On March 28, 2022, the U.S. Department of the Treasury released its General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals (here), also known as the “Greenbook.” The Greenbook provides detail regarding the Biden Administration’s proposals for significant new tax provisions.
It remains to be seen whether these proposals will be enacted into law. If they are enacted, they may have significant effects on the taxation of fossil fuel activities.
For information regarding various tax provisions of the Greenbook that could be relevant to particular taxpayers, please see our client updates regarding corporate tax (available here) international tax (available here), private equity (available here) and tax controversy (available here).
Repeal fossil fuel “tax preferences,” including the MLP tax regime
The Greenbook proposes to repeal 13 identified “tax preferences” currently enjoyed by the fossil fuels industry. Such repeal is projected to raise $44 billion of tax revenue over the ten-year period through fiscal year 2032. Seven of those proposals (all effective for tax years beginning after 2022) would account for approximately 90% of that projected revenue:
- repeal of percentage depletion for oil and gas wells,
- repeal of the deduction for intangible drilling costs,
- increase of the two-year amortization period for geological and geophysical expenditures of independent producers to seven years,
- repeal of percentage depletion for hard mineral fossil fuels,
- repeal of the credit for oil and gas produced from marginal wells,
- repeal of the 15% credit for eligible costs attributable to enhanced oil recovery projects, and
- repeal of the deduction for tertiary injectants used as part of a tertiary recovery method that increases the recovery of crude oil.
The Greenbook also proposes to eliminate the passthrough tax regime for MLPs/PTPs with qualifying income and gain from activities relating to fossil fuels, effective for tax years beginning after 2027. That proposal is projected to raise approximately $1 billion over five years (2028 through 2032).
For a complete list of the 13 identified tax preferences, the proposed effective date of their elimination, and the projected increase in tax revenue, click here.
Resurrection of the Superfund Tax on Crude Oil and Expansion of That Tax to Crude Oil from Bitumen and Kerogen-Rich Rock
The Superfund Trust Fund was originally established in 1980 to finance cleanups of contaminated sites in certain circumstances, such as when responsible parties cannot be identified. Certain taxes, including excise taxes on petroleum and chemicals, provided most of the Superfund Trust Fund’s original revenue, but the taxes all expired in 1996. The Infrastructure Investment and Jobs Act reinstated, effective July 1, 2022, the Superfund excise taxes imposed on certain hazardous chemicals and imported taxable substances and increased the tax rates for such chemicals and substances (discussed here).
The Greenbook proposes to resurrect the Superfund excise tax on crude oil, increase the historic tax rate from 9.7 cents per barrel to 16.4 cents per barrel (adjusted annually for inflation), and expand the scope of the historic tax to encompass varieties of crude oil that were formerly exempt from tax, such as those produced from bituminous deposits and kerogen-rich rock. The expansion of the tax to historically exempt varieties of crude oil is projected to raise revenue of $873 million over ten years; the Greenbook assumes for this purpose that prior legislation will have already reinstated the tax at the 16.4 cents per barrel rate on varieties of crude that were not historically exempt. Repeal of a similar exemption for bituminous deposits and kerogen-rich rock under current law from the Oil Spill Liability Trust Fund excise tax is one of the 13 “tax preferences” whose proposed repeal is mentioned above.
Eliminate Drawback for the Oil Spill Liability Trust Fund
An excise tax of nine cents per barrel is currently imposed on certain imported and domestic crude oil to finance the Oil Spill Liability Trust Fund. The Greenbook proposes to expand the scope of this excise tax by repealing an administrative interpretation that currently allows a “drawback” of that tax when products subject to the tax are exported. This provision is projected to raise revenue of $698 million over ten years.
We will continue to monitor developments and will provide further updates as more details are released. In the meantime, Baker Botts would be pleased to assist you in your analysis of these proposals.
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