Taxpayers have been subsidizing the same mature, polluting energy technologies for decades. Many projects and outdated programs still exist on the books and should be cut, but tackling them is difficult because they are often entrenched in our existing energy policies and connected to the big energy industries. Eliminating these programs and policies could save billions of taxpayer dollars by cutting subsidies to well-established energy sources including coal, oil, and gas.

Cuts Include:

Ultra-deepwater and Unconventional Natural Gas and other Petroleum Resources R&D
Cut: $190 million

Expensing of Exploration and Development Costs
Cut: $270 million

Percentage Depletion Allowance (Gas & Oil) (Excess of percentage of cost depletion)
Cut: $10.8 billion

Percentage Depletion Allowance (Coal)
Cut: $1.3 billion

Capital Gains Treatment for Royalties on Coal
Cut: $630 million

Domestic Manufacturing Deduction for Hard Mineral Fossil Fuels
Cut: $2.3 billion

Intangible Drilling Costs (Expensing of exploration and development costs)
Cut: $8.3 billion

Manufacturing Tax Deduction for Oil and Gas Companies (IRC Sec 199)
Cut: $15.9 billion

Geological and Geophysical Amortization
Cut: $1 million

FutureGen
Cut: $1.3 billion

End Title XVII Loan Guarantee Program

Total Energy Cuts: $42 billion

Ultra-deepwater and Unconventional Natural Gas and other Petroleum Resources R&D

Cut: $190 million

This program was meant to encourage the development of technology to tap hard to reach oil reserves far off the coast. However, spending was encouraged by a handful of politicians and has been directed toward a select few oil and gas companies. Title IX, Subtitle J of the Energy Policy Act of 2005 creates a program in the Department of for “research, development, demonstration, and commercial application of technologies for ultra-deepwater and unconventional natural gas and other petroleum resource exploration and production.” The program is funded through 2017. According to the National Energy Technology Laboratory (NETL), 32.5% of the funding is spent on unconventional oil and gas exploration, 35% is spent on ultra-deepwater architecture, 25% is spent on complimentary research, and 7.5% is spent addressing technology challenges of small producers.

Expensing of Exploration and Development Costs

Cut: $270 million

At a time when energy companies are making significant profits, they don’t need incentives to look for more opportunities – they already have all the incentive they need. Coal companies can expense 70% of their costs from surface strip mining exploration and development and amortize the remaining 30% over five years. Expensing of mine development was established in 1951 and expensing of mine exploration in 1966.

Percentage Depletion Allowance (Gas & Oil) (Excess of percentage of cost depletion)

Cut: $10.8 billion

Enacted in 1926, the Percentage Depletion Allowance permits 27.5% of revenue to be deducted for the cost of the depletion of the mineral deposit. The percentage depletion allowance is a tax break given to independent oil and gas producers and can exceed capital costs. When such producers are raking in billions in profit on a yearly basis, there’s no need to continue this ridiculous credit.

Percentage Depletion Allowance (Coal)

Cut: $1.3 billion

Often dubbed a “reverse royalty,” PDA deductions typically exceed capital investment, which means the federal government essentially pays hardrock companies to mine on public lands. Meant to encourage mining, the percentage depletion allowance allows companies to recoup the costs of investment by offering a tax credit for as long as the site generates income. The percentage depletion allowance permits a company to deduct a fixed percentage from gross income according to the mineral extracted, ranging from 22% for uranium to 15% for silver and other hardrock minerals.

Capital Gains Treatment for Royalties on Coal

Cut: $630 million

Established by the 1951 Revenue Act, this modification to the tax code allows coal companies to declare income received from royalties as capital gains, allowing them to pay lower tax rates. In a year when top coal companies are making billions in profits, taxpayers shouldn’t be giving them even more money. (It is not possible to take advantage of both this provision and the percentage depletion allowance.)

Domestic Manufacturing Deduction for Hard Mineral Fossil Fuels

Cut: $2.3 billion

Established by the American Jobs Creation Act of 2004, coal companies are currently able to deduct up to 9% of the cost of domestic manufacturing activities from income taxes. By cutting this item, it puts a stop to continued subsidization of hugely profitable energy companies.

Intangible Drilling Costs (Expensing of exploration and development costs)

Cut: $8.3 billion

The expensing of exploration and development costs means billions of dollars for oil and gas companies that are making huge profits on the backs of taxpayers. Created in 1916, intangible drilling costs (IDCs) include all expenditures made for wages, fuel, repairs, hauling, supplies, etc that are incident to the drilling of wells and the preparation of wells for the production of oil and gas. While most costs that bring future benefits must be capitalized according to the Internal Revenue Code, IDCs are an exception that can be expensed in the period the costs are incurred. Special rules are provided for intangible drilling and development costs so that these costs can either be expensed (current deduction) or capitalized (current law). When the decision is made to “expense” the IDCs, the taxpayer deducts the amount of the IDCs as an expense in the taxable year the cost is paid or incurred. If the IDCs are capitalized, they are generally recovered through either depreciation or depletion. Both alternatives lead to substantial tax benefits for the oil and gas industries.

Manufacturing Tax Deduction for Oil and Gas Companies (IRC Sec 199)

Cut: $15.9 billion

This subsidy to Big Oil was targeted for elimination in the President’s FY2012 budget and its repeal would save taxpayers billions. The domestic production deduction benefits oil and gas companies to the extent that their products are “manufactured, produced, or extracted in whole or in significant part in the United States.” The deduction was 3% of income for 2006, rising to 6% between 2007 and 2009, and 9% thereafter; it is subject to a limit of 50% of the wages paid that are allocable to domestic production during the taxable year. This was enacted under the American Jobs Creation Act of 2004 and is now part of IRC Section 199.

Geological and Geophysical Amortization

Cut: $1 billion

There’s no need to continue to have the taxpayer subsidize energy companies to look for oil and gas deposits when these companies can use their own massive profits to look for themselves. Included in the 2005 Energy bill and modified in the Tax Increase Prevention and Reconciliation Act of 2005, this tax credit allows oil and gas companies to deduct these costs over several years.

FutureGen

Cut: $1.3 billion

The Department of Energy’s (DOE) FutureGen project is a large federal initiative to finance and construct a “clean coal” facility in Matoon, Illinois. For more than 7 years, the massive plant has been politically controversial, and increasing costs led the Bush Administration to cancel the project in 2008. Yet project proponents, led by Illinois lawmakers, quickly revived plans for the mega-facility upon Bush’s departure. Although project costs continue to soar and clean coal technology remains elusive, taxpayer subsidies continue to flow to FutureGen.

End Title XVII Loan Guarantee Program

The Department of Energy (DOE) Loan Guarantee Program was created to provide loan guarantees for innovative emerging energy technologies, yet mature industries like coal and nuclear are eligible as well. More than $50 billion in taxpayer backed loan guarantee authority is available. There are several major taxpayer problems with the program: the massive scope and uncertain costs; high default rates and low recovery rates on capital intensive projects, like nuclear reactors; the weakening of taxpayer rights in the event of default; and the unclear administration of loans. In addition to the loan guarantee authority, the DOE also received $4 billion in appropriated funds to pay the credit subsidy costs for renewable energy, energy efficiency, and electric power transmission projects in the 2009 Stimulus.

Note: Figures from the Joint Committee on Taxation estimates, FY2012 Budget of the U.S. Government.

 For more information, please contact Autumn Hanna at (202) 546-8500 x112 or autumn [at] taxpayer.net.