Andre J. Barbe
Ph.D. Candidate, Rice University
President Obama’s Fiscal Year 2013 Budget proposes significant changes to the taxation of fossil fuels. These changes include increasing tax rates, reinstating expired taxes, and eliminating deductions. This presentation discussed the ten most important tax changes contained in the proposed budget.
The ten most important tax changes contained in the proposed 2013 Budget are: (1) increase the Oil Spill Liability Trust Fund financing rate, (2) repeal expensing of intangible drilling costs, (3) repeal percentage depletion for fossil fuels, (4) repeal the domestic manufacturing deduction for fossil fuels, (5) increase the geological and geophysical amortization period for independent producers, (6) repeal capital gains treatment for coal royalties, (7) repeal expensing of exploration and development costs for coal, (8) repeal the last-in-first-out method of accounting for inventories, (9) reinstate the Superfund excise taxes, and (10) modify the tax rules for dual capacity taxpayers. After discussing each change proposed by the budget we compare it to both current law and treatment under a neutral tax system. We find that the proposals in the President’s Fiscal Year 2013 budget to increase the Oil Spill Liability Trust Fund financing rate, partially repeal the domestic manufacturing deduction, modify the dual capacity rules, and reinstate the Superfund excise taxes reduce the neutrality of the code. The proposals to repeal the capital gains treatment of coal royalties and increase the G&G amortization period are neutrality enhancing. The neutrality of repealing last-in-first-out inventory accounting, percentage depletion, and the expensing of intangible drilling costs and coal exploration is unclear.
We also discuss estimates of the overall level of taxation of fossil fuel production compared to other industries. This issue is important in the context of the energy tax changes the President proposes because even if the tax changes would be distortionary by themselves, they might not be so when considered along with the other existing features of the tax code. For example, supporters of the budget have pointed to evidence that fossil fuel production faces low tax rates and high subsidies. In this case, increasing taxes on the industry might enhance neutrality by leveling the playing field between fossil fuel production and other industries.
To test this hypothesis, we measure the overall level of taxation using the average effective tax rate on capital, value added, and the value of total output. Table 1 presents average effective tax rates (AETRs) on capital for energy and other sectors from 1998-2009. The average effective tax rate in fossil fuel producing sectors is 13.0 percent. This tax rate is 5.5 percentage points or 73 percent higher than the rate of 7.5 percent for all sectors. These results are driven by the extremely high 21.4 percent tax rate on capital in petroleum and coal products manufacturing. The other two sectors, oil and gas extraction and pipeline transportation have lower AETRs than the average for all sectors.
Table 2 presents AETRs using value added and the value of total output as the bases and includes all taxes and subsidies, not just capital taxes. As a fraction of value added, the average effective tax rate for all industries is 10.9 percent. The average rate for fossil fuel producing sectors is 19.7 percent, a difference of 8.8 percentage points and 81 percent higher than the economy wide rate. If total taxes paid are instead divided by the total value of output, the AETR for these fossil fuel producing sectors is now 7.4 percent. The AETR for all sectors is 1.5 percentage points lower at 5.9 percent. The AETR for oil and gas extraction is now the highest at 12.1 percent. Petroleum and coal products manufacturing now has the lowest AETR at 5.1 percent.
Although some of the individual tax provisions identified for repeal in the President’s 2013 Budget favor fossil fuel production, it is not clear that the tax code as a whole does. Our calculations show the average effective tax rate on capital used in fossil fuel production is 2.9 percentage points higher than the economy wide rate. However these taxes are only a minority of taxes paid by the industry. Calculating average effective tax rates for all taxes on fossil fuel production gives a tax rate that is either 8.8 or 1.5 percentage point higher than the economy wide rate, depending on the basis used.