Energy Tax Policy: Issues in the 112th Congress

Molly F. Sherlock
Specialist in Public Finance

Margot L. Crandall-Hollick
Analyst in Public Finance

Energy tax policy has been actively debated in the 112th Congress. Much of this debate has centered around proposals in the President’s FY2012 and FY2013 budgets, proposals to eliminate certain tax preferences, and proposals to extend other expired or expiring provisions. The Obama Administration has proposed a number of changes in energy tax policy with the intent of correcting perceived distortions in the market and encouraging conservation and the use of renewable energy. Specifically, the Administration seeks to eliminate a number of existing tax incentives for fossil fuels. Further, the Administration has proposed expanding select incentives for commercial-building energy efficiency, extending incentives to promote manufacturing of advanced energy technologies, extending certain renewable energy incentives, and modifying incentives for alternative technology vehicles. In early 2012, Congress considered the possible extension of certain temporary energy tax provisions, which had either expired at the end of 2011 or were scheduled to expire in coming years (see S.Amdt. 1812 to S. 1813 and S. 2204). S. 2204 would pay for the extension of certain expired and expiring provisions by eliminating certain tax incentives for oil and gas. Many of the provision that expired at the end of 2011 were previously granted a temporary extension as part of the Tax Relief, Unemployment Reauthorization, and Job Creation Act (P.L. 111-312), enacted in December 2010.

Energy tax policy involves the use of one of the government’s main fiscal instruments, taxes (both as an incentive and as a disincentive) to alter the allocation or configuration of energy resources and their use. In theory, energy taxes and subsidies, like tax policy instruments in general, are intended either to correct a problem or distortion in the energy markets or to achieve some economic (efficiency, equity, or even macroeconomic) objective. In practice, however, energy tax policy in the United States is made in a political setting, determined by fiscal dictates and the views and interests of the key players in this setting, including policymakers, special interest groups, and academic scholars. As a result, enacted tax policy embodies compromises between economic and political goals, which could either mitigate or compound existing distortions.

The economic rationale for government intervention in energy markets is commonly based on the government’s perceived ability to correct for market failures. Market failures, such as externalities, principal-agent problems, and informational asymmetries, result in an economically inefficient allocation of resources—in which society does not maximize well-being. To correct for these market failures governments can utilize several policy options, including taxes, subsidies, and regulation, in an effort to achieve policy goals.

Current energy policy reflects efforts to achieve both current and past policy objectives. Recent legislative efforts have primarily focused on renewable energy production and conservation to address environmental concerns. In contrast, past efforts attempted to reduce reliance on foreign energy sources through increased domestic production of fossil fuels. Legislation enacted in the 111th Congress focusing on encouraging renewable energy production and conservation reduces reliance on imported, foreign oil, while also addressing environmental concerns by reducing the use of fossil fuels. Favorable tax preferences given to domestic fossil fuel energy sources also promote domestic energy production, reducing the demand for imported oil.


Date of Report: March 28, 2012
Number of Pages: 31
Order Number: R41769
Price: $29.95

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