TAX EXPENDITURES RELATED TO THE PRODUCTION AND
CONSUMPTION OF MOTOR FUELS AND MOTOR VEHICLES
Report # 18 in the series: The Annualized Social Cost of Motor- Vehicle Use in
the United States, Based on 1990- 1991 Data
UCD- ITS- RR- 96- 3 ( 18) rev. 1
Mark A. Delucchi1
James Murphy2
1Institute of Transportation Studies
University of California
Davis, California 95616
madelucchi@ ucdavis. edu
www. its. ucdavis. edu/ people/ faculty/ delucchi/
2Department of Resource Economics and Public Policy
University of Massachusetts
Amherst, Massachusetts 01003
October 2004
August 2006 rev. 1
i
ACKNOWLEDGMENTS
This report is one in a series that documents an analysis of the full social cost of
motor- vehicle use in the United States. The series is entitled The Annualized Social Cost of
Motor- Vehicle Use in the United States, based on 1990- 1991 Data. Support for the social- cost
analysis was provided by Pew Charitable Trusts, the Federal Highway Administration
( through Battelle Columbus Laboratory), the University of California Transportation
Center, the University of California Energy Research Group ( now the University of
California Energy Institute), and the U. S. Congress Office of Technology Assessment.
Many people provided helpful comments and ideas. In particular, we thank
David Greene, Gloria Helfand, Arthur Jacoby, Bob Johnston, Charles Komanoff, Alan
Krupnick, Charles Lave, Douglass Lee, Steve Lockwood, Paul McCarthy, Peter Miller,
Steve Plotkin, Jonathan Rubin, Ken Small, Brandt Stevens, Jim Sweeney, Todd Litman,
and Quanlu Wang for reviewing or discussing parts of the series, although not
necessarily this particular report. Of course, we alone are responsible for the contents of
this report.
ii
REPORTS IN THE UCD SOCIAL- COST SERIES
There are 21 reports in this series. Each report has the publication number UCD- ITS- RR-
96- 3 (#), where the # in parentheses is the report number.
Report 1: The Annualized Social Cost of Motor- Vehicle Use in the U. S., 1990- 1991:
Summary of Theory, Methods, Data, and Results ( M. Delucchi)
Report 2: Some Conceptual and Methodological Issues in the Analysis of the Social
Cost of Motor- Vehicle Use ( M. Delucchi)
Report 3: Review of Some of the Literature on the Social Cost of Motor- Vehicle Use ( J.
Murphy and M. Delucchi)
Report 4: Personal Nonmonetary Costs of Motor- Vehicle Use ( M. Delucchi)
Report 5: Motor- Vehicle Goods and Services Priced in the Private Sector ( M.
Delucchi)
Report 6: Motor- Vehicle Goods and Services Bundled in the Private Sector ( M.
Delucchi, with J. Murphy)
Report 7: Motor- Vehicle Infrastructure and Services Provided by the Public Sector ( M.
Delucchi, with J. Murphy)
Report 8: Monetary Externalities of Motor- Vehicle Use ( M. Delucchi)
Report 9: Summary of the Nonmonetary Externalities of Motor- Vehicle Use ( M.
Delucchi)
Report 10: The Allocation of the Social Costs of Motor- Vehicle Use to Six Classes of
Motor Vehicles ( M. Delucchi)
Report 11: The Cost of the Health Effects of Air Pollution from Motor Vehicles ( D.
McCubbin and M. Delucchi)
Report 12: The Cost of Crop Losses Caused by Ozone Air Pollution from Motor
Vehicles ( M. Delucchi, J. Murphy, J. Kim, and D. McCubbin)
Report 13: The Cost of Reduced Visibility Due to Particulate Air Pollution from Motor
Vehicles ( M. Delucchi, J. Murphy, D. McCubbin, and J. Kim)
Report 14: The External Damage Cost of Direct Noise from Motor Vehicles ( M.
Delucchi and S. Hsu) ( with separate 100- page data Appendix)
Report 15: U. S. Military Expenditures to Protect the Use of Persian- Gulf Oil for Motor
Vehicles ( M. Delucchi and J. Murphy)
iii
Report 16: The Contribution of Motor Vehicles and Other Sources to Ambient Air
Pollution ( M. Delucchi and D. McCubbin)
Report 17: Tax and Fee Payments by Motor- Vehicle Users for the Use of Highways,
Fuels, and Vehicles ( M. Delucchi)
Report 18: Tax Expenditures Related to the Production and Consumption of
Transportation Fuels ( M. Delucchi and J. Murphy)
Report 19: The Cost of Motor- Vehicle Accidents ( M. Delucchi)
Report 20: Some Comments on the Benefits of Motor- Vehicle Use ( M. Delucchi)
Report 21: References and Bibliography ( M. Delucchi)
There are two ways to get copies of the reports.
1). Most reports are posted as pdf files on Delucchi’s faculty page on the UC Davis ITS
web site: www. its. ucdavis. edu/ people/ faculty/ delucchi/
2). You can order hard copies of the reports from ITS:
A. fax: ( 530) 752- 6572
B. e- mail: itspublications@ ucdavis. edu
C. ITS web site: http:// www. its. ucdavis. edu
D. mail: Institute of Transportation Studies, University of California, One Shields
Avenue, Davis, California 95616 attn: publications
For general information about ITS, call ( 530) 752- 6548.
ITS charges for hard copies of the reports. The average cost is $ 10 per report.
You can get a cost list before hand, of course. Or, you can have them send the
reports with an invoice.
iv
LIST OF ACRONYMS AND ABBREVIATIONS AND OTHER NAMES
The following are used throughout all the reports of the series, although not necessarily
in this particular report
AER = Annual Energy Review ( Energy Information Administration)
AHS = American Housing Survey ( Bureau of the Census and others)
ARB = Air Resources Board
BLS = Bureau of Labor Statistics ( U. S. Department of Labor)
BEA = Bureau of Economic Analysis ( U. S. Department of Commerce)
BTS = Bureau of Transportation Statistics ( U. S. Department of Transportation)
CARB = California Air Resources Board
CMB = chemical mass- balance [ model]
CO = carbon monoxide
dB = decibel
DOE = Department of Energy
DOT = Department of Transportation
EIA = Energy Information Administration ( U. S. Department of Energy)
EPA = United States Environmental Protection Agency
EMFAC = California’s emission- factor model
FHWA = Federal Highway Administration ( U. S. Department of Transportation)
FTA = Federal Transit Administration ( U. S. Department of Transportation)
GNP = Gross National Product
GSA = General Services Administration
HC = hydrocarbon
HDDT = heavy- duty diesel truck
HDDV = heavy- duty diesel vehicle
HDGT = heavy- duty gasoline truck
HDGV = heavy- duty gasoline vehicle
HDT = heavy- duty truck
HDV = heavy- duty vehicle
HU = housing unit
IEA = International Energy Agency
IMPC = Institutional and Municipal Parking Congress
LDDT = light- duty diesel truck
LDDV = light- duty diesel vehicle
LDGT = light- duty gasoline truck
LDGV = light- duty gasoline vehicle
LDT = light- duty truck
LDV = light- duty vehicle
MC = marginal cost
MOBILE5 = EPA’s mobile- source emission- factor model.
MSC = marginal social cost
MV = motor vehicle
NIPA = National Income Product Accounts
NOx = nitrogen oxides
NPTS = Nationwide Personal Transportation Survey
OECD = Organization for Economic Cooperation and Development
v
O3 = ozone
OTA = Office of Technology Assessment ( U. S. Congress; now defunct)
PART5 = EPA’s mobile- source particulate emission- factor model
PCE = Personal Consumption Expenditures ( in the National Income Product Accounts)
PM = particulate matter
PM10 = particulate matter of 10 micrometers or less aerodynamic diameter
PM2.5 = particulate matter of 2.5 micrometers or less aerodynamic diameter
PMT = person- miles of travel
RECS = Residential Energy Consumption Survey
SIC = standard industrial classification
SOx = sulfur oxides
TIA = Transportation in America
TSP = total suspended particulate matter
TIUS = Truck Inventory and Use Survey ( U. S. Bureau of the Census)
USDOE = U. S. Department of Energy
USDOL = U. S. Department of Labor
USDOT = U. S. Department of Transportation
VMT = vehicle- miles of travel
VOC = volatile organic compound
WTP = willingness- to- pay
vi
TABLE OF CONTENTS
ACKNOWLEDGMENTS ......................................................................................................... i
REPORTS IN THE SERIES ...................................................................................................... ii
LIST OF ACRONYMS ............................................................................................................ iv
18.1 INTRODUCTION................................................................................................ 1
18.1.1 Background............................................................................................. 1
18.1.2 Outline of this paper .............................................................................. 2
18.2 THEORETICAL ISSUES...................................................................................... 2
18.2.1 Definition of a tax expenditure ............................................................. 2
18.2.2 Tax expenditures and social welfare. ................................................... 3
18.2.3 Tax expenditures versus public- sector costs ( agency
outlays)................................................................................................... 7
18.2.4 Public- sector costs versus environmental externalities...................... 8
18.2.5 A note on government price subsidy programs................................. 8
18.3 TYPES OF TAX EXPENDITURES ...................................................................... 9
18.3.1 Accelerated Depreciation....................................................................... 9
18.3.2 Investment Tax Credits....................................................................... 11
18.3.3 Percentage Depletion ( in excess of cost depletion)........................... 11
18.3.4 Expensing of Exploration and Development Costs
( Intangible Drilling Costs) .................................................................. 12
18.3.5 Expensing of Tertiary Injectants......................................................... 13
18.3.6 Exception from Passive Loss Limitations.......................................... 13
18.3.7 Alternative Fuel Production Credit ................................................... 13
18.3.8 Research and Development Tax Credit............................................. 14
18.3.9 Expensing of Long- term Research and Development...................... 14
18.3.10 Deferral of Tax on Shipping Companies ......................................... 14
18.3.11 Special Treatment of Alaskan National Corporations ................... 14
18.3.12 Safe Harbor Leasing.......................................................................... 14
18.4 LITERATURE REVIEW..................................................................................... 15
18.4.1 Cone et al. ( 1980) ................................................................................. 15
18.4.2 Heede et al. ( 1985) ............................................................................... 16
18.4.3 Kosmo ( 1987) ....................................................................................... 17
18.4.4 U. S. Energy Information Administration ( 1992)............................... 17
18.4.5 Koplow ( 1993)...................................................................................... 19
18.4.6 Management Information Services, Inc. ( MIS) ( 1993) ...................... 20
18.4.7 Loper ( 1994) ......................................................................................... 21
18.4.8 Domestic Fuels Alliance ( 1995) .......................................................... 22
18.4.9 Union of Concerned Scientists ( UCS) ( Hwang, 1995) ...................... 23
18.4.10 Energy Information Administration ( 1999, 2000) ......................... 23
18.4.11 Green Scissors ( 2004)....................................................................... 23
18.4.12 Earthtrack ( 2004).............................................................................. 23
18.5 ESTIMATES OF CORPORATE- INCOME TAX AND SALES-TAX
EXPENDITURES, BASED ON AVERAGE TAX RATES....................... 24
18.5.1 Corporate income- tax expenditures for the oil
industry................................................................................................ 24
vii
18.5.2 Sales- tax expenditures related to the use of motor
vehicles and motor fuel....................................................................... 26
18.5.3 Summary.............................................................................................. 27
18.6 REFERENCES .................................................................................................... 28
TABLE 18- 1. CONE ET AL. ( 1980) SUMMARY OF OIL INCENTIVES BY TYPE
FROM 1916 - 1978 ( MILLIONS OF 1978 DOLLARS) ............................................. 32
TABLE 18- 2. HEEDE ET AL. ( 1985) FY1984 FEDERAL SUBSIDIES TO OIL
( MILLIONS OF 1984 DOLLARS) ........................................................................... 33
TABLE 18- 3. EIA ESTIMATES OF FY1992 AND FY 1999 OIL SUBSIDY ELEMENTS
IN FEDERAL PROGRAMS ON A BUDGET OUTLAY BASIS ( MILLIONS
OF 1992 OR 1999 DOLLARS) ............................................................................... 34
TABLE 18- 4. KOPLOW ( 1993) ESTIMATES OF FY1989 FEDERAL SUBSIDIES TO
OIL ( MILLIONS OF 1989 DOLLARS) ..................................................................... 35
TABLE 18- 5. LOPER ( 1994) ESTIMATES OF 1991 STATE AND LOCAL TAXATION
OF PETROLEUM ( MILLIONS OF 1991 DOLLARS) ................................................. 37
TABLE 18- 6. GREEN SCISSORS ( 2004B) ESTIMATES OF EXISTING TAX- BREAK
SUBSIDIES TO THE OIL INDUSTRY IN 2002 .......................................................... 38
TABLE 18- 7. OUR ESTIMATES OF U. S. FEDERAL CORPORATE INCOME TAX
RATES, INCOME- YEAR 1991 ............................................................................... 39
TABLE 18- 8. OUR ESTIMATES OF THE EFFECT ON INCOME- TAX PAYMENTS OF
PAYING AT THE U. S. AVERAGE RATE ( FOR ALL OTHER
INDUSTRIES) RATHER THAN THE ACTUAL RATE, INCOME YEAR
1991 ( 103 DOLLARS)........................................................................................... 44
TABLE 18- 9. CORPORATE INCOME TAXES, RATES, AND “ SUBSIDIES,” INCOME-YEAR
2000 .......................................................................................................... 45
PART A. TAX RATES, INCOME- YEAR 2000. ................................................................. 45
PART B. THE EFFECT ON INCOME- TAX PAYMENTS OF PAYING AT THE
U. S. AVERAGE RATE ( FOR ALL OTHER INDUSTRIES) RATHER
THAN THE ACTUAL RATE, INCOME- YEAR 2000 ( 103 DOLLARS). ...................... 45
TABLE 18- 10. SALES- TAX EXPENDITURES RELATED TO THE USE OF MOTOR
VEHICLES............................................................................................................ 47
TABLE 18- 10. SALES- TAX EXPENDITURES, CONTINUED.......................................................... 48
FIGURE 18- 1. THE IMPACT OF A PRICE SUBSIDY ON WELFARE ............................................... 50
APPENDIX 18- A: THE LOW- INCOME HOME ENERGY
ASSISTANCE PROGRAM ( LIHEAP) ( DEPARTMENT OF
HEALTH AND HUMAN SERVICES, FAMILY SUPPORT
ADMINISTRATION) ................................................................................................. 51
1
18. TAX EXPENDITURES RELATED TO THE PRODUCTION AND
CONSUMPTION OF TRANSPORTATION FUELS
18.1 INTRODUCTION
18.1.1 Background
It is an elementary principle of economics that if a good or service is underpriced
— that is, if the all- inclusive economic cost to society of consuming the good or service
exceeds the private- cost price that consumers actually pay for it— then consumers will
consume “ too much” of it from the standpoint of society. More precisely, unless the
underpriced good is offered by a monopoly, or provides unaccounted for ( external)
benefits, the amount consumed will exceed the amount that provides the greatest net
benefits to society. Generally, the correct solution to this problem is to set all prices in
the economy equal to marginal social cost rather than marginal private cost.
For most if not all goods and services, the marginal social cost exceeds the
marginal private cost, if only because nearly all production and consumption creates
pollution. Recently, however, many researchers have argued that this divergence
between social cost and private cost is especially serious in the case of motor vehicles
and transportation fuels. These researchers often label this divergence the “ unpaid” cost
of motor- vehicle use, and usually estimate three different kinds of unpaid costs:
environmental externalities ( e. g., the harmful effects of air pollution or oil spills),
public- sector expenditures in excess of user fees received ( e. g., expenditures on
highways less road- user tax revenues), and so- called “ tax subsidies” ( preferential
treatment in the tax code), which we will refer to as “ tax expenditures1.” ( See Report # 3
in this series for a review of estimates of the social- cost of motor- vehicle use.)
In this report, we too provide estimates of tax expenditures related to the
production and consumption of transportation fuels. But— and this is an important
qualification— we do not add the estimates of environmental externalities, public- sector
expenditures, and tax expenditures together because, as we will explain in more detail
later, tax expenditures are not necessarily social costs in the same way that environmental
externalities and public- sector expenditures for roads are. In other words, tax expenditures
or subsidies do not belong in an analysis of the social- cost of motor vehicle use, because
they are not necessarily an economic cost, or welfare loss, to society. Of course, tax
expenditures are relevant in analyses of the “ fairness” or “ neutrality” of transportation,
energy, and tax policy, and for this reason we have estimated them here2. But the main
point must be kept in mind throughout this analysis: in the absence of social- welfare
analytical demonstration to the contrary, one should not count tax expenditures as an
item in the social cost.
1Note the subtle distinction between a tax expenditure and a tax subsidy: the expenditure is what the
government foregoes, and the subsidy is what a producer gains, as a result of special tax provisions.
2 We do apply our estimates of tax expenditures from this report in our equity- based analysis of user
payments for government- provided motor- vehicle infrastructure and services in report # 17 in the UCD
social- cost series.
2
18.1.2 Outline of this paper
First we will present the theory, and explain why tax expenditures are not
necessarily a social economic cost— that is, why they do not necessarily constitute a
reduction in social welfare. Next we will review the literature, which builds up
estimates of tax expenditures piecemeal, tax provision by tax provision. Then, we will
offer an alternative way to estimate tax expenditures, based on aggregate corporate
income- tax rates. We do this for 1991 and for the year 2000, the most recent year for
which data are available. We also provide an estimate of tax expenditures related to
transportation based on differences in sales tax rates.
18.2 THEORETICAL ISSUES
18.2.1 Definition of a tax expenditure
The tax code does not treat every individual and every business the same way.
For example, certain products are exempt from sales tax, and some mineral production
activities are allowed special deductions that reduce income tax liabilities. As a result of
this differential tax treatment, some people and businesses pay less ( or more) tax, both
in total and per unit of income, than do others. If one defines a “ baseline” or “ standard”
tax rate on particular entities, one can then calculate the difference between the taxes
actually paid by the entity and the taxes that would have been paid had the entity been
taxed at the “ standard” or baseline rate. This difference has been called a tax
expenditure:
Tax expenditures exist when actual tax treatment for particular kinds of taxpayers
deviates from standard tax treatment” ( EIA, 1992, p. 21).
The Joint Committee on Taxation ( JCT) of the U. S. Congress elaborates:
“ Tax expenditures” are defined under the Budget Act... as reductions in individual and
corporate income tax liabilities that result from special tax provisions or regulations that
provide tax benefits to particular taxpayers. These special tax provisions can take the
form of exclusions, credits, deductions, preferential tax rates, or deferrals of tax
liability... In general, a special provision is classified as a tax expenditure because the
provision represents a departure from the taxation of economic income that is made for
reasons other than administrative feasibility ( JCT, 1993, page 2) 3.
According to the JCT, the tax expenditure is calculated by estimating the
“ difference between tax liability under current law and the tax liability that would
result from a recomputation of tax without benefit of the tax expenditure provision.
Taxpayer behavior is assumed to remain unchanged for tax expenditure purposes”
( JCT, 1993, page 8).
Tax expenditures, then, depend entirely on what one deems to be the “ standard”
treatment, with respect to which deviations constitute “ preferential” treatment. What is
“ standard” ultimately is a matter of taste, and as a result, “ there is disagreement as to
what constitutes standard tax treatment...” ( EIA, 1992, p. 21).
3 Note that the tax expenditures identified by JCT and the Treasury ( OMB) refer only to preferential
treatment in federal income tax provisions. They do not consider other forms of taxation such as federal
excise taxes, or state and local income taxes.
3
18.2.2 Tax expenditures and social welfare.
Over the past 15 years there have been several estimates of tax expenditures
related to oil use ( see the literature review below, and also Koplow and Dernback [ 2001]
and Koplow [ 2004]). In most of these studies the expenditures are referred to as a
“ subsidy,” which in some studies seems to imply that the expenditure is, or constitutes,
a social cost, in the same way that the cost of the highways or the cost of air pollution is
a social cost ( i. e., a reduction in social welfare, the benefits of use aside). In any event,
still other researchers have interpreted tax expenditures to be social costs ( in economic
terms), and have incorporated the original estimates of expenditures ( from the studies
reviewed below) into analyses of the total social cost of oil use or motor- vehicle use. As
we stated in the introduction, we believe that this is an error. In the following section
we will explain why.
The tax expenditure estimates in the major original analyses that we will review,
such as the studies by the EIA ( 1992) and Koplow ( 1993), are derived from data
published by the Joint Committee on Taxation and the Office of Management and
Budget. The Congressional Budget Act of 1974 ( Public Law 93- 344) requires that the
U. S. Federal budget, published by the Office of Management and Budget ( OMB),
include estimates of tax expenditures. In compliance with the law, every Federal
budget contains estimates of tax expenditures for three years: the last fiscal year, the
current fiscal year, and the coming fiscal year for which the budget was submitted.
The OMB develops its estimates of tax expenditures in cooperation with the
Congressional Joint Committee on Taxation ( JCT), which publishes its own estimates of
tax expenditures. The OMB and JCT both derive their figures from Internal Revenue
Service statistics, for the purpose of projecting the tax credits, deductions, and
exclusions that will be claimed under the present- law baseline ( JCT, 1993, page 8) 4.
Now, as noted just above, some social- cost analyses add up the OMB or JCT
estimates of tax expenditures and represent the total as a social cost of oil use or motor-vehicle
use. However, there are methodological problems with this simple addition,
and more serious theoretical problems with interpreting the total as a social cost. In the
first place, a simple summation does not account properly for the interaction of joint
changes in different tax provisions. Second, the JCT and OMB estimates are short- run
and static, and do not account for changes in the behavior of firms or individuals or the
macro- economy as a result of eliminating a tax expenditure. For these reasons, the
simple sum of the OMB and JCT estimates does not represent the difference in tax
revenue between the status- quo baseline and a scenario with no preferential taxes. But
even if the simple sum was an accurate measure of aggregate tax expenditures, it still
would not be a social cost of oil use or motor- vehicle use in the way that expenditures
on the highway patrol or the environmental effects of oil spills are. This is because,
even though tax expenditures distort prices and economic behavior, in any economy with
4Although the JCT and the OMB have similar objectives, their estimates of tax expenditures do differ.
First, the agencies report expenditures for different time periods. The OMB estimates “ cover the usual
three- year period of a budget submission - the last fiscal year, the current fiscal year, and the forthcoming
fiscal year to which the budget proposals apply. The Joint Committee staff estimates cover the
forthcoming fiscal year and the succeeding four fiscal years” ( JCT, 1993, page 6). Second, they define
taxable income differently, and treat foreign income differently. In addition, the JCT considers a
somewhat broader set of tax expenditures than does the OMB.
4
multiple distortions, we are not necessarily better off if we eliminate any particular tax
expenditures. We discuss all of these problems in more detail next.
18.2.2.1 Tax expenditure estimates should not simply be summed
The first problem is that simply summing the OMB and JCT estimates does not
account for interaction effects. The Joint Committee on Taxation clearly states that “ each
tax expenditure is measured in isolation. If two or more items were to be eliminated
simultaneously, the result of the combination of changes might produce a lesser or
greater revenue than the sum of the amounts shown for each item separately.” Because
of this, they caution that summing the amounts of the various tax expenditures is of
“ limited usefulness” ( JCT, 1989, page 8).
The OMB provides an excellent example of the problems with ignoring the
interaction effects for personal income taxes:
If the state and local interest exclusion alone were repealed, some taxpayers would be
thrust into higher tax brackets, automatically increasing the size of their charitable
contribution tax expenditure even if taxpayers did not make larger charitable
contributions. Alternatively, if both the interest exclusion and the charitable deduction
were repealed simultaneously, the increase in tax liability would be greater than the sum
of the two separate expenditures since each is estimated assuming that the other is in
force ( OMB, 1992, page 2- 24).
In this case, if both tax provisions were rescinded, aggregating the individual
estimates as published would understate the true change in tax expenditures.
18.2.2.2 Tax expenditure estimates do not account for the microeconomic or macroeconomic
effects of eliminating the expenditure
The OMB and JCT figures also do not incorporate any adjustments that firms
might make in response to changes in the tax code. Their published estimates of the tax
expenditures, or revenue losses, measure the amount of additional revenue the
government would receive if the Federal government were to repeal unexpectedly a
particular tax provision on the day that the corporations filed their tax returns ( so that
the firms could make no behavioral adjustments in response to the policy change).
Because this unrealistic “ snapshot” analysis does not allow for any adjustments that
firms will make in the longer run, it does not, as the OMB and JCT clearly state, provide
a realistic estimate of the effect of eliminating a tax expenditure.
In reality, firms will change their decisions in response to new tax policies. Let
us use the investment tax credit as an example. The estimates published by OMB and
JCT assume that if the investment tax credit were eliminated, there would be no change
in the investment decisions of the firms. But obviously this is not realistic. The credit is
meant to encourage firms to invest; hence, if it were eliminated, firms would invest less,
and their tax liability, and hence tax payments might be different than if the tax credit
were in effect.
At the macro scale, tax expenditures that favor capital investment, such as
accelerated depreciation and the investment tax credit, could impact aggregate income
and economic growth. This is relevant to the estimate of the tax expenditures
themselves because any changes in the projected growth rates for aggregate national
income could alter the tax base against which tax expenditures are measured. The OMB
and JCT estimates of growth rates assume that all existing laws will continue. If tax
5
expenditures are eliminated growth rates might be different than assumed by the OMB
and JCT in their original estimates of the tax expenditures.
In sum, quoting from the OMB:
Tax expenditure revenue loss estimates do not necessarily equal the increase in Federal
revenues ( or the reduction in budget deficits) that would accompany the repeal of the
special provisions, for the following reasons: Eliminating a tax expenditure may have
incentive effects that alter economic behavior... Tax expenditures are interdependent even
without incentive effects... The annual value of tax expenditures for tax deferrals is
prepared on a cash basis ( U. S. Office of Management and Budget, 1992, 2- 24).
18.2.2.3 Tax expenditures are not necessarily an economic cost, let alone an economic cost equal
to the expenditure
There is no doubt that the preferential tax treatments identified by the JCT and
OMB affect economic behavior in some way. Furthermore, it is obvious that, were the
preferential tax policies the only deviations from optimal conditions in the economy ( in
a second- best world in which the government still raised revenue by taxes, rather than
by lump- sum transfers)— i. e., if they were the only reasons that social welfare was not at
its potential ( second- best) maximum — then eliminating them would be beneficial,
because it would restore the second- best optimum. In this one- distortion second- best
world, tax expenditures would occasion a real cost, equal to the difference between the
maximum social welfare and the social welfare with the tax expenditures.
But note two points. First, in the one- distortion economy, the real cost of the tax
expenditure is the difference between social welfare with and without the expenditure,
which difference probably will be much less than the expenditure itself. An analogy can
be drawn with the true cost of price subsidies, in which the welfare cost of the price
subsidy is considerably less than the total subsidy itself. This is illustrated in Figure 18-
1, which is discussed later.
Second, but more important, we can be sure that the tax expenditure creates an
economic cost only if it is the only imperfect policy in an otherwise perfect ( but second-best)
world. Although it might sound perverse, it is quite possible that, given all of the
distortions in the real economy, some tax expenditures actually could be beneficial: that
eliminating them would make society worse off, not better. This anyway is the
somewhat discouraging conclusion of the “ general theory of the second- best,”
originally developed and elaborated by Lipsey and Lancaster ( 1956- 57) and Davis and
Whinston ( 1965), and summarized here by Laffont ( 1990): 5
( a) If a distortion [ e. g. tax expenditure] exists in one sector ( this is, there is some
constraint that prevents the first- best optimal conditions from being satisfied in this
sector), it is no longer generally desirable to apply the first- best optimality condition in
other sectors...
( b) If n distortions ( where n ≥ 2) exist, we cannot claim that the competitive equilibrium
with n - 1 distortions is preferable to the competitive equilibrium with n distortions is
preferable to the competitive equilibrium with n distortions...
5The impacts of policy changes in a distorted economy have been well studied in the literature on trade
policy -- e. g., Martin and Alston ( 1994) and Martin ( 1994).
6
( c) The problems of equity and efficiency can no longer be separated unless we use
personalized lump- sum transfers as political economic instruments.
( d) The results obtained in second- best analysis may contradict the economist’s intuition
in the first- best analysis. ( Laffont, 1990, page 167; brackets added).
Laffont’s conclusions apply to any analysis of tax expenditures in the real world,
because the real world is far from being economically ideal. Rarely, if ever, are taxes
based on economic principles of pricing, user charges, and cost allocation. Instead,
taxes are frequently set according to political, not economic, criteria, and as a result,
every sector of the economy is distorted in manifold and difficult- to- quantify ways.
Because of these distortions, one must perform a complex general equilibrium/ social-welfare
analysis in order to determine the effect of tax expenditures on welfare. As
mentioned above, there is no reason to believe that such an analysis will reveal that on
balance, tax expenditures create economic costs.
Laffont’s second comment is the most relevant to our discussion. We are
indisputably in an economy which is characterized by n ≥ 2 distortions. Hence, getting
rid of tax expenditures on the oil industry would not necessarily improve social
welfare, and could in principle diminish it6. This might be the case if everyone was
being taxed too much on average; i. e., if the marginal social value of tax resources were
higher in the private sector than the public sector. In this case, it might be better to have
a few industries taxed less than average than have all industries taxed at the same too-high
rate.
In summary, then;
• In the real ( economically far- from- perfect) world, any particular tax
expenditure does not necessarily create a real cost to society.
• Even if a tax expenditure does create a cost, the cost will not necessarily be
equal to the amount of the expenditure— it probably will be less.
18.2.2.4 Tax expenditures are a question of “ fairness”
The preceding discussion tell us that we cannot add up estimates of tax
expenditures and call the total a social cost. This does not mean, of course, that
estimates of tax expenditures are completely useless. Even if they tell us nothing about
welfare costs ( unless we do a general- equilibrium/ social- welfare analysis), they do
convey information about how government treats different activities. In short, tax
expenditures certainly are of interest in analyses of equity, if not necessarily analyses of
efficiency. However, even in an equity analysis, one must recognize the “ interaction”
and “ incentive” problems, discussed above, of aggregating the estimates from the JCT
and OMB.
6There is another questionhere: with respect to what is a tax expenditure a distortion? Answers to this
question inevitably are judgmental.
7
18.2.3 Tax expenditures versus public- sector costs ( agency outlays)
The preceding discussion on preferential tax treatment begets an obvious
question: do the problems with estimating tax expenditure subsidies also apply to direct
government outlays, such as for highway construction and maintenance? We will
argue that they do not, and that public- sector expenditures can be considered social
costs. ( Note that in this report, this question is of theoretical interest only, because we
do not actually estimate agency outlays here.)
Certain government outlays related to the use of oil or motor vehicles ( e. g.,
outlays for highways, the highway patrol, and pollution regulation) represent ( at least
crudely) a true resource or opportunity costs of oil use or motor- vehicle use, whereas as
we have just seen tax expenditures associated with oil use generally do not. These
government outlays are not merely transfers; they are the long- run public- sector
resource costs of oil use or motor- vehicle use. For example, if there were no motor
vehicles, then the Environmental Protection Agency’s Office of Mobile Sources probably
would not exist. 7 If there were no Office of Mobile Sources, then people employed
there would do something else, and the capital used there would be put to other uses.
These other activities and purposes would be the foregone real benefits — the opportunity
cost— of devoting people and capital to the Office of Mobile Sources.
By contrast, as explained above, it is not at all clear that there would be real
welfare benefits to eliminating tax expenditures. If the oil industry were taxed more,
then either other industries would be taxed less, or the government would collect more
revenue, or some combination of both. Whether or not it would be beneficial to tax the
oil industry more and other industries less would depend on the marginal productivity
of the industries and many other factors. Even if it was beneficial— and it might well not
be— the magnitude of the net benefit almost certainly would be less than the magnitude
of the tax expenditure, because the bulk of the effect simply would be to shift the tax
burden. Similarly, whether or not it would be beneficial to tax the oil industry more and
provide more government services would depend on the marginal cost to the industry
of the tax and the marginal value of the extra government services. Again, even if it
were beneficial— and it might well not be— the magnitude of the net benefit would
almost certainly be less than the tax expenditure because the benefit ( in government
goods and services) provided by eliminating the expenditure would be reduced by the
cost to the industry.
In addition, government outlays are probably are less intimately related to
industry behavior than are tax expenditures, and probably can be added to obtain a
total cost. It is reasonable to assume that, for example, the total public- sector resource
savings from eliminating the EPA office of Mobile Sources and U. S. Department of
Energy spending on research and development simultaneously is approximately the
sum of the outlays for each of the programs. 8 It is not necessarily the case that
eliminating these will significantly affect either the behavior of industry, or
expenditures on other government programs.
7 This ignores the small amount of attention to non- highway mobile sources.
8 Estimating the amount of these expenditures allocated to the oil industry is more complicated.
8
18.2.4 Public- sector costs versus environmental externalities
Although public- sector costs and environmental externalities both are economic
costs of oil use or motor- vehicle use, there is, of course, an important difference between
them: the former typically are long- run costs of public- sector decisions, whereas the
latter usually are short- run costs of private decisions. If tomorrow many people decide
to drive fewer miles, then tomorrow there will be less air pollution from motor vehicles.
But there will not be less roadway, or less police service. If the reduction in driving is
significant and sustained, then in the long run the public sector might recognize that
less roadway and less police service is needed, and adjust the supply accordingly. Thus,
we may count [ most] public- sector expenditures as a cost of motor- vehicle or
transportation- fuel use only if we are doing an analysis of large changes in vehicle or
fuel use in the long run. By contrast, we may count [ most] environmental externalities
in any kind of analysis.
18.2.5 A note on government price subsidy programs
Thus far we have talked about tax expenditures, which represent tax revenue
foregone because of preferential tax treatment ( and which as explained above are not
necessarily social costs) and public- sector resource costs, such as the cost of building
highways. Some researchers claim that a third class of government expenditures, price
or quantity subsidy programs, also are true costs to society. An example of a subsidy
program is the Low- Income Home Assistance Program ( LIHEAP), which provides
assistance to low- income homes with high energy bills. ( See Appendix 18- A of this
report for more details.)
For our purposes, however, subsidy programs are more like tax expenditures
than like true direct resource costs. Price subsidies do affect welfare, but they do so by
distorting prices and hence consumption, and so are similar in their effect to tax
expenditures. It is relatively easy to show diagrammatically how a single price subsidy,
viewed in isolation, reduces welfare and hence has a real cost to society. In Figure 18- 1, a
good is subsidized by the amount P’- P, so that consumers pay P and demand Q. In the
absence of the subsidy, consumers would pay P* and demand Q*. As a result of the
subsidy, consumers consume marginal units that cost more to produce than they are
worth. This cost of excess consumption, due to the subsidized price, is the area of above
the demand curve ( the marginal value curve) and below the supply curve ( the cost
curve)— area xyz in Figure 18- 1. If the subsidy were removed, these net costs would not
be incurred. Thus, xyz is the welfare cost of the subsidy.
Now, note first that the welfare cost is much less than the total subsidy, which is
the subsidy price P’- P multiplied by the subsidized quantity, Q, or area P’yxP. We
postulated the same kind of effect in the case of tax expenditures. Furthermore, this
analysis isolates the subsidy from the rest of the distorted economy. It is not impossible
that, were the subsidy to be analyzed as part of the bigger economic picture, it would
not have a cost at all— just like in the case of tax expenditures.
In the end, our distinction between tax expenditures and subsidy programs on
the one hand, and some public- sector costs on the other, is mainly a distinction between
moving resources around, which can be said to have an only “ indirect” effect on welfare
via price changes, and actually consuming resources, in the form of manpower and
materials, to provide goods and services. Tax expenditures move resources around
( mainly). Highway building ( for example) consumes resources.
9
18.3 TYPES OF TAX EXPENDITURES
In this section, we discuss some of the important tax expenditures which pertain
to the oil industry. We describe each kind of tax expenditure, and explain under what
conditions it is reasonable to count the expenditure in an “ equity” analysis of
government support. We emphasize— again— that tax expenditures are relevant in a
discussion of equity, but not, in the absence of a general- equilibrium/ social- welfare
analysis, in a discussion of economic efficiency. That is, we may set up some standard of
fairness, and then measure tax expenditures with respect to that, but we may not
classify tax expenditures as social costs, or sources of economic ( welfare) losses, unless
we have done the additional analysis to determine the effect of a tax expenditure on
economic efficiency.
Given that ( short of much additional analysis) we cannot appeal to economic
efficiency in our classification and analysis of tax expenditures, our measurement of tax
expenditures becomes partly ( if not wholly) arbitrary, in the sense that it is governed by
notions of “ fairness” or “ neutrality”, and depends on what one is comparing with
what. The EIA report ( 1992) makes a similar point: “ tax expenditures exist when actual
tax treatment for particular kinds of taxpayers deviates from standard tax treatment”
( p. 21), although “ there is disagreement as to what constitutes standard tax treatment...”
[ p. 21].) Consequently, in the following sections, we merely raise some considerations
that might be relevant in estimating and comparing tax expenditures.
Because tax laws change, some of our discussion below may be out of date. For a
review of tax and regulatory legislation currently affecting energy industries, see the
Earthtrack ( 2004) website, which is discussed briefly in section 18.4.12.
18.3.1 Accelerated Depreciation
18.3.1.1 Definitions
When determining the level of income upon which they are liable for taxes, firms
may deduct any expenses incurred in generating their income. In the case of operating
expenses, these are normally deducted in the year in which the expenses are incurred.
For capital investment, this is not the case. Because a fixed asset has can be used for
many years, firms must depreciate it over its useful life rather than expensing it in the
year it was purchased. There is little debate that depreciating an asset is the
appropriate means of expensing ( deducting) a capital investment. At issue is the
appropriate rate at which the asset is depreciated.
Accelerated depreciation can be viewed as any depreciation rate that is faster
than some baseline rate of depreciation. Accelerated depreciation changes the timing
but the not the total amount of deductions over an asset’s life: with accelerated
depreciation, a firm deducts more in the early years than it would in the case of
“ normal” appreciation. This generally is desirable because it generally is desirable to
have money now ( in the form of reduced tax payments) rather than later.
The OMB estimates tax expenditures due to accelerated depreciation by
comparing actual depreciation deductions with the deductions that would obtain with
straight- line depreciation, in which the value of an assets declines linearly with time. If
one believes that straight- line depreciation is the appropriate baseline, and more
generally, that favoring capital investment is “ unfair,” then it is appropriate to use the
OMB and JCT estimates of accelerated depreciation tax expenditures.
10
18.3.1.2 Considerations
One can argue that the depreciation tax expenditures should be calculated not
with respect to straight- line depreciation necessarily but rate with respect to the true
economic rate of depreciation, which is not necessarily always linear over time. Some
kinds of assets wear out or devalue more quickly in the earlier stages of use. For these
assets, the claimed “ accelerated” depreciation might actually be the true economic rate
of depreciation, in which case there is no tax expenditure with respect to the true
depreciation rate. Generally, we expect that tax expenditures will be less with respect to
true economic depreciation than with respect to straight- line depreciation.
Consideration of inflation also affects estimates of tax expenditures. According
to the Joint Committee on Taxation, “ The measurement of income from capital under
the normal income tax structure9 does not take into account the effects of inflation on
such items as depreciation... As a result, some tax expenditure estimates will generally
be larger than would be the case if the normal tax structure provided for inflation
adjustments in these items” ( Joint Committee on Taxation, 1991, p. 6). In other words, a
depreciation baseline that accounts for inflation will look more like an accelerated
depreciation, because the “ inflated” part of remaining value will be removed.
More generally, one can ask under what conditions accelerated depreciation,
however measured, should be counted as a tax expenditure. Accelerated depreciation
( however measured) is available to all firms, and provides favorable treatment of
capital investments in general. It is not a tax break for energy over other industries, or
oil over other energy industries: virtually all major energy sources require large
investments in capital. For this reason, the EIA ( 1992) excludes accelerated depreciation
in their study of energy “ subsidies”. In their words: “ Programs that provide incentives
for broad classes of economic activity, such as investment in fixed capital or investment
in basic research, have been excluded, because they affect neither the choice between
energy and non- energy investment, nor the choice among particular forms of energy”
( EIA, 1992, page 3).
However, accelerated depreciation does in some sense favor capital- intensive
means of producing energy over less capital- intensive alternatives such as end- use
efficiency. For this reason, Heede ( 1985) and Koplow ( 1993), who were comparing
efficiency and “ soft” energy sources ( such as solar power) with traditional energy
sources ( such as coal, oil, and nuclear), both consider accelerated depreciation to be an
energy “ subsidy”.
More subtly, one can argue that the corporate income tax itself discourages
capital investment, and that accelerated depreciation mitigates this disincentive. The
corporate tax rate raises the pre- tax rate of return an investment must generate to
preserve the after- tax return ( Pechman, 1987, page 147). However, historically this
negative effect of the corporate income tax has been “ cushioned by substantial increases
in capital- consumption allowances. Whereas straight- line depreciation was the rule
before World War II, the postwar tax law allowed more accelerated methods and
sharply reduced the period over which depreciation was taken” ( Pechman, 1987, page
149). One might argue, then, that if accelerated depreciation is to be counted as a tax
expenditure, then the disincentive of the corporate income tax should be counted as a
tax penalty ( negative tax expenditure).
9 The normal income tax structure assumes straight line depreciation.
11
18.3.1.3 Modified Accelerated Cost Recovery System ( MACRS)
The 1986 Tax Reform amended but did not repeal accelerated depreciation
allowances. In order to eliminate areas of contention between taxpayers and the IRS
over the appropriate useful life and salvage value, the Modified Accelerated Cost
Recovery System contains eight classes of assets, each of which has a specific useful life
and depreciation method. Salvage value is ignored under MACRS. “ With these rules,
possibilities for abuse using unrealistic values for useful life and salvage value are
essentially eliminated ( Pratt and Kulsrud, 1993, page 9- 5). Prior to the revision, capital
costs were recovered over a period which was much shorter than the useful life of the
asset. According to Pechman, “ depreciation allowances in the MACRS are closer to, but
still somewhat more liberal than, economic depreciation for equipment” ( Pechman,
1987, page 162). Because tax expenditure estimates use a baseline of straight- line
depreciation, accelerated depreciation should still be considered an active provision,
and not residual as asserted by Koplow ( 1993). Both the JCT and the OMB project that
the total tax expenditures resulting from this will continue to grow over the next few
years.
Depreciation allowances under the MACRS became effective for property in
place on or after January 1, 1986.
18.3.2 Investment Tax Credits
The investment tax credit was effective from January 1, 1962 to December 31,
1985, with the exception of two brief periods in the late 1960’ s. It was eliminated by the
1986 Tax Reform Act. The credit allowed firms to deduct from their tax liability 10
percent of the costs of any new investment that had a recovery period exceeding three
years. This had an effect similar to a depreciation allowance greater than 100 percent of
the cost of the asset ( Pechman, 1987). Recent estimates of tax expenditures for both
OMB and JCT no longer include figures for investment tax credits. Presumably, there
are no longer any residual effects from this provision.
18.3.3 Percentage Depletion ( in excess of cost depletion)
An excellent description of percentage depletion can be found in the Federal
budget:
Independent fuel mineral producers and royalty owners are generally allowed to take
percentage depletion deductions rather than cost depletion on limited quantities of
output. Under cost depletion, outlays are deducted over the productive life of the
property based on the fraction of the resource extracted. Under percentage depletion
taxpayers deduct a percentage of gross income from mineral production at rate of ... 15
percent for oil... Unlike depreciation or cost depletion, percentage depletion deductions
can exceed the cost of the investment. ( OMB, 1992, page 2- 29)
In 1975, percentage depletion was eliminated for major oil companies, and
between 1976 to 1984 percentage depletion allowances for smaller independent oil
producers were eventually reduced to the current rate of 15 percent of gross income
from production.
Percentage depletion provides oil producers with incentives to increase the
development of existing oil fields since the total depletion deduction which they claim
may exceed their original investment ( EIA, 1992). This allowance favors any mineral
fuel source over alternative energy sources which do not require mineral extraction,
including energy efficiency.
12
18.3.4 Expensing of Exploration and Development Costs ( Intangible Drilling Costs)
This provision allows oil companies to expense costs incurred in developing an
oil field, rather than amortize these costs over the life of the property. Major oil
companies are permitted to expense 70% of these cost of successful domestic wells in
the current year, and amortize the remaining 30% over five years. All of the costs of
unsuccessful domestic wells may be expensed in the year they are incurred.
Independent oil producers can expense 100% of the costs of successful and unsuccessful
domestic wells.
Tax expenditures for intangible drilling costs can be negative, and that in fact is
what both Koplow ( 1993) and EIA ( 1992) report. That is, in 1989, this tax provision
actually provided “ extra” tax revenues for the government— revenues that it would not
have received had the policy not been in place. This is possible because, in any given
year, the expensing provision will have two countervailing effects. On the one hand,
current expenses taken in the given year will reduce taxable income and hence reduce
tax payments, compared to what would be the case were there no expensing provision.
By this effect ( of current expensing), the government loses tax revenue on account of the
expensing provision. On the other hand, had there been no expensing provision in
years past, then firms would have had to spread their past expenses over several years,
in some cases up to the given year. In that case, had there been no expensing provision,
firms would have reduced their tax liability in the given year rather than in past years.
By this effect ( of past expensing), the government receives tax revenues in the current
year on account of the expensing provision.
The net effect of having and having had an expensing provision is the sum of
these two countervailing effects. ( The same reasoning applies if one does a future rather
than a historical analysis of the expensing provision.) If current expenses exceed
foregone past expenses in the current year, then the tax expenditure will be positive;
otherwise, it will be negative. In a normal growth period, the tax expenditure is
positive, but the EIA ( 1992) explains that the sharp decline in oil prices has resulted in
decreased exploration and development expenditures, and hence relatively low current
expenses.
The EIA ( 1992, page 106) explains the impact of this policy:
This tax deferral provision has historically been one of the most important for oil and gas
producers. The rapid write- offs have added to other incentives to engage in exploration
and development. As a result, domestic crude oil production has been greater than it
would otherwise have been and capital has been diverted from more productive
activities. The increased output has contributed to oil prices being lower than they
otherwise would be, despite OPEC’s price controlling position, and to constrained
growth for non- conventional forms of energy.
More recent estimates suggest that this provision may now result in a positive
tax expenditure. In 1989, the total tax expenditure outlay equivalent for both oil and
gas was a negative $ 65 million. The 1993 estimate is a positive $ 185 million. However,
the oil share of this is uncertain. OMB forecasts between 1993 and 1999 show a
declining trend in the tax expenditures, but the estimates remain positive. 10
10Apparently, some in the oil industry believe that the fiscal impact of these expensing provisions should
not be counted as a tax expenditure, presumably on the ground that the provisions are part of a broadly
13
18.3.5 Expensing of Tertiary Injectants
This provision allows oil companies to expense the costs of certain chemical
injectants used to enhance the process of recovering oil ( EIA, 1992, page 108). The
effects of this policy have been insignificant. Estimates of the tax expenditures
associated with this do not exceed $ 20 million. Their primary effect is to increase the
life of certain oil wells beyond the economically efficient life.
18.3.6 Exception from Passive Loss Limitations
Passive losses ( or income) are those losses ( or income) which result from
activities in which the tax payer did not materially participate. Prior to the 1986 Tax
Reform, tax payers could use losses from one activity to offset the income generated by
another. This created a strong incentive to invest in tax shelters which would incur
accounting losses in order to reduce the overall tax liability of the firm. Usually these
losses were artificial, in the sense that often they were the result of mismatching
expenses and revenues in the early years of an investment. The 1986 Tax Reform did
not completely eliminate this provision, but it did place strong restrictions on the ways
in which the passive losses could be used to offset income from other activities.
However, owners of working interests in oil and gas properties are exempt from these
limitations.
The passive loss limitations, and the oil and gas exemption, primarily apply to
partnerships and individuals, not corporations. Hence, this provision creates an
incentive for unlimited- liability partnerships to develop oil- and- gas properties. Also,
the exemption does provide some incentives to increase exploration and development
of oil properties because the subsidy attracts new capital. However, because of the
large risks associated with an unlimited liability partnership, the effects of this
provision are likely to be small ( Pratt and Kulsrud, 1993; EIA, 1992).
18.3.7 Alternative Fuel Production Credit
This credit applies to qualified fuels that are from wells drilled or facilities in
place between January 1, 1980 and December 31, 1992 and are sold before the end of
2002. There are a number of alternative fuels which are eligible for this credit, including
oil produced from shale or tar sands. 11 Qualifying firms receive a tax credit of $ 3 ( in
1979 dollars) for each barrel of oil- equivalent fuel produced, provided the price per
barrel of oil remains below $ 23.50 ( in 1979 dollars). The credit is gradually phased out
as the price of oil increases from $ 23.50 to $ 29.50 ( in 1979 dollars).
The credit is in effect a price subsidy. It is meant to encourage production of
alternative fuels by minimizing the economic risks associated with low market prices
for oil. Koplow ( 1993) estimates that the oil industry received between $ 2.5 and $ 5.0
million dollars in alternative fuel production credits in 1989— an evidently minor
equitable tax policy, and are not exceptional or preferential. Although in the end this is a matter of
judgment, we note that to our eye, the expensing provisions look exceptional.
11 The fuels which qualify for this credit are: ( 1) oil produced from shale and tar sands; ( 2) gas from
pressurized brine, Devonian shale, coal seams, tight formations or biomass; ( 3) liquid, gaseous, or solid
synthetic fuels produced from coal; ( 4) fuel from qualified processed wood; and ( 5) steam from
agricultural by- products. The most fuel most affected by this credit is probably gas produced from coal
seeams ( EIA, 1992).
14
amount. However, between 1989 and 1994, the total tax expenditure ( not necessarily the
oil share) associated with this provision increased almost a hundred- fold. The OMB
estimate of the total outlay equivalent rose from $ 10 million in 1989 to $ 900 million in
1994. The OMB and JCT only report the data, and provide little analysis of trends.
Hence, the cause of this increase is unclear, although a significant share of it can
probably be attributed to the changes that resulted from the Energy Policy Act of 1992,
which provides additional support for the development of alternative fuels. It is
unlikely that the oil industry share of the benefits from the alternative fuel production
credit has increased dramatically.
18.3.8 Research and Development Tax Credit
“ The tax credit is 20 percent of the qualified expenditures in excess of each year’s
base amount” ( OMB, 1990, page A63). This credit expired in July 1995 ( OMB, 1995).
18.3.9 Expensing of Long- term Research and Development
“ Research and experimentation ( R& E) projects can be viewed as investments
because their benefits accrue for several years when they are successful. It is difficult,
however, to identify whether a specific R& E is completed and successful and, if it is
successful, what its expected life will be. For these reasons, the statutory provision that
these expenditures may be expensed is considered part of the reference law. Under the
normal tax method, however, the expensing of R& E is viewed as a tax expenditure. The
baseline assumed for the normal tax method is that all R& E expenditures are successful
and have an expected life of five years” ( OMB, 1992, page 2- 29).
18.3.10 Deferral of Tax on Shipping Companies
“ Certain companies that operate U. S. flag vessels receive a deferral of income
taxes on that portion of their income used for shipping purposes, primarily
construction, modernization and major repairs to ships, and repayment of loans to
finance these qualified investments” ( OMB, 1990, page A67).
Although this provision is intended to maintain the U. S. merchant marine, a
share of the benefits accrues to the oil industry since some oil travels via U. S. flag
vessels.
18.3.11 Special Treatment of Alaskan National Corporations
“ Tax law restricts the ability of profitable corporations to reduce their tax
liabilities by merging or buying corporations with accumulated net operating losses
( NOLs) and as yet unrefunded claims to investment credits. Alaska Native
Corporations have a limited exemption ( fifteen years after the NOL or credit was first
experienced) from these restrictions that includes NOLs and credits claimable prior to
April 26, 1988” ( OMB, 1990, page A67).
18.3.12 Safe Harbor Leasing
“ Under this provision, a corporation, otherwise unable to utilize the accelerated
depreciation allowances and investment credit, might sell to, and then lease from,
another corporation assets acquired after December 31, 1981. The term of such
leaseback agreements, absent the safe harbor leasing provision, would not qualify the
lessor corporation as the owner of the assets and allow it to utilize the investment
incentives for tax purposes. The selling corporation could gain at least part of the
financial advantage provided by the investment tax incentives by successfully
15
negotiating leaseback agreements below market costs. Although this provision was
repealed in 1982, its budget effects persist for the duration of the safe harbor lease
entered into in 1981” ( OMB, 1990, page A66).
The 1991 federal budget contains estimates of the tax expenditures associated
with this provision. By 1995, estimates were no longer provided. Presumably, the
residual effects from this item no longer persist.
18.4 LITERATURE REVIEW
In this section we review a number of the “ tax- subsidy” studies done over the
last 15 years, and one study of state and local “ subsidies”. Most of these studies have
tried to quantify preferential Federal tax treatment of energy industries in general. We,
however, will review only the parts of these studies relevant to the oil industry.
Over the past 15 years tax provisions have changed considerably— most
dramatically on account of the 1986 Tax Reform. Consequently, we will focus mainly on
the better of the more recent studies ( EIA, 1992; Koplow, 1993), and relatively little on
the pre- 1986 studies ( Cone et al., 1980; Heede et al. 1985). Readers interested in a more
comprehensive review of these and other studies should see Koplow and Dernbach
( 2001) 12.
We limit this review to studies of tax expenditures specifically, or of “ subsidies”
more broadly. We do not review studies of the total social cost of oil use or motor-vehicle
use, even if they include estimates of tax expenditures, because virtually all such
social- cost studies are literature reviews themselves.
For a comprehensive listing of federal intervention in oil markets, see Earthtrack
( 2004).
18.4.1 Cone et al. ( 1980)
This study was prepared by Battelle Memorial Institute for the U. S. Department
of Energy primarily as a response to the 1973 oil crisis and consequent desire to make
the U. S. more self- sufficient in energy production. The purpose of the analysis was to
assist in the “ study and recommendation of Federal incentives for the development of
solar energy” ( Cone et al., 1980, p. 1). The authors recognized that in order to develop a
coherent strategy for the development of solar energy, they needed to identify the
distortions in the energy market which resulted from Federal incentives to stimulate
energy production. The study covered nuclear energy, hydroelectricity, coal, oil natural
gas and electricity.
18.4.1.1 Definition of an incentive
Unlike most of the other studies, this report did not attempt to quantify
“ subsidies” to the oil industry. Rather, it focused on “ incentives.” The intent was to
12 Koplow and Dernbach ( 2001) review studies of federal subsidies to fossil- fuel use, and then discuss the
implications of reforming these subsidies on policies designed to abate emissions of greenhouse gases.
Thus, their purpose is not to estimate “ subsidies” as true social costs. They identify three kinds of
measures of subsidies: i) the value of specific government programs to particular industries; ii) the
difference between the domestic ( subsidized) price of energy and the foreign ( unsubsidized) price of
energy; and iii) the producer or consumer subsidy equivalent, which is meant to capture direct
government- industry transfers and the effects of pricing distortions.
16
determine how Federal policy influenced the mix of energy sources. In Cone et al.
( 1980), any action which the government can take to expand residential and
commercial use of an energy source is an incentive.
18.4.1.2 Data and estimates
The study identifies two major areas of oil energy incentives: ( 1) exploration and
production, and ( 2) refining and product transportation. The key contribution of this
study was to recognize that past as well as present policies, decisions, and events can
distort present energy markets. Because these historical events and decisions can play
an important role in the current state of the industry, simply eliminating presently-distortionary
policies might not sufficiently “ correct” energy markets to enable
emerging alternatives ( such as solar power, in the Cone et al. Study) to compete fairly.
Cone, et al. estimate that between 1916 and 1978, Federal oil incentives totaled $ 123.6
billion ( in 1978 dollars). The results of their analysis are shown in Table 18- 1.
18.4.2 Heede et al. ( 1985)
18.4.2.1 Definition of “ Subsidy”
According to Heede et al. ( 1985), a “ subsidy” is “ any Federal expenditure that
makes energy appear cheaper to final consumers than its full economic cost.”
18.4.2.2 Data and estimates
This study identifies the Federal interventions in the energy market during fiscal
year 1984 that target the following energy sources: crude oil, natural gas, coal, synfuels,
electricity ( four sources of generation), non- hydroelectric renewables, and efficiency.
Subsidies were classified into three categories:
Tax expenditures were special provisions in the Internal Revenue Code that
resulted in revenue losses to the Treasury. These provisions allowed exemptions or
deductions from gross income or provided a special credit, a preferential tax rate, or a
deferral of tax liability ( page 6). Heede, et al estimate that fiscal year 1984 Federal tax
expenditures that benefited the oil industry amounted to $ 7.3 billion.
Agency program outlays were usually made to ameliorate certain market
failures ( page 6). Examples of this included expensive or risky research and
development projects undertaken by the Federal government on the behalf of the
private sector and the Strategic Petroleum Reserve. Heede et al. ( 1985) estimate that
$ 1.3 billion in agency outlays benefited the oil industry in 1984.
Loans and loan guarantees were the costs to the Treasury of providing interest-free
subsidies and paying for occasional defaults ( page 6). Heede et al. did not estimate
these costs to the oil industry.
Heede et al. ( 1985) identify their data sources clearly but do not detail their
estimates. This probably does not matter now, because the study was done before the
1986 Tax Reform and so is of limited relevance today. However, the study
wascomprehensive at the time, and did provide a useful framework for subsequent
studies ( particularly Koplow’s).
The results of his study are shown in Table 18- 2.
17
18.4.3 Kosmo ( 1987)
Kosmo ( 1987) defines a subsidy as the difference between the domestic and
world prices, and on this basis does a comparison of different countries. This effort is
outside of our scope, and is not considered further reviewed here.
18.4.4 U. S. Energy Information Administration ( 1992)
This report was prepared by the Energy Information Administration ( EIA) of the
U. S. Department of Energy, in response to a mandate by Congress to prepare a report
which covered both direct and indirect Federal energy subsidies, methods of valuing
those subsidies, and a survey of the subsidies currently in place.
18.4.4.1 Definition of “ Subsidy”
“ EIA incorporated a broad definition of subsidization including most
governmental actions which had as their function alteration of energy markets
benefiting some group of producers or consumers” ( EIA, 1992, p. ix).
18.4.4.2 Data and estimates
Unlike Heede ( 1985) and Koplow ( 1993), the EIA limits its analysis to programs
whose primary purpose is to directly influence energy markets. Thus, because
accelerated depreciation and investment tax credits benefit capital investment in
general, the EIA does not include these. It is worth noting that these two items
represent a significant percentage of the subsidy estimates in these other studies. In the
Heede et al. ( 1985) report, accelerated depreciation and investment tax credits account
for 78 percent of the total tax expenditures, and 66 percent of the total subsidy to oil. In
Koplow’s ( 1993) study, these provisions represent between 62 and 79 percent of the
total tax expenditures, and between 22 and 43 percent of the total subsidy to oil. 13 Also,
the EIA omits the costs of the Strategic Petroleum Reserve on the assumption that is
meant to provide national security and public transport.
EIA defines two kinds of subsidies:
Direct subsidies are direct payments to producers or consumers, and tax
expenditures ( as defined in the Federal tax code), provided conditional on the
recipient engaging in energy production or consumption.
Indirect subsidies consist of government actions ( other than direct subsidies)
which involve some form of Federal financial commitment that affects the cost of
consumption or production of some form of energy. They include the provision
of energy at below- market rates, loans or loan guarantees, government
assumption of risk, research and development, and provision of regulatory
services.
The EIA’s ( 1992) estimates are summarized in Table 18- 3. Note that the EIA
( 1992) counts as a negative subsidy any excise taxes— mainly the portion of the Federal
excise tax on gasoline that is earmarked for deficit reduction— that go into the general
13 It appears that the principle cause of the difference in the share of the total oil subsidy that these two
provisions represent is due to Heede’s lower estimate of total government outlays. We are not sure
because Heede et al. ( 1985) do not provide details on their estimates.
18
fund. This $ 3.1 billion negative subsidy swamps the other subsidies ( which total $ 947
million) and results in an overall negative subsidy to the oil industry.
Is it reasonable to count the deficit- reduction portion of the gasoline tax as a
negative subsidy ( tax expenditure)? Only the EIA ( 1992) does. The California Energy
Commission ( 1993), in its analysis of the social cost of motor- vehicle use, believes that
the EIA should not have included the negative subsidy, because according to the CEC
( 1993) funds from excise taxes are earmarked for a specific purpose and are usually a
mechanism for paying for government goods and services— that is, they are like a user
fee, not a general tax. Thus, since revenue collected from these taxes does not contribute
to the general fund, the CEC ( 1993) contends that it should not be included in the
analysis. However, the CEC ( 1993) apparently is mistaken, because the EIA ( 1992) has
counted only those excise taxes ( mainly the deficit- reduction tax on gasoline) that do
indeed go into the general fund.
We agree with the EIA that any excise tax revenues that contribute to the general
fund and are not used for a specific purpose may be counted as negative tax
expenditures. However, excise taxes collected specifically for the purposes of offsetting
external or government costs of fuel production or consumption ( e. g., the Oil Spill
Liability Trust Fund) should not be included in an analysis of general government tax
expenditures, government tax subsidies, or government tax fairness.
There is, however, one important caveat to our concurrence that it is acceptable
to count general excise taxes as a negative tax expenditure. If one classifies the deficit-reduction
tax on gasoline as a general tax, like an income tax, rather than as a road- user
fee ( like most of the rest of the excise tax on gasoline), then, in an analysis of the social-cost
of motor- vehicle use, one cannot also count the general excise- tax revenues as user-fee
payments for the highways, to be credited against government outlays for
highways. The deficit- reduction portion of the excise tax may be credited against
government expenditures on the highways, or against government expenditures for
general purposes, but not both. ( In Report # 17, we count it as a payment for highways,
rather than as a contribution to the general fund.)
The results of their analysis is shown in Table 18- 314.
14Although this report is concerned mainly with tax expendiures, and not with government outlays, we
think it useful to remind the reader that the EIA has not included in its estimates several kinds of
government outlays -- such as for the SPR -- that other studies have included. The EIA ( 1992) excluded
the SPR on the grounds that it is meant to provide national security and benefits the oil industry only
indirectly. We do not agree with their reasoning for excluding the cost of the SPR as a government outlay .
Although it may be true that the SPR was developed in the interests of national security, the correct
question to ask -- in an analysis of the social cost or public- sector- cost of oil use -- is whether or not a
reduction in oil consumption would reduce the cost of the SPR. If it would, then the SPR is by definition a
cost of oil use. Although we do not know the precise relationship between oil consumption and the cost
of the SPR, especially at the margin ( in large part because the behavior of government decision makers is
hard to predict), we do believe that the SPR is at least a long- run cost of all oil use. Thus, the cost of the
SPR is appropriately included in an analysis of the social cost of oil use.
There are of course many complications. For example, it might be that the SPR is constrained
politically to an economically suboptimal size. If so, then the size of the SPR might not be reduced if oil
consumption is reduced. But then, in this case, one also must account for the “ residual” energy security
costs -- those not mitigated by the SPR -- because they will decline with declining oil consumption if the
size of the SPR does not.
19
18.4.5 Koplow ( 1993)
18.4.5.1 Definition of “ Subsidy”
In this report, subsidies are: “( 1) government- provided goods and services,
including risk- bearing, which otherwise would have to be purchased in the
marketplace; and ( 2) reductions in tax burdens compared to standard treatment for a
similar activity” ( p. i).
18.4.5.2 Data, methods, and estimates
Koplow ( 1993) focuses on Federal interventions in the energy market targeted at
coal, oil, gas, solar ( non- grid), ethanol, biomass ( non- grid), energy efficiency, and
electricity ( including eleven sources of generation). The study is modeled after that of
Heede et al., ( 1985), but is a more comprehensive analysis and a significant
improvement. It is based on the 1989 tax laws and accounts the effects of the 1986 Tax
Reform Act.
“ Subsidies” are classified into three categories:
Tax Benefits are defined as any tax provision that reduces the effective rate of
taxation. This includes tax credits, reductions in the tax rate, reductions in the
tax basis, and alterations in the taxable entity. Koplow ( 1993) estimates that the
total tax- benefit subsidy to the oil industry ranged between $ 1.8 and $ 4.6 billion
in 1989.
Federal Agency Programs include a wide range of government activities that
benefit energy sources directly or indirectly. These include government R& D
expenditures, low- interest loans, and losses on government enterprises.
Other Market Interventions include government assumption of risk, changes in
the rules by which people may buy or sell energy services, and Federal
procurement of energy services. Koplow does not quantify these other market
interventions in the oil market.
All subsidy estimates are calculated using a zero government spending and
policy baseline, and include all stages of energy use such as research, exploration,
extraction, refinement, distribution, consumption and waste disposal. This baseline
assumes that there is no government budget, no tax benefits and no energy policy.
Deviations from this baseline are considered a subsidy.
Koplow ( 1993) provides both a low and a high estimate of the subsidies. In
general, the low estimate reflects the government costs of providing the particular
benefit, and the high estimate represents the market value of the subsidy to the
industry. Koplow asserts that the latter is the preferred measure of the market
distortions and barriers to entry for emerging energy sources. Overall, Koplow’s ( 1993)
analysis is one of the most comprehensive.
According to Koplow, “ it cost taxpayers at least $ 20 billion in 1989 to subsidize
the energy sector. This $ 20 billion includes two components - $ 7.7 billion in tax
20
expenditures and $ 12 billion in Federal budget outlays” ( Koplow, 1993, p. 24). 15
Koplow’s ( 1993) estimate of $ 7.7 billion in energy- related tax expenditures ( a portion of
which is allocated to the oil industry) is derived from OMB and JCT figures, which, as
discussed above, do not sum to a meaningful total. Koplow acknowledges this problem
when he admits that it is difficult to determine how much of the $ 20 billion total really
would have been saved, because “ eliminating one subsidy might allow businesses and
consumers to re- direct their energy choices toward another subsidy” ( Koplow, 1993, p.
24). However, he appears to leave this concern aside, for he goes on to conclude that “ if
the total level of all subsidies for individual supply- side resources, for instance, were
reduced to the level of subsidies for end- use efficiency ($ 570 million), taxpayers would
have saved about $ 19 billion of the $ 20.4 billion spent in 1989.” For our part, we think
that the difficulties with summing the OMB and JCT estimates should not be dismissed
so lightly.
Koplow’s estimates are summarized in Table 18- 4.
18.4.6 Management Information Services, Inc. ( MIS) ( 1993)
The purpose of this report was to quantify the magnitude of federal government
support for the energy industry over the last fifty years. However, the authors do not
provide a clear definition of “ support”, and provide little details on their methods.
MIS estimates that the total subsidy to the oil industry through 1992 totaled $ 239
billion ( in 1992 dollars). Federal energy- related activities are classified into one of six
categories ( with total oil industry benefits through 1992 in parenthesis): research and
development ($ 5 billion) 16, regulation ($ 85 billion) 17, taxation ($ 121 billion) 18,
disbursements ($ 4 billion) 19, government services ($ 21 billion) 20 and market activity ($ 3
billion) 21. They do not explain how these estimates were derived.
Because of the incomplete details and a lack of analysis in the report it is difficult
to comment further on their results.
15 Note that these figures respresent his estimates to the energy industry as a whole, not the oil industry
exclusively.
16 Includes federal research and development expenditures for the oil industry and the pro- rated costs of
US Geological Survey and Bureau of Mines data collection costs.
17 Includes exemption from price controls for stripper wells and the costs of oil industry regulation.
18 These tax expenditures resulted primarily from percentage depletion allowances and intangible
drilling costs.
19 Consists primarily of subsidies for construction and operation of oil tankers.
20 Consists primarily from the pro- rated costs of maintaining ports and inland waterways.
21 This refers to the oil- related activities of the Bureau of Land Management.
21
18.4.7 Loper ( 1994)
This study, which is a companion to Koplow ( 1993), is the only detailed study of
state and local tax policies available. 22 In 1991, state and local governments collected a
total of $ 525 billion in revenues ( roughly 80 percent of what the Federal government
collected) including $ 40 billion from energy taxes. Loper estimates that nationwide,
state and local taxes on end- use energy products are 30 percent lower than the average
sales tax. This preferential treatment resulted in $ 7.4 billion in foregone tax revenue,
$ 4.1 billion of which could be attributed to petroleum products.
18.4.7.1 Objective
Loper ( 1994) focuses on state and local tax policies that impact the 10 most
widely used end- use energy products and services: petroleum, electricity and natural
gas for residential, industrial and office use, and gasoline for highway use. The primary
goal of the study is to estimate foregone state and local tax revenues, which he calls “ net
energy tax subsidies,” on account of preferential tax treatment for energy. He estimates
the net energy tax subsidy ( foregone revenue) on the basis of the difference between an
“ energy tax rate” and the general sales tax rate for each state. The energy tax rate is
discussed below.
18.4.7.2 Data, methods, and estimates
The study identifies four ways in which tax biases for energy- related activities
may occur: ( 1) different statutory tax rates, ( 2) partial or total tax exclusions, ( 3) tax
refunds or credits, and ( 4) additional special taxes. Loper analyzed all areas of the tax
codes, including general sales taxes, gross receipts taxes, highway fuel taxes, income
taxes, and property taxes, along with numerous lesser- known taxes imposed on or
containing some special treatment of energy or energy businesses. From this he
compiled a database of over 1,000 energy- related state and local tax code provisions
that were in place as of July 1993. The study includes only those taxes and tax
provisions that are likely to be borne by end- use consumers.
Loper ( 1994) notes that there are some important tax issues which are not
addressed in his report. For example, the report includes only state and local tax
provisions that specifically affect energy consumers or producers. Hence, accelerated
depreciation and investment tax credits are not included. Passive tax provisions ( tax
breaks passed through from the Federal income tax code) are not included. The study
also omits non- tax interventions, such as government regulations and spending.
Loper calculates the “ energy tax rate,” as a percentage of the pre- tax retail price
of energy, in four steps. First, he identifies taxes imposed on energy products. The two
main energy tax categories which are related to petroleum use identified in the study
are petroleum taxes ( including user fees, which he deducts in the next step), and
severance and production taxes.
Second, Loper deducts any user fees included in the first step. He deducts these
because user fees are intended to “ fund government- provided services that primarily
benefit the payer of the taxes, or they are intended to compensate governments for costs
incurred as a result of the taxable activity.” These include highway fuel taxes, toll
22 For the purposes of this study, the District of Columbia is considered a state.
22
collections and vehicle registration fees, environmental fees and assurances, 23 and
petroleum inspection fees.
Third, Loper makes adjustments for related income and property tax provisions.
Although some states have exemptions from income and property taxes for petroleum
related activities, these are not included in the analysis because the author believes that
these benefits will not be passed on to end- use consumers. Thus, there are no
adjustments made for the oil industry.
Finally, Loper adds in the applicable general sales taxes. Only eight states
subject gasoline to sales taxes, although most have some sales tax provision for
petroleum used in homes, offices and industries.
In sum, Loper calculates the energy tax rate, as a percentage of the pre- tax retail
sales price, as all applicable energy taxes except user fees plus applicable sales taxes.
Loper ( 1994) then compares this energy tax rate with the prevailing general sales tax
rate, and calculates the taxes that would have been collected had energy been taxed at
the general sales tax rate rather than the estimated energy- tax rate, assuming that sales
prices and quantities were unchanged. The estimated foregone revenues are the net energy
tax subsidy.
Based on the difference between the energy tax rate and the general sales tax
rate, Loper finds that 38 states under- taxed petroleum for highway use, 24 states under-taxed
petroleum for residential use, 31 states under- taxed petroleum for industrial use,
and 5 states under- taxed petroleum for office use. The net energy tax subsidy attributed
to petroleum, i. e. the revenue impact on state and local governments, totaled $ 4.1 billion
in 1991.
Loper’s ( 1994) estimates are summarized in Table 18- 5. The appendix to Loper’s
report provides a detailed listing of the energy- related tax provisions for each state.
18.4.8 Domestic Fuels Alliance ( 1995)
This report by the Domestic Fuels Alliance ( DFA) is a response to oil- industry
lobbying efforts to eliminate any Federal incentives that promote alternative- fuel use.
Unfortunately, the estimates in this report are merely pieced together— often
uncritically and inconsistently— from other studies of tax subsidies.
DFA’s summary table, presented on page 5 of its report, is difficult to interpret.
It presents the table as a “ total Federal energy subsidy costs to government on an
annual basis,” drawn from eight different studies conducted over the last 20 years. One
of these eight is the 1992 study by the World Resources Institute ( Mackenzie et al.,
1992), which estimated that costs of motor- vehicle use “ not borne by drivers” in the
United States amounted to some $ 300 billion. However, the $ 300 billion of Mackenzie
et al. ( 1992) included all kinds of environmental externalities and other costs “ not borne
by drivers” ( such as free parking); tax expenditures and government- agency outlays
constituted but a small fraction of the $ 300 billion. In light of this, we do not know
exactly what DFA is purporting to measure.
Similarly, we do not understand DFA’s presentation, in their section titled
“ Federal Petroleum Subsidies,” of the analysis done by the EIA ( 1992). The DFA states,
correctly, that the EIA ( 1992) estimated that Federal energy “ subsidies” were about $ 5 to
$ 10 billion. This, however, was the subsidy to all energy sources. As we noted above,
the EIA ( 1992) estimated that the “ subsidy” to petroleum specifically— and the DFA is
23 A number of these taxes fund environmental actions required as a result of oil spills.
23
presenting the estimate in a section called “ Federal Petroleum Subsidies”— was a
negative $ 2.2 billion.
Because the DFA study is derivative and difficult to interpret, we do not
summarize the results here. The American Petroleum Institute ( 1995) offers a critique of
the DFA study.
18.4.9 Union of Concerned Scientists ( UCS) ( Hwang, 1995)
The UCS estimates hidden “ subsidies” to the oil industry. It defines “ subsidy” to
include:
i) reduced corporate income taxes for the oil industry;
ii) lower than average sales taxes on gasoline;
iii) government funding of programs that primarily benefit the oil industry and
motorists, and
iv) “ hidden” environmental costs such as air, water, and noise pollution.
As discussed above, we are not concerned here with expenditures for
government goods and services ( subsidy iii in the USC’s accounting), or environmental
externalities ( subsidy iv in the USC’s accounting). The UCS’s estimates of reduced
corporate income taxes, and lower- than- average sales taxes, are relevant, but either are
based on the work of Koplow ( 19930 or Loper ( 1994) or else are similar to the analysis
presented here. Therefore, we do not analyze the UCS work further.
18.4.10 Energy Information Administration ( 1999, 2000)
In 1999 and 2000, the EIA updated it’s 1992 study on Federal Energy Subsidies.
The 1999 report examines Federal programs that provide a specific financial benefit to
producers of primary energy, and the 2000 report examines programs targeted at the
energy transformation and end- use sectors. The 1999 and 2000 reports use a narrower
definition of “ subsidy” than did the 1992 report and include a couple of tax
expenditures not in the 1992 report, but otherwise the methods and data sources in the
reports are similar. Table 18- 3 shows the EIA’s 1999 and 2000 estimates alongside the
1992 estimates.
18.4.11 Green Scissors ( 2004)
The annual Green Scissors ( 2004a) report identifies tax expenditures, direct
government expenditures, R& D programs, loan programs, and other government fiscal
programs and policies that the authors believe are environmentally harmful and
generally wasteful. The 2003 report includes a discussion of oil royalty exemptions and
specific road and highway projects.
A different Green Scissors ( 2004b) focuses more specifically on “ tax breaks”
( similar to our “ tax expenditures”) and “ spending subsidies” ( similar to our “ direct
government spending”) for energy industries. They estimate that existing tax breaks for
the oil industry cost $ 2.6 billion per year, an estimate that turns out to be similar to our
independent estimate derived in section 18.5. The Green Scissors ( 2004b) estimates are
summarized in Table 18- 6.
18.4.12 Earthtrack ( 2004)
The Earthtrack website keeps tabs on tax expenditures, direct government
spending, government loans, and government research and development outlays that
24
affect energy industries. In the case of oil, Earthtrack ( 2004) lists all of the expenditure
categories in section 18.3 of this report, plus a couple of others: tax relief for certain oil
producers from the Alternative Minimum Tax, and exclusion of interest on IDBs for
seaports and marine terminals. Earthtrack also tabulates direct spending by
government agencies that benefits the oil industry. For the most part the web site does
not present estimates of the magnitude of the tax expenditures.
18.5 ESTIMATES OF CORPORATE- INCOME TAX AND SALES- TAX
EXPENDITURES, BASED ON AVERAGE TAX RATES
18.5.1 Corporate income- tax expenditures for the oil industry
All previous estimates of tax expenditures identify individual “ preferential” tax
provisions, estimate the revenue losses owing to each provision, and then sum the
losses to produce the total tax expenditure. In our view, this method has two
shortcomings. First, it is piecemeal, and liable to inconsistency and incompleteness. It
requires that the researcher decide upon a standard tax treatment and then examine
every tax provision consistently with respect to that standard. Second, the estimates are
derived from OMB and JCT figures, which as discussed do not sum to a meaningful
total expenditure estimate.
An alternative approach is to estimate and compare overall actual tax rates—
taxes actually paid as a fraction of some measure of income or value. This method has
several advantages: it uses aggregated data on overall taxes, rather than estimates of
individual provisions, and therefore will include the effect of all provisions, favorable
or unfavorable ( so that one is not liable to the charge of having omitted the
countervailing effect of any unfavorable tax provisions); it uses data on actual tax
payments and income, rather than OMB and JCT estimates; and it uses an intuitively
appealing and straightforward basis of comparison: actual tax rates. Of course, there is
at least one disadvantage to using aggregated data: they do not reveal potentially
important details.
To develop our average- tax estimates we use industry- level corporate Federal tax
and income data published by the Internal Revenue Service ( 1994, 2003). In Table 18- 7
( which presents data for “ income- year” 1991) we divide Federal income taxes and
Federal income taxes after credits by net income and taxable income, for various
industry groupings. Part A of the table shows the actual income and tax payments, and
Part B shows the calculated tax rates based on the data in Part A. The tables show the
taxes for each major industry group, and then for oil and motor- vehicle- related
industries within the major group. Totals are presented for all industries, oil- related
industries, motor- vehicle related industries, other industries, and the motor- fuel and
motor- vehicle- related industries.
The results of the 1991 analysis are illuminating. The income tax liability of the
oil industries, before tax credits are taken, and expressed as a fraction of net income ( not
taxable income), is actually relatively high— higher than the average for other
industries. However, as one would expect, the tax liability expressed as a fraction of
taxable income is similar in all industries. From this we infer two things: i) that on
average most industries are in the same tax brackets, and ii) that the oil industry did not
exempt as much of its net income as did other industries. For every $ 100 of taxable
income, most industries, including the oil industries, had a tax liability of about $ 35.
However, the oil industry had about $ 120 of net income for every $ 100 of taxable
25
income, whereas other industries had about $ 160 of net income for every $ 100 of taxable
income.
However, the standings change when we consider income tax after credits— that
is, income tax actually paid, which undoubtedly is the more equitable basis of
comparison. The last two columns of Table 18- 7 reveal that the oil industry paid a
relatively small amount of income tax as a fraction of its net income— considerably less
than did other industries, on average. Comparison of columns 1 and 3 indicates that in
the oil industry, tax credits were more than half of the pre- credit tax liability, whereas in
other industries they were less than one quarter. Line- by- line ( i. e., industry- group by
industry- group) comparisons of the results in column 3 of the third part of the table ( oil
industries) with the results in column 3 of the second part ( industries excluding oil)
show that the oil industry pays on the order of half as much tax per dollar of net income
as do other industries24.
What would the oil and vehicle industries had paid if they had paid income tax
after credits at the national average rate for all industries other than the oil and vehicle
industries? Table 18- 8 answers this question. It shows how tax payments would have
changed if the tax rate were at the average for other industries rather than the actual in
1991, for each of the four tax- rate metrics. We see that if the oil industry had paid
income tax after credits at the national average rate ( for other industries) with respect to
net or taxable income, it would have paid $ 2.1 to $ 3.9 billion more in taxes after credit
than it actually did. ( The change in the motor- vehicle industry is very small.) This is
similar to Koplow’s ( 1993) estimate of $ 4.5 billion in income- tax subsidies to the oil
industry in 1989 ( Table 18- 4), and Green Scissor’s ( 2004b) estimate of $ 2.6 billion/ year
as of 2002 ( Table 18- 6). If the calculation is done on the basis of the national average
rates for all industries including the oil and vehicle industries, the oil industry would
have paid $ 2.0 to $ 3.6 billion more in taxes after credit. ( The “ subsidy” amount is less
because the average rate including the oil and vehicle industries is less than the average
rate including them.)
When the analysis is done for motor- vehicle industries plus the highway- fuel
share of oil industries, the results are similar to those for motor- vehicle + oil industries,
except that the estimated tax expenditures are smaller because only a fraction of the oil
industry ( which receives the largest subsidies) is counted as being motor- fuel related.
Corporate income- tax expenditures associated with the motor- vehicle and motor- fuel
industries amounted to $ 1.4 to $ 2.8 billion in 1991, with essentially all of this deriving
from motor- fuels ( the oil industry) rather than from the motor- vehicle industry.
Table 18- 9 shows the same calculations done with “ income- year” 2000 corporate
income- tax data. The tax rates, shown in Part A of the table, are similar to those
estimated for 1991 ( Table 18- 7) with one exception: the difference between the ratio of
income tax after credits to net income for the oil industry and the ratio for all industries
( or all other industries) is less than what it was in 1991. As a result, the total “ subsidy”
calculated on this basis ( Part B of Table 18- 9) is the same as it was in 1991 ( about $ 2
billion) even though net income increased substantially from 1991 to 2000 while overall
tax rates remained about the same.
For income- year 2000, the tax expenditures for motor- vehicle industries plus the
highway- fuel share of oil industries are $ 0.9 to $ 7.4 billion when the baseline is the
24 The data are not available to conduct a formal statistical test of whether thes ratios actually are
statistically significant from each other.
26
average tax rate in all other industries ( Table 7), and $ 0.8 to $ 6.5 billion when the
baseline is the average rate in all industries including oil and vehicle- related industries.
18.5.2 Sales- tax expenditures related to the use of motor vehicles and motor fuel
Most states and some cities and counties assess a sales tax on most retail
transactions. Different rates apply to different products and to retail- sector vs.
wholesale- sector vs. service- sector transactions, and as a result one may estimate tax
expenditures ( positive or negative) on sales of particular goods and services relative to
any number of “ fair” baselines.
To estimate the sales- tax expenditures related to motor- vehicle use, one must
decide the rate at which sales of motor vehicles, parts, and fuels should have been taxed,
and compare that to the rate at which they actually were taxed. Table 18- 10 presents
comprehensive data on sales of and sales taxes on motor vehicles and parts, motor- fuel,
and automotive services, at the retail and wholesale levels, and national data on sales
and sales taxes in the entire retail, wholesale, and service sectors. With these data, we
can make a number of comparisons of sales taxes actually paid on vehicles, parts, and
fuel with the amount that would have been paid at different “ fairer” baseline tax rates.
The last part of Table 18- 10, from lines 26L to 30H, shows tax expenditures calculated
with respect to different baseline tax rates, beginning with the highest rate ( which
results in the highest expenditures or “ subsidies” to motor vehicles and fuels) and
ending with the lowest rate, which actually results in a negative tax expenditure
( because the actual tax rate on motor vehicles and fuels is higher than the lowest
baseline rate).
If the baseline rate is assumed to be state and local posted sales- and use- tax rates,
then tax expenditures on items related to motor- vehicle use are quite high, about $ 15
billion in 1990 and almost $ 40 billion in 2004 ( lines 26L and 26H). This however does
not seem a reasonable basis, because average actual tax rates clearly are well below the
posted rates. Indeed, if one goes to the other extreme and assumes that the appropriate
baseline tax rate is total national sales and use taxes divided by total final sales to
consumers ( which excludes wholesale sales), and compares this with actual average
sales tax rate on motor- vehicle related goods and services in the retail and service
sectors, one finds the latter exceeds the former, with the result that motor- vehicle
related items currently are overpaying sales and use taxes by at least $ 10 billion ( lines
30L and 30H). An intermediate case, in which one calculates the baseline tax rate for
sales in the service, wholesale, and retail sectors that actually are subject to sales taxes
( i. e., excluding in this case all “ exempt” sales from the baseline, whereas in cases 30L
and 30H exempt sales are included in the baseline), results in tax expenditures on
motor- vehicle and fuel- related sales on the order of $ 2 billion per year in 1990 and up to
$ 15 billion at present ( lines 28L and 28H). If one considers just the retail sector, then the
actual average rate on motor- vehicles and fuels of about 2.6% is less than the national
average rate of around 4%, and tax expenditures are on the order of $ 6 billion in 1990
and about $ 15 billion at present ( Lines 27L and 27H).
Finally, we can compare our estimates with Loper’s ( 1994). As we mentioned in
section 18.4.7, Loper ( 1994) estimates that in 1991 state and local sales- tax expenditures
on all petroleum products totaled $ 4.1 billion, of which approximately $ 2.5 billion
pertained to highway fuels specifically ( based on the ratios of Table 18- 5). Our own
estimate is that $ 122 billion in sales of fuels and lubricants was taxed at 1.8%, versus a
national average of 3.6% for all retail sales ( Table 18- 10), resulting in a sales- tax
expenditure of $ 2.1 billion. This is close to Loper’s ( 1994) estimate.
27
18.5.3 Summary
We estimate that sales- tax and corporate- income- tax expenditures related to
motor vehicles and motor fuels, estimated as the difference between what tax payments
would have been at a “ fair” baseline rate and what tax payments actually have been,
may be on the order of several billion dollars per year. However, we emphasize again
that these estimates must be considered with respect to questions of fairness, not
economic efficiency. The question of how the income of different industries ( or
individuals) should be taxed is primarily an equity issue, to be evaluated by normative
criteria. We do not undertake a normative analysis here.
We do, however, apply our estimates of tax expenditures in our analysis of user
payments for government- provided motor- vehicle infrastructure and services, in
Report # 17. In that report, we point out that if certain kinds of general taxes are counted
as payments by motor- vehicle users for government- provided motor- vehicle
infrastructure and services, then it is reasonable to count general tax expenditures
related to motor- vehicle use as subsidies to motor- vehicle users. Therefore, in Report
# 17, we deduct tax expenditures from estimated user payments. The deducted tax
expenditures of more than $ 20 billion are about 7% of estimated user payments, a small
but not trivial fraction of total payments.
28
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29
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http:// tonto. eia. doe. gov/ FTPROOT/ service/ servicepubs. htm.
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Spending, available on the web at www. greenscissors. org/ news/ gs2003pr. html,
accessed March ( 2004a).
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30
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Cleveland, Elsevier Inc., the Netherlands, pp. 749 - 764 ( 2004).
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MIT Press, Cambridge, Massachusetts ( 1990).
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Economic Studies 24( 1): 11- 33 ( 1956- 1957).
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Energy, Washington, D. C., June ( 1994).
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U. S. Energy Industries, Washington, D. C.: Management Information Services, Inc., May
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Presence of Trade Distortions,” American Journal of Agricultural Economics 76: 26- 35
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31
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Executive Office of the President, Washington, D. C. ( 1987).
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Cited in EIA ( 1992).
32
TABLE 18- 1. CONE ET AL. ( 1980) SUMMARY OF OIL INCENTIVES BY TYPE FROM 1916 -
1978 ( MILLIONS OF 1978 DOLLARS)
Incentive area Estimate
Research and development 1,287
Exploration and production
U. S. Geological Survey - data 574
Bureau of Land Management - leasing 498
Bureau of Mines - data 18
Stripper well price incentives 16,840
Incentives for new oil 33,340
Economic Regulatory Administration a 1,708
Intangible drilling expense 15,449
Percentage depletion allowance 40,033
Refining and transportation
High yield on pipelines 5,601
Maintenance of ports and waterways 6,923
Subsidies for tankers 1,301
Total 123,572
Source: Cone et al. ( 1980), page 240.
a Includes the Strategic Petroleum Reserve
33
TABLE 18- 2. HEEDE ET AL. ( 1985) FY1984 FEDERAL SUBSIDIES TO OIL ( MILLIONS OF
1984 DOLLARS)
Federal tax expenditures
Intangible drilling costs 890
Percentage depletion allowance 740
Accelerated cost recovery 3,780
Investment tax credits 1,890
Total tax expenditures 7,300
Federal agency outlaysa 1,270
Total Federal oil subsidies 8,570
Source: Heede et al. ( 1985), page 12.
a Includes expenditures from the following agencies: Department of Energy, Army Corps of
Engineers, Environmental Protection Agency, Naval Petroleum and Oil Shale Reserves,
Internal Revenue Service, Minerals Management Service, Coast Guard, Strategic Petroleum
Reserve, Bureau of Land Management, United States Geological Survey, and Federal Energy
Regulatory Commission. Detailed estimates for each agency were not provided in the report.
34
TABLE 18- 3. EIA ESTIMATES OF FY1992 AND FY 1999 OIL SUBSIDY ELEMENTS IN
FEDERAL PROGRAMS ON A BUDGET OUTLAY BASIS ( MILLIONS OF 1992 OR 1999
DOLLARS)
Type of subsidy 1992 ( 106 1992 $) 1999 ( 106 1999 $)
Income tax expendituresa 395 263
LIHEAPb 262 n. e.
Cost of regulatorsc / direct expenditures 215 255
Excise tax contributions without
offsetting liabilitiesd
( 3,132) n. e.
Research and development 75 49
Total Federal subsidies ( 2,185) 567
Sources: 1992 data from EIA ( 1992) p. 7; 1999 data from EIA ( 2000) p. 54.
a Most of the EIA ( 1992) estimates of tax expenditures are taken from the Federal budget and
from the Joint Committee on Taxation.
b The Low Income Housing Energy Assistance Program ( LIHEAP) disburses money to the
States for the purpose of providing assistance to approximately 5.8 million low- income
households for payment of utility bills and weatherization of residences. In FY1992, LIHEAP
totaled $ 1.1 billion in outlays. EIA ( 1992) estimates that approximately $ 262 million of this can
be attributed to petroleum products ( pages 7, 11- 12). See Appendix A for details.
c “ Cost of regulators” in the 1992 report, “ direct expenditures” in the 1999/ 2000 reports. The
cost of regulators includes the Office of Surface Mining Reclamation and Enforcement and the
Department of the Interior minerals management programs.
d See the discussion in the text.
35
TABLE 18- 4. KOPLOW ( 1993) ESTIMATES OF FY1989 FEDERAL SUBSIDIES TO OIL
( MILLIONS OF 1989 DOLLARS)
Tax benefit subsidy allocations Statusa Low High
Tax credits
Alternative fuel production credit active 2.5 5.0
ITCs: new machinery and equipment residual 242.4 616.8
R& D tax credit active 28.3 72.0
Other reductions in the effective tax rate
Activities or products exempt from taxation
Tax exempt bond issues: pollution control residual 148.8 181.5
Tax exempt bond issues: seaports, etc. narrowed 52.6 53.5
Reductions in the effective taxable basis
Expensing of costs normally capitalized
Expensing of long- term R& D active 50.9 79.2
Expensing of oil & gas exploration and
development
narrowed ( 44.3) ( 204.5)
Expensing of tertiary injectants active 20.0 20.0
Accelerated depreciation of certain assets
ACRS/ accelerated depreciation of machinery
and equipment
residual 873.8 2,996.6
Deferral of required income tax payments
Deferral of tax on shipping companies active 6.3 60.0
Special deductions
Percentage of depletion benefits narrowed 245.1 333.1
Special definitions of the taxable entity
Benefits due to special congressional exemptions
Passive loss restrictions active 92.0 204.5
Special treatment of Alaskan national
corporations
residual 102.4 186.9
Foreign research expense, offset of domestic
income
active 0.0 0.1
Benefits due to transfer pricing
Sale harbor leasing ( 24.9) ( 51.2)
Total tax benefit subsidy allocations 1,795.9 4,553.5
36
Agency spending, loans & loan guarantees Status Low High
Executive Branch
International Development Assistance:
multilateral development banks
active 14.3 14.3
Department of Defense
Army Corps of Engineers civil program active 417.7 417.7
Navy Supervisor of Salvage active 0.0 18.5
Department of Energy
Energy R& D, waste management and
administration
active 120.8 120.8
Strategic Petroleum Reserves active 1,736.7 2,061.9
Energy Information Administration active 31.0 31.0
Federal Energy Regulatory Commission active ( 0.4) ( 0.4)
Naval Petroleum and Oil Shale Reserves active 0.0 103.9
Department of Health and Human Services
Family Support Administration: LIHEAP active 347.7 347.7
Department of the Interior
Minerals Management Service active 93.1 93.1
Department of Transportation
Coast Guard active 406.2 406.2
Maritime Administration active 111.3 111.3
Federal Railroad Administration active 0.8 1.5
Independent Agencies
Export- Import Bank active 85.1 98.7
Total government support 3,364.3 3,826.2
Total Federal subsidies to oil in FY 1989 Low High
Tax benefits plus government support 5,160.2 8,379.7
Source: Koplow ( 1993), Appendix A- 8, A- 9.
a Active refers to those policies that were still in effect in 1989.
Residual refers to those policies which were repealed or expired before 1989, but which still
affected tax expenditures in 1989 on account of transitional rules, or stored credits.
Narrowed refers to those provisions which were still in effect in 1989, but for which eligibility
had been tightened.
37
TABLE 18- 5. LOPER ( 1994) ESTIMATES OF 1991 STATE AND LOCAL TAXATION OF
PETROLEUM ( MILLIONS OF 1991 DOLLARS)
Petroleum
Category Highway Home Industry. Office Totals
1. Energy tax revenues 22,003 51 251 236 22,541
2. User fee revenues ( included
in above)
21,368 36 110 26 21,540
3. General sales tax revenues 2,168b 232 861 339 3,600
4. Net energy tax subsidiesa ( 2,677) ( 467) ( 733) ( 190) ( 4,067)
Source: Loper ( 1994), page 46.
a Negative numbers represent under- taxation. For two reasons, the net energy tax subsidies
shown here cannot be calculated from the data shown in this table, or for that matter, from the
data shown in Loper ( 1994). First, the net energy tax subsidy is the difference between net
energy tax revenues and revenues that would have been generated had energy been taxed at
the general sales- tax rate, and neither this table nor Loper’s report show the latter. Second, the
net energy tax revenues are not exactly equal to line 1 minus 2 plus line 3 ( as one might expect
on the basis of Loper’s method), because “ of the different expenditure bases used to calculate
revenues for each tax category. In particular, energy tax revenues [ and] user fee revenues.. are based
on energy expenditures that exclude both energy and general sales taxes, [ whereas] general sales tax
revenue” are based on energy expenditures excluding sales taxes, but including energy taxes.. ( Loper,
1994, p. 46).
b In Report # 17 of this social- cost series, we use data from the U. S. Census to estimate that in
1991, sales taxes on highway fuels and lubricants generated $ 2.18 billion in sales- tax revenues.
This is virtually identical to Loper’s estimate of $ 2.17 billion.
38
TABLE 18- 6. GREEN SCISSORS ( 2004B) ESTIMATES OF EXISTING TAX- BREAK SUBSIDIES
TO THE OIL INDUSTRY IN 2002
Type of tax break Cost/ yr ( 106 $)
Enhanced oil recovery 280
Intangible drilling costs 920
Non- conventional fuel production credit 900
Passive loss 20
Percentage depletion allowance for fossil fuels 440
Total tax breaks 2,560
Source: Green Scissors ( 2004b).
39
TABLE 18- 7. OUR ESTIMATES OF U. S. FEDERAL CORPORATE INCOME TAX RATES,
INCOME- YEAR 1991
PART A: CORPORATE INCOME TAXES OF ACTIVE CORPORATIONS ( 103 1991 DOLLARS)
Industry Group Net income Taxable
Income
Income Tax
Before
credits
Income Tax
After
Credits
Agriculture, forestry, and fishing 3,774,209 1,875,241 520,185 473,493
Mining 7,721,788 4,495,495 1,814,367 1,041,082
Oil and gas extraction 5,818,875 3,187,606 1,302,585 645,160
All other mining 1,902,913 1,307,889 511,782 395,922
Construction 14,965,305 6,662,049 2,008,680 1,722,422
Heavy construction 3,575,418 2,343,458 800,148 602,173
Manufacturing 181,884,248 152,624,397 53,891,094 32,104,071
Petroleum refining 23,747,357 22,605,091 7,927,594 2,826,449
Motor vehicles and equipment 1,123,915 692,399 277,809 201,320
All other manufacturing 157,012,976 129,326,907 45,685,691 29,076,302
Transportation and Public
Utilities
53,590,652 47,111,134 17,143,124 15,793,417
Wholesale Trade 29,096,847 16,267,870 5,340,458 4,649,750
Petroleum and petroleum
products
3,270,404 1,832,262 627,077 211,213
Motor vehicles and auto. equip. 1,913,058 1,397,644 498,907 493,011
All other wholesale trade 23,913,385 13,037,964 4,214,474 3,945,526
40
Retail Trade 35,151,817 23,994,992 7,862,574 7,343,538
Gasoline service stations 451,697 201,452 53,083 51,198
Motor vehicle dealers 1,704,165 555,345 159,309 152,368
All other retail trade 32,995,955 23,238,195 7,650,182 7,139,972
Finance, Insurance and Real
Estate, Other
174,249,613 80,797,221 27,281,531 24,850,137
Services n. e. n. e. n. e. n. e.
Auto repair and maintenance 1,246,131 584,960 180,171 154,139
Totals
All industries 535,816,622 350,009,712 121,121,231 92,566,319
Oil industriesa 33,288,333 27,826,411 9,910,339 3,734,020
Motor- vehicle industriesb 5,987,269 3,230,348 1,116,196 1,000,838
Oil and vehicle industries 39,275,602 31,056,759 11,026,535 4,734,858
All other industries 496,541,020 318,952,953 110,094,696 87,831,461
Motor- vehicle and motor- fuel
relatedc 31,076,325 24,746,152 8,665,043 4,064,016
Source: Internal Revenue Service ( 1994). The taxes in this table include only the Federal
corporate income tax. They do not include any other federal taxes ( e. g. excise taxes and other
non- income taxes) or any state and local taxes. The data are for “ income year” 1991, which
refers to corporate accounting periods ending between July 1 1991 and June 30 1992.
a Comprises oil and gas extraction, petroleum refining, petroleum and petroleum products, and
gasoline service stations.
b Comprises motor vehicles and equipment ( under manufacturing), motor vehicles and auto
equipment ( under wholesale trade), motor vehicle dealers, and automobile repair and
maintenance.
c Equal to the amount for each motor- vehicle or oil industry multiplied by the fraction of the
amount in the industry that actually pertains to motor- vehicles or motor fuels, summed for all
motor- vehicle or oil industries. For example, petroleum refineries