Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010

Release date: August 1, 2011

Not All Subsidies Impacting the Energy Sector Are Included in this Report

This report only includes subsidies meeting the following criteria: they are provided by the federal government, they provide a financial benefit with an identifiable FY 2010 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. Some of the subsidies excluded from this analysis are discussed below.

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. The value of the Section 199 deduction in FY 2010 is estimated at $13 billion and approximately 25 percent is energy-related. While domestic oil and natural gas companies utilized this provision to reduce their 2010 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 schedules arise from many provisions of the tax code and are widely available to energy and non-energy industries. Because the Internal Revenue Service (IRS) allows firms and individuals to deduct depreciation as an expense when computing their tax liability, accelerated depreciation front-loads deductible expenses, thereby reducing the present value of that liability. Accelerated depreciation provides a subsidy only to the extent that the amount of depreciation specified by the 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, though the exact pattern varied from study to study. This report 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 U.S. 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 the Code 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 percent 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.⁴ As with many other tax provisions, the tax treatment of PTPs is not exclusive to the energy sector.

Another potential subsidy source 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 potential subsidies 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 2010.

This report also does not attempt to quantify the potential subsidy resulting from 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 $400 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 $12 billion.