.

There's a great deal of detail in the full summary, but my key takeaways are below:

  • Largest subsidies to fossil fuels are not touched by tax reform proposals, and post-reform subsidies to fossil will remain very large. Although a handful of tax subsidies to oil and gas are eliminated in tax reform, the largest ones remain untouched by either proposal and exceed the reductions by a large margin. As shown in Table 4, net subsidies to conventional energy after tax reform are still at a staggering $52 to $67 billion dollars over the 2018-27 time period. Fossil fuels comprise more than 80% of the total, with nuclear the remainder.
  • Effective tax rates on fossil energy are likely to remain well below those on competing resources as a result. The residual tax subsidies, in combination with a lower top corporate rate, and lower top rates on income flowing from pass-throughs, will bring down the effective tax rate on key fossil fuel sectors even further.
  • Tax subsidies to nuclear are increased or untouched via tax reform. Further, the large subsidies flowing to nuclear via other transfer mechanisms in credit, insurance, and government ownership of fuel cycle functions, will also remain in place.
  • In contrast, significant reductions in subsidies to renewable energy are being implemented, particularly under the House proposal. Although the eligibility period for a handful of these subsidies is being extended, changes to the production tax credit for wind are estimated to be much larger, more than offsetting the gains to other renewable resources. Net subsidies to emerging energy resources will drop significantly under the reform plans. There will be some gains through reduced corporate rates and pass-throughs, though renewables are not likely to benefit to the same degree as fossil energy will due to differences in industry scale and the use of large partnerships.
  • In the “mixed” category, the largest changes are in the area of transportation and parking. Commuting via bicycle or mass transit will no longer be subsidized, though the largest shift is likely the elimination of employer-subsidized parking – which could shift ridership to less carbon-intensive modes.

The Joint Committee on Taxation of the US Congress has gradually posted many of its publications going back as early as 1926.  Special tax rules for natural resources were a focus of JCT's attention even in its earliest days.  By the mid-1920s, standard cost depletion had already been jettisoned for discovery value.  Under cost depletion, taxpayers could write off what they'd invested in the mining property.  Discovery value depletion introduced subsidization, as it allowed the write off of the value of minerals at the time of discovery, even if that value was more than the investment (as it normally would be, else the mine would be losing money).  The discovery approach proved difficult to implement because the minable reserves couldn't always be assessed ahead of time, so the tax code shifted to percentage depletion, allowing 27.5% of the gross value of oil and gas to be written off from taxes each year.  JCT was concerned about this from the outset:

The text below has a refreshing honesty, particularly in comparison to the bland bureaucratic language that pervades government documents today.  The note to the in-process study reads:

The 1926 act in regard to depletion on oil and gas wells includes a radical change from the 1924 act, consisting of the substitution of an arbitary 27 1/2 per cent of gross income for a depletion deduction in lieu of the depletion, on discovery value previously allowed.  It is most important to study the effect of this change as it was made on insufficient data.

JCT 1926 OG pct depletion study









Rates are lower, and the largest of oil firms can no longer claim the subsidy.  But the 1926 study, and however many more followed it, have never been sufficient to kill this tax break entirely.  It remains a significant subsidy to oil and gas today.

The cover page of the JCT report is below.  It can be read in full here.


Natural gas fracking well in Louisiana

One important provision dropped from the Senate's "compromise" tax bill was a requirement that the the Joint Committee on Taxation and the Government Accountability Office actually evaluate tax provisions regularly "extended": by Congress to see if they are accomplishing what they were originally intended to accomplish.

Citizens for Tax Justice notes that these provisions amount to nearly $30 billion in revenue losses each year.  Periodic evaluation of efficacy seems the very least the taxpayers granting this largess deserve.  More on the issue from Seth Hanlon at the Center for American Progress

Regulatory activity by the federal government to accomplish such goals as protecting human health or environmental quality must run through a wide array of review to assess the costs and benefits of the proposed options and whether there are less expensive ways to reach the same goals.  If the affected sectors don't think these assessments have been well done, they can (and often do) litigate.

Not so with fiscal subsidies such as tax breaks. The table below (from this article by Koplow and Dernbach) starkly demonstrates the lack of transparency that plagues multi-billion dollar fiscal subsidies.  Federal fiscal subsidies are often larger in economic impact than government regulatory actions.  Yet they subject to far less evaluation and review.  It is high time for this to change.

Reg vs fiscal