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Analysis of the Energy Bill Tax Provision 199

Dec 03 2007

Analysis of the Energy Bill Tax Provision 199

At the request of Senators Jeff Bingaman, Chairman of the Senate Energy and Natural Resources Committee, and Max Baucus, Chairman of the Senate Finance Committee, the JEC examines the impact of denying the Internal Revenue Code (IRC) Section 199 manufacturing deduction to major integrated oil and gas producers (while simultaneously freezing the deduction for other oil and gas producers) on consumer prices of oil and natural gas. The report finds that the proposed modification of this deduction would have a negligible effect, if any, on consumer energy prices. This tax provision will likely be included in a larger Senate energy bill as a way to finance renewable and energy conservation efforts.

Key Points

• Because the removal of the tax deduction does not affect production decisions in the near term, removing or modifying the tax deduction will have no effect on consumer prices for gasoline and natural gas in the immediate future.

• In the long run, the removal of the tax deduction is unlikely to have any effect on consumer prices for oil and gas. Oil prices are more than three times higher than they were when the tax deduction was implemented in 2004 – and those high prices are an incentive for investors to continue to invest in oil and gas companies. Although natural gas prices are not significantly different from their 2005 levels, natural gas prices rose significantly over the last decade and those higher prices also provide good incentives for investors.

For the full text of this report, please click on the file listed under "Related Resources."

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