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Energy Taxation — A Look at the Horizon

22 Jul 2010

In the words of President Obama's Chief of Staff, Rahm Emanuel, "Never let a serious crisis go to waste."

Although reform, regulation and taxation of the energy industry have been hot topics in recent months, they are now getting hotter... much hotter. After taking a back seat to healthcare legislation earlier this year, energy legislative proposals are becoming increasingly prominent as a result of the recent Deepwater Horizon explosion in the Gulf of Mexico.

With vast amounts of oil pouring into the Gulf of Mexico until recently and environmental and economic damages mounting, the energy provisions in President Obama's proposed 2011 Budget and the climate bill are getting renewed attention.

The Budget contains many energy-related tax provisions aimed at increasing the use of "greener" energy and removing tax benefits for companies in the fossil fuel industry. Several of these tax provisions have already been passed, making their way into recent legislation, like the healthcare reform and "jobs" bills. Others are pending in such legislation as The American Jobs and Closing Tax Loopholes Act. These pending energy-related tax proposals and legislation could have a profound impact on the energy industry and will likely be costly for many energy-related companies that have long benefited from various tax provisions.

While President Obama's energy proposals vary in terms of scope and subject, several focus on the repeal of certain tax provisions benefiting fossil fuel producers. These much debated proposals are in line with President Obama's discussions with world leaders at the September 2009 G-20 summit in Pittsburgh, where he agreed to phase out certain provisions favoring fossil fuels so that the United States can transition to a so-called "21st century energy economy." However, little if any attention has been paid in these proposals to the most likely candidate to be the "bridge" to this new energy economy -- natural gas, an abundant domestic source of energy and a "cleaner" alternative (although not without its own environmental controversy and opponents) to other fossil fuels.

Since that meeting, the Gulf of Mexico oil spill has added fuel to the fire of this debate and will likely increase President Obama's push for the removal of these pro-fossil fuel provisions. With that being said, the opposition to the Administration's proposals continues.

The US Department of Energy's website states that 85 percent of the nation's energy is provided by fossil fuels. So, it is reasonable to conclude that the repeal or amendment of many of these fossil-fuel-related tax provisions (as listed below) will have a significant impact on the economy and the ultimate users of energy -- all Americans.

Taxand US discusses the important legislative proposals pending in Congress, the President's 2011 Budget and recently proposed legislation to combat climate change.

Taxand's Take

As with the healthcare bill that was recently enacted into law, expect there to be much partisan politics and fighting over energy legislation. With the heightened attention provided by the Gulf of Mexico oil spill, we are poised for a contentious battle over the future of the US oil and gas industry -- from the on and off again moratorium on deepwater drilling to the elimination of perceived tax "subsidies" to the oil and gas industry. Whatever the outcome, expect there to be extensive tax changes that will impact consumers and businesses alike, with debatable impact on actually transitioning to a 21st century energy economy. As one political satirist pointed out, presidents since Richard Nixon, if not before, have emphasised the need for America to achieve energy independence and then later environmentally friendly energy sources -- and neither seems much closer, despite current rhetoric and government proposals. The only thing that does seem certain is increased regulation and higher taxes.

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