|
The American Jobs Creation Act of 2004 [13] was signed into law on October 22, 2004. Most of the 650 pages of the Act are related to tax legislation. Provisions pertaining to energy are described below.
Diesel Excise Taxes
Section 241 phases out an excise fuel tax of 4.3 cents per gallon on railroads and inland waterway transportation incrementally between January 1, 2005, and January 1, 2007. Under current law, diesel fuel used in trains and fuels used in barges on certain inland waterways are subject to an excise tax of 4.4 cents per gallon. Revenues from 4.3 cents of the tax are retained in the General Fund. The remaining 0.1 cent is put in the Leaking Underground Storage Tank Fund, which is scheduled to expire on March 31, 2005. AEO2005 reflects the phaseout of these excise taxes.
Ethanol Tax Credits
Section 301 establishes the Volumetric Ethanol Excise Tax Credit (VEETC). Before this Act, gasoline blenders could choose between an income tax credit of 51 cents per gallon of ethanol blended or a reduced rate of Federal excise tax on each gallon of gasoline blended with ethanol. Thus, gasoline containing 10 percent ethanol would be taxed at 13.2 cents per gallon instead of the usual 18.3 cents per gallon in calendar year 2005. Gasoline blended with 5.7 percent or 7.7 percent ethanol would receive a proportionally smaller reduction in the excise tax. The VEETC is instead assessed at a rate of 51 cents per gallon of ethanol, and the entire excise tax is assessed on the finished gasoline. This gives several advantages over the existing structure. VEETC applies to any blend of ethanol and gasoline. It also applies to ethyl tertiary butyl ether (ETBE), a gasoline blending component made from ethanol. The excise tax exemption does not apply to blends containing less than 5.7 percent or more than 10 percent ethanol, such as E85. The income tax credit can be taken for ethanol used in such blends or to make ETBE, but not all gasoline blenders have sufficient Federal income tax liability to take the credit. The VEETC is effective through 2010; the excise tax reduction will expire in 2007. This section also extends the alcohol income tax credit through 2010. AEO2005 includes these tax credits and, in addition, assumes that they will remain in force indefinitely, given that historically they have been extended when they expired.
Biodiesel Tax Credits
The VEETC also applies to biodiesel blends. A diesel fuel blender can claim a credit of $1 per gallon of biodiesel made from agricultural commodities such as soybean oil and can claim a credit of 50 cents per gallon of biodiesel made from recycled oil such as yellow grease. Section 302 extends income tax credits for biodiesel blending similar to the alcohol income tax credits. The VEETC provision for biodiesel and the biodiesel income tax credits expire after 2006. Section 302 is modeled in the AEO2005 reference case.
Rural Electric Cooperatives Income Treatment
Current law gives tax-exempt status for rural electric cooperatives if at least 85 percent of the cooperative’s income comes from amounts collected from members for the sole purpose of meeting losses and expenses incurred in providing service to those members. Section 319 provides that, under certain actions approved or accepted by the FERC, gains realized by a rural electric cooperative from a voluntary exchange or involuntary conversion of certain property are excluded in determining whether that cooperative meets the 85-percent test. This provision applies only to the extent that the gain would qualify for deferred recognition under tax laws or the replacement property is used to generate, transmit, distribute or sell electricity or natural gas. This provision represents a level of detail that is not characterized in NEMS.
Low-Sulfur Diesel Fuel Production Credit
Sections 338 and 339 contain provisions allowing small business refiners a 25-percent credit for production of ultra-low-sulfur diesel fuel (15 parts sulfur per million or less), with additional provisions for expensing the remaining 75 percent of the capital investment. Current law does not provide a credit for the production of low-sulfur diesel fuel. The Act allows a small business refiner to claim a credit at a capture rate equal to about 5 cents per gallon for each gallon of low-sulfur diesel fuel produced in compliance with the Highway Diesel Fuel Sulfur Control Requirements law. The credit is a qualified business credit under Section 169(c) of the Act. The existing carry-back and carry-forward provisions for a qualified business credit apply [14]. The effective date for this provision is December 31, 2002.
Taxpayers may currently recover the cost of investments in refinery property through annual depreciation deductions. A separate expensing provision permits small business refiners to deduct as an expense up to 75 percent of the costs paid or incurred in making upgrades to comply with the EPA’s Highway Diesel Fuel Sulfur Control Requirements.
Small business refiners (up to 205,000 barrels per day and up to 1,500 employees in refining) can claim a tax credit of up to 25 percent of the capital investment costs incurred since 2003 for producing ultra-low-sulfur diesel. Most of the credit would result from refining the first 155,000 barrels per day, with pro rata credits for the next 50,000 barrels. The credit expires 1 year after EPA’s applicable ultra-low-sulfur diesel deadline or by the end of 2009. Because NEMS does no model individual companies, these tax provisions are not included in the AEO2005 reference case.
Marginal Wells Tax Credit
Section 341 creates a new tax credit of up to $3 per barrel for the production of crude oil and a credit of up to $0.50 per thousand cubic feet for the production of natural gas from qualified marginal wells. A marginal well is defined as one that produces less than 25 barrels per day of oil equivalent and produces water at a rate not less than 95 percent of total well effluent. Full credit is provided to such marginal wells at reference prices less than or equal to $15 per barrel for oil and $1.67 per thousand cubic feet for natural gas [15]. The credit declines linearly to zero when reference prices, adjusted for inflation, reach $18 per barrel of oil and $2 per thousand cubic feet of natural gas. The tax credit applies to the first 1,095 barrels of oil equivalent produced, and the limit is reduced in proportion to the numbers of days in the taxable year for which the well is not in production. The tax credit takes effect in taxable years beginning after December 31, 2004. Because NEMS does not contain a separate marginal well category, the impact of this legislative provision is not quantified in AEO2005.
Green Building Bonds
Section 701 contains a brownfields demonstration program that provides tax-exempt status for facility bonds issued to finance qualified “green” buildings and sustainable design projects. The program, designed to encourage the use of solar photovoltaic and fuel cell generation, applies to bonds issued from January 1, 2005, through December 31, 2009; however, projects must be nominated by a State or local government and meet several criteria in addition to the specific green or sustainable criteria. For example, eligible projects must include a brownfields site, be of a certain size, provide a certain level of employment, not include a sports stadium or restaurant, and receive State or local government resources of at least $5 million. Because of the process involved and the site- and company-specific nature of the provision, it is not characterized in the AEO2005 reference case.
Tax Incentives for Alaska Natural Gas Pipeline and Gas Processing Facilities
Section 706 provides a 7-year cost-of-investment recovery period for the Alaska natural gas pipeline, as opposed to the currently allowed 15-year recovery period, for tax purposes. The provision would be effective for property placed in service after 2013, or treated as such. The expected return on equity for the pipeline was lowered to reflect this provision in AEO2005.
Section 707 extends the 15-percent tax credit currently applied to costs related to enhanced oil recovery to construction costs for a gas treatment plant that supplies natural gas to a 2 trillion Btu per day pipeline, lies in Northern Alaska, and produces carbon dioxide (CO2) for injection into hydrocarbon-bearing geological formations. A gas treatment plant on the North Slope that feeds gas into an Alaska pipeline to Canada is expected to satisfy this requirement. The provision would be effective for costs incurred after 2004. For AEO2005, lowering the expected charges for gas treatment on the North Slope captured this provision.
Extension and Expansion of the Production Tax Credit for Renewable Electricity
Section 710 expands application of the renewable electricity PTC to wind, closed-loop biomass, and poultry-litter plants in service by December 31, 2005 [16]. Eligibility for a modified PTC is also extended to geothermal, solar, small irrigation hydropower, open-loop biomass, municipal solid waste, and landfill gas facilities, also with a December 31, 2005, in-service date. This change has been incorporated in AEO2005.
Modified Alternative Minimum Tax Rules for the PTC and Alcohol Fuels Tax Credit
The law exempts the alcohol fuel tax credit (Section 40 of the Internal Revenue Code) and the first 4 years of the PTC (Section 45 of the Internal Revenue Code) from tax liability under the Alternative Minimum Tax (AMT), allowing businesses with AMT liability to recover the full value of the affected tax credits. This provision is not included in the AEO2005 reference case, because EIA assumes that these tax credits are generally able to be used at full value.
Section 45 Tax Credit for Coal Products
The refined coal provisions in Section 710 establish Section 45 tax credits for producers of qualified refined coal products. The refined product must be at least 50 percent higher in market value than the coal or high-carbon fly ash feedstock, and combustion of the refined product must result in 20 percent less emissions of NOx and either SO2 or mercury than the feedstock. The refined coal must be sold for the purpose of creating steam. This provision represents a level of detail that is not characterized in NEMS.
Alcohol Alternative Minimum Tax
Section 711 allows the alcohol income tax credit, biodiesel income tax credit, and small ethanol producer income tax credit to offset liability under the AMT. The small ethanol producer credit applies only to firms with capacity of 15 million gallons per year or less. Because NEMS does not model individual tax obligations, these changes are not incorporated in the AEO2005 reference case.
Suspension of Duties on Nuclear Steam Generators and Reactor Vessel Heads
Section 714 extends from January 31, 2006, to January 31, 2008, the period in which nuclear steam generators can enter the United States duty-free. The law allows nuclear reactor vessel heads to enter the United States duty-free through January 31, 2008, suspending the current 3.3-percent duty. This provision represents a level of detail that is not characterized in NEMS.
Disposition of Transmission Property to Implement FERC Restructuring
Section 909 allows companies to spread capital gains from the sale of transmission assets over 8 years. This provision applies to property sold by a utility to comply with FERC electricity market restructuring efforts. Money from the sale must be used to buy reinvestment property within 4 years of the initial transaction. This restructuring provision is not incorporated in the AEO2005 reference case.
Tax Evasion Provisions
Subtitle C, Part III, of Title VIII of the Act contains 21 provisions related to fuel tax evasion. Some of the more pertinent provisions and economic impacts are described below. Because NEMS does not model oil and gas income statements, these changes are not incorporated into AEO2005.
- Section 853 relates to taxation of aviation-grade kerosene and moves the point of taxation of aviation fuel to the supply rack. Fuel used in commercial aviation that is removed from any refinery or terminal and placed directly into the fuel tank of an aircraft for use in commercial aviation will be taxed at 4.3 cents per gallon. The regulation also stipulates that certain refueler trucks, tankers, and tank wagons be treated as part of a terminal. The person who uses the fuel for commercial aviation will be liable for and pay the tax. These regulations apply after December 31, 2004, and have no stated expiration date.
- Sections 860 and 861 provide clarifications and requirements for exemptions from taxes imposed on the removal of taxable fuel from any refinery or terminal. These amendments take effect on March 1, 2005. Exemptions were already allowed for bulk transfers to registered terminals or refineries. Section 860 clarifies that the transfer must occur by pipeline or vessel. Clarification is provided for the registration of such pipelines or vessels, the requirement to display proof of registration, and the penalties for failure to display registration.
- Section 870 covers tax refunds for re-refined transmix [17] and diesel fuel blendstocks that were previously taxed. This amendment applies to fuel removed, sold, or used after December 31, 2004, and it has no stated expiration date. The Act redefines diesel fuel contaminated with transmix as a taxable diesel fuel if it is suitable for use in a highway vehicle or train. If the fuel is re-refined and then sold into nonroad markets (tax-free), it can qualify for tax refunds.
Notes and Sources
Contact: Sean Hill
Phone: 202-586-4247
E-mail: sean.hill@eia.doe.gov |