Present law and analysis of energy-related tax expenditures

The Senate Committee on Finance Subcommittee on Energy, Natural Resources, and Infrastructure has scheduled a public hearing on March 27, 2012, on renewable energy tax incentives.

Since 2004, the Congress has been active in promulgating legislation related to energy production (including oil and gas and renewables) and conservation. Part I of this document, prepared by the staff of the Joint Committee on Taxation, provides tables that summarize current and recently expired energy-related Federal tax incentives.

Part II of this document provides a brief discussion of the economic rationale for certain government intervention in energy markets through the tax code and issues related to the proper design of such tax preferences. These tax expenditures create incentives that have the potential to affect economic decisions and allocate economic resources from other uses to the tax-favored uses. Such tax preferences may produce an allocation of resources that is more efficient for society at large if they are properly designed to overcome negative effects (such as atmospheric pollution, for example) that would otherwise result from a purely market based outcome without any government intervention. Tax expenditures for energy production and conservation have been criticized for lacking well defined objectives, and for lacking coordination among provisions having similar objectives. Some argue that the simultaneous existence of tax preferences for the fossil fuel industry and for renewable energy production represents conflicting government policy. Others have noted that the incentives for renewable energy and conservation are not themselves designed in a coordinated way to produce the most efficient or equitable subsidies for renewable energy and conservation.