Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013

This report focuses on financial interventions and subsidies that meet the following criteria: they are provided by the federal government, they provide a financial benefit with an identifiable federal budget impact, and they are specifically targeted at energy. These criteria, particularly the energy-specific requirement, exclude some subsidies that benefit the energy sector.

For example, Section 199 of the American Jobs Creation Act of 2004, referred to as the domestic manufacturing deduction, provides reductions in taxable income for American manufacturers, including domestic oil and gas producers and refiners. Taxpayers generally are permitted a 9% deduction for domestic production activities. The deduction is reduced to 6% for qualified production activities income attributable to the production refining, processing, transportation, or distribution of oil, gas, or any primary product thereof. The Section 199 manufacturing credit applies to oil and gas producers along with a variety of other U.S. manufacturers. While domestic oil and natural gas companies utilized this provision to reduce their tax liability, other industries, including traditional manufacturing sectors and other activities such as engineering and architectural services, sound recordings, and qualified film production, also took advantage of it.

Accelerated depreciation is the set of tax rules that allow businesses (both energy and non-energy) to deduct from their taxable income the declining value of business-related investments, such as equipment and machinery. Accelerated depreciation provides a subsidy only to the extent that the amount of depreciation specified by the Internal Revenue Service (IRS) exceeds the true economic “wear and tear” costs. Most empirical studies of economic depreciation have found evidence of some type of accelerated economic depreciation affecting various industries, although the exact pattern varied from study to study. This report, consistent with earlier editions, includes the impacts of accelerated depreciation schedules identified as specific to the energy sector, but excludes schedules with applicability beyond the energy sector.

Subsidized credit for energy infrastructure projects is frequently provided by export credit agencies and multilateral development banks. However, entities such as the Export-Import Bank of the United States also provide support to non-energy industries including aerospace, medical equipment, non-energy mining, and agribusiness.

Tax-exempt municipal bonds allow publicly owned utilities to obtain lower interest rates than those available from either private borrowers or the Treasury. However, while they are used by energy industries such as electric utilities, the group of eligible borrowers also includes water utilities, telecommunication facilities, waste treatment plants, and other publicly owned entities.

The tax code allows a foreign tax credit for income taxes paid to foreign countries. If a multinational company is subject to a foreign country’s levy, and it also receives a specific economic benefit from that foreign country, it is classified as a “dual-capacity taxpayer.” Dual-capacity taxpayers cannot claim a credit for any part of the foreign levy unless it is established that the amount paid under a distinct element of the foreign levy is a tax, rather than a compulsory payment for some direct or indirect economic benefit. Major oil companies are significant beneficiaries of this provision. However, this tax provision is also available to non-energy industries.

The tax code also provides special treatment for some publicly traded partnerships (PTP). Section 7704 of Title 26 of the U.S.C. generally treats a publicly traded partnership as a corporation for federal income tax purposes. For this purpose, a PTP is any partnership that is traded on an established securities market or secondary market. However, a notable exception to Section 7704 occurs if 90% of the gross income of a PTP is passive-type income, such as interest, dividends, real property rents, gains from the disposition of real property, and similar income or gains. This would include gains from natural resource sales. In these cases, the PTP is exempt from corporate-level taxation, thus allowing it to claim pass-through status for tax purposes. As with many other tax provisions, the tax treatment of PTPs is not exclusive to the energy sector.

Another type of program not addressed in this report is associated with energy-related trust funds financed by taxes and fees. Examples include the Black Lung Disability Trust Fund, the Leaking Underground Storage Tank Trust Fund, the Oil Spill Liability Trust Fund, the Pipeline Safety Fund, the Aquatic Resources Trust Fund, the Abandoned Mine Reclamation Fund, the Nuclear Waste Fund, and the Uranium Enrichment Decontamination and Decommissioning Fund. By tying trust fund collections to products and activities responsible for the damages they address, the cost of programs for remediation and prevention of those damages can be reflected in the market price of energy use and production. If the fees or taxes collected by trust funds have been set appropriately, the funds will have sufficient resources to meet their obligations with the result that no subsidy is involved. However, if the fees or taxes are set too low, energy companies are receiving an implicit subsidy. These programs are not addressed in this report because of the difficulty in determining the sufficiency of the funds to meet potential liabilities and the fact that there is no direct federal budgetary impact in FY 2013.

This report also does not include or attempt to quantify the value of limits to liability in case of a nuclear accident provided by Section 170 of the Atomic Energy Act of 1954, the Price-Anderson Act. The Price-Anderson Act requires each operator of a nuclear power plant to obtain the maximum amount of primary coverage of liability insurance. Currently, the amount is about $375 million. Damages exceeding that amount would be funded with a retroactive assessment on all other firms owning commercial reactors based upon the number of reactors they own. However, Price-Anderson places a limit on the total liability to all owners of commercial reactors at about $13 billion. (pp. xi-xiii)