President's Veto Threat: Energy

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In December, Congress passed an energy bill that increases fuel efficiency standards for automobile manufacturers (known as corporate average fuel economy, or CAFE) to 35 miles per gallon by 2020 and requires gasoline to contain a certain level of biofuels by 2022. Previous versions of the bill that included a package of tax provisions were unable to get the 60 votes needed in the Senate for approval, in one case failing by just one vote. Republicans in the Senate cast the revenue-raising provisions in the tax package as tax increases that would hurt the economy. To the contrary, the tax package was a revenue-neutral set of provisions that would merely shift tax incentives from the oil and gas industry, which seems to profit immensely regardless of what Congress does, to renewable energy sources.

House Ways and Means Chairman Charles Rangel (D-NY) has introduced a bill (H.R. 5351) that is similar to the tax package that failed in the Senate. It would extend and modify the "section 45 credit" for energy from renewable sources like wind, geothermal and hydropower, at a cost of $6.6 billion over ten years. Other provisions costing over a billion each include a $4,000 credit for hybrid vehicles that can be plugged into an electric socket for recharging, bonds for state and local conservation programs, the extension and modification of a $300 credit for energy efficiency improvements in homes, and bonds for infrastructure in and around the World Trade Center. Several other provisions would promote the production and use of renewable fuels and other goals.

The bill includes two main revenue-raising provisions to offset the costs. The largest would raise $13.6 billion over ten years by barring large oil and gas companies from using the deduction for domestic manufacturing (often called the Section 199 deduction) and limiting the deduction for smaller oil and gas companies. To put that in perspective, this would raise an average of over $1.3 billion a year for ten years, while the net profits last year for Exxon-Mobil alone were over $40 billion.

In the 2004 tax cut law enacted by Congress and the President, manufactured goods under Section 199 were redefined to include oil and gas, thus allowing energy companies to use this tax break that was not initially intended for them. (The deduction is 6% of the cost of domestic manufacturing activities this year, rising to 9% in 2010.) The second revenue-raising provision would restrict the use of credits for foreign taxes by oil and gas companies, raising $4 billion over ten years.

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