Table 2.-Nonconventional Fuels Production Tax Credit Relative to the Market Price of Oil, 1979-1994 Source: Credit amount is from Internal Revenue Service announcements; price data is from Monthly Energy Review, various issues, Energy Information Administration, U.S. Department of Energy. Table 3.-Nonconventional Fuels Production Tax Credit Relative to the Market Price of Natural Gas, 1979-1994 Source: Credit amount is from Internal Revenue Service announcements; price data is from Monthly Energy Review, various issues, Energy Information Administration, U.S. Department of Energy. If the section 29 credit were re-characterized as an increase in the sales price of the fuel, the dollar figure to provide the same incentive would be larger. For example, for natural gas in 1994, the $1.04 tax credit provides approximately the same after-tax benefit to a producer as a $1.60 increase in the sales price (which would almost double the wellhead price received by the producer of qualified gas).30 (See Table 3.) It should be noted that the price figures presented are averages, and may mask substantial regional price differences. However, they are suggestive that the production spur from the section 29 credit potentially is large. These figures do not, however, directly address the issue of whether the credit is larger than necessary to encourage the desired amount of production of nonconventional fuels. Equity of credit Concern has been raised about possible inequity in the treatment of different fuels under the nonconventional fuels production credit. Because certain fuels that qualify for the credit directly compete in local and national markets with fuels that do not qualify for the credit, producers who do not receive the subsidy may claim that they are subject to unfair competition from credit recipients.31 To the extent this claim is true, it may be the case that there is less justification for the tax subsidy provided to this class of nonconventional fuels. 30 This computation assumes a producer facing a 35-percent marginal tax rate on income from production. 31 Some natural gas producers have asserted that the nonconventional fuels production credit has led to excess natural gas in certain local markets, driving down the price received for all gas sold in those markets. In these cases, unsubsidized producers claim they cannot profitably explore for gas in these areas, while producers receiving the credit may be able to earn a competitive return. 7. Transportation fuels tax exemption for fuels used in commercial aviation (sec. 4092(b)(2) of the Code) Present Law A 4.3-cents-per-gallon excise tax is imposed on fuels used in most transportation modes. Fuels subject to the tax include gasoline (including gasoline blended with alcohol, "gasohol"), diesel fuel, special motor fuels, propane, compressed natural gas, aviation fuels (jet fuel and gasoline), and any other motor fuel used in shipping in the inland waterway system. The transportation modes subject to tax include highway, rail, air, inland waterway, and motorboats and other recreational boats. Fuel consumed before October 1, 1995, in commercial aviation, defined as the transportation of persons or property for hire, is exempt from this tax. Revenues from this transportation fuels tax are deposited in the General Fund of the Treasury. This tax is separate from, and in addition to, any user-based excise taxes imposed on the same fuels to fund the Highway Trust Fund, the Airport and Airway Trust Fund, the Leaking Underground Storage Tank Trust Fund, the Inland Waterways Trust Fund, or the Aquatic Resources Trust Fund. Legislative Background The transportation fuels tax was enacted as part of the Omnibus Budget Reconciliation Act of 1993, as a deficit reduction measure. The exemption for fuel consumed in commercial aviation expires with respect to fuel consumed on or after October 1, 1995. In the 104th Congress, H.R. 752 (introduced on January 31, 1995 by Messrs. Collins of Georgia, Bunning, Cardin, and English, Ms. Dunn, and others) would permanently extend the exemption from the 4.3-cents-per-gallon fuels tax on commercial aviation by repealing the scheduled application of the tax to commercial aviation fuels. Analysis With the exception of commercial aviation, all major transportation modes are subject to the 4.3-cents-per-gallon fuels tax: auto, trucking, rail, and inland shipping. One rationale stated in 1993 for the commercial aviation exemption was the economic condition of the commercial aviation industry.31a In evaluating whether to extend the exemption, three main issues should be considered. First, has the economic condition of the commercial aviation industry changed since 1993? Second, is the ultimate burden of the tax (if it is imposed) likely to be borne by the aviation industry or by consumers and, hence, to what extent is an exemption from tax beneficial to the industry? Third, what is the potential for the exemption to create inefficiencies in the transportation sector? To evaluate the economic condition of the commercial aviation industry, the staff of the Joint Committee on Taxation has drawn a 31a See statement by Senator Gorton regarding the "desperate nature of the domestic airline industry...." 139 Cong. Rec. S7885 (daily ed., June 24, 1993). |