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A Guide to the Fossil Fuel Provisions of the Biden Budget

25 min readBy: Alex Muresianu, William McBride

Key Findings

  • The Biden administration’s budget proposals have several provisions focused on raising taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es on the U.S. fossil fuel industry.

  • These proposals largely depart from neutral tax policy and intentionally target the industry.

  • Internal Revenue Service data does not indicate any substantial tax preference for the fossil fuel industry, rather indicating the industry pays relatively high levels of tax.

  • Raising taxes on U.S. production and ownership of fossil fuel, both domestically and abroad, mainly disadvantages U.S. companies and workers in favor of foreign suppliers.

  • Taxing fossil fuel consumption, for example through user fees or more comprehensively through a carbon taxA carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them. , would avoid the problem of creating preferences for foreign-owned fossil fuel.


One prominent feature of President Biden’s agenda on the environment is to target U.S. fossil fuel (e.g., oil, gas, and coal) producers and production with about $120 billion of new taxes over 10 years through repeal of so-called “tax breaks.” While some of these changes could have a marginally beneficial impact on the environment, in practice the elimination of most of the provisions would deny the industry normal cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. and subject the U.S. fossil fuel industry to additional layers of tax not faced by other industries in the U.S. or abroad. By focusing on taxing U.S. producers, foreign producers of fossil fuel would benefit, causing the U.S. economy to become more heavily reliant on imports and foreign, often state-owned, producers from countries like Saudi Arabia, Russia, and China. Taxing consumption of fossil fuels, rather than domestic production, would be a more neutral approach.

What are these fossil fuel tax provisions?

In the Treasury Department’s Green Book, under the heading “eliminate fossil fuel tax preferences,” 13 current-law provisions would be repealed or replaced, raising $35 billion over 10 years.[1] Additionally, the document details $86 billion of tax increases on the foreign income of U.S. oil and gas companies. The fossil fuel provisions can be split into five categories, discussed below.

Whether these provisions should count as “subsidies” depends on one’s understanding of what the right “normal” corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. is. In our view, corporations should be taxed on profits, or revenues minus costs. Those costs should include both regular expenses like wages and office supplies, as well as investment costs like acquiring new heavy machinery. And those costs should be deducted when they are incurred, preventing factors such as inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. and the time value of money from eating away at the real value of the deduction.

Category 1: Cost Recovery Provisions ($14.3 billion)

These provisions allow fossil fuel companies to deduct the costs of certain investments in a way equivalent firms in other industries would. The Biden proposals would reduce the real value of these deductions for oil and gas companies by forcing them to spread the deductions over longer time horizons. The simpler approach that would also be more neutral across industries and assets would be to let all companies fully expense their investments, i.e., immediately deduct the full cost.[2] It’s also worth noting that the Tax Cuts and Jobs Act made 100 percent bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. available for many types of capital investment, making these provisions no different from treatment widely available across the tax code.[3]

Table 1: Proposed Changes to Fossil Fuel Cost Recovery Provisions in the Biden Budget
Tax Provision 10-Year Budget Cost Description of Current Law and Biden Administration Proposal
Expensing for Intangible Drilling Costs $10.468 billion This provision allows independent, non-integrated producers to expense all costs related to drilling that do not have salvage values immediately (e.g., basic supplies, surveyors, and well maintenance), while large companies can expense 70 percent of those same costs and must deduct the remaining 30 percent over five years. The Biden administration proposal would require both types of firms to spread deductions for all of these costs over five years.
Expensing for Geological and Geophysical Costs $1.985 billion Independent producers can expense the cost of accumulating data that will become the basis for extraction of mineral properties over two years, while integrated producers must deduct the same costs over seven years. The Biden administration proposal would require independent producers to deduct these costs over seven years.
Expensing for Exploration and Development Costs $911 million Companies can expense the costs of ascertaining the location, quality, or quantity of a deposit, as well as the costs of development for extraction once the deposit is discovered. The Biden administration proposal would require companies to spread deductions for those costs over several years.
Treatment of Air Pollution Control Facilities Costs $901 million Certain types of air pollution control facilities can be deducted over either five years or seven years. The Biden administration would require companies to deduct those costs over 39 years.
Deduction for Tertiary Injectants $0* Companies can deduct the cost of injectants the year they are purchased, like any ordinary expense. The Biden administration would disallow this deduction.

Sources: United States Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” May 2021,; and Alex Muresianu, “Wyden’s Energy Tax Proposal a Mixed Bag,” Tax Foundation, Mar. 11, 2021, The revenue from repealing the deduction for tertiary injectants is included in the estimate for repealing the enhanced oil recovery credit.


These provisions are conventional deductions for costs incurred, not subsidies. In the ideal tax system, all costs should be deducted the year they are incurred, whether regular recurring expenses like wages and utility bills or major capital investments in equipment, machinery, or structures.[4] Notably, many of the costs included as intangible drilling costs are wages, making full deductions the normal tax treatment even without expensing for investments in equipment and machinery.

These provisions often wrongly get classified as subsidies as some analysts rely on a different definition of a neutral tax system. Specifically, they use Haig-Simons taxation, where the cost of investment is deducted over the lifetime of the asset.[5] The problem with this system economically is that the real value of those deductions declines over time thanks to inflation and the time value of money (a dollar today is worth more than a dollar tomorrow). So companies are unable to deduct the full cost of their investments, creating a tax bias against investment. Companies respond by reducing their investment, which in turn harms workers in the form of lower productivity and lower wages.[6]

Category 2: Percentage Depletion ($10.5 billion)

Percentage depletion allows some taxpayers (specifically non-integrated producers, which also face some additional restrictions) to deduct a fixed percentage of their gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” derived from the property.[7] Meanwhile, cost depletion allows the company to deduct a portion of the cost of acquiring the reserves equal to the amount of reserves depleted in that year. Eligible companies deduct the larger of the fixed percentage of gross income or the cost of the resources depleted.

Table 2: Proposed Changes to Percentage Depletion in the Biden Budget
Tax Provision 10-Year Budget Cost Description of Current Law and Biden Administration Proposal
Percentage Depletion for Oil and Gas Wells $9.172 billion This provision allows certain independent oil and gas producers to deduct 15 percent of their gross income instead of the cost of resources depleted in a given year. It is limited to wells with an average daily production of up to 1,000 barrels of oil or gas-equivalents, and the percentage depletion deduction is limited to 100 percent of net income from the well and 60 percent of income per taxpayer. The Biden administration would eliminate percentage depletion and make cost depletion the only option.
Percentage Depletion for Hard Mineral Fossil Fuels $1.311 billion The tax code has a similar provision for recovering the cost of acquiring coal reserves. Certain producers can deduct 10 percent of their gross income instead of the cost of resources depleted in a given year. Coal producers face a limit of 50 percent of net income on the deduction for depletion. Additionally, percentage depletion deductions for coal corporations are reduced by 20 percent of the difference between the percentage depletion method and the cost depletion method. The Biden administration would eliminate percentage depletion and make cost depletion the only option.

Source: United States Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” May 2021,


Percentage depletion is a difficult issue, as in some circumstances it can allow companies to deduct more than the real value of the original costs they incurred, making it sometimes equivalent to a non-neutral tax break.[8] In other cases, this system does not allow firms to deduct the full value of the original cost.[9] The ideal tax treatment of oil reserves in this regard would be to allow companies to deduct the full acquisition cost the year they purchased them.[10] It’s unclear whether shifting to expensing would on net reduce or increase tax revenue, given that the current tax treatment sometimes creates a subsidy and sometimes creates a penalty relative to expensing, but there is evidence that percentage depletion creates a negative marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. on some oil and gas investment performed by independent producers.[11] However, if the tax code were to shift from percentage depletion and towards expensing, it would make sense to do so for all extractive industries, not just fossil fuels.

One possible effect of repealing percentage depletion (as well as several of the cost recovery provisions) is higher consolidation within the oil and gas industry. Many of these tax preferences only exist for non-integrated or independent producers. As such, eliminating those preferences would eliminate a bias favoring independent producers and thus drive companies to form into integrated operations.[12] In fact, percentage depletion matters most significantly for the smallest oil and gas producers—often family-owned small businesses. That’s one way of saying that many of these tax increases, specifically the elimination of percentage depletion, would primarily be felt by small-scale producers and royalty owners.[13] However, higher levels of integration in the industry might be economically efficient.

Category 3: Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s ($8.3 billion)

As opposed to deductions, which reduce taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. , tax credits reduce tax liability directly, on a dollar-for-dollar basis.[14] The two tax credits targeted for elimination in the Biden proposal are the tax credit for marginal wells and the enhanced oil recovery credit.

Table 3: Proposed Changes to Tax Credits for Fossil Fuels in the Biden Budget
Tax Provision 10-Year Budget Cost Description of Current Law and Biden Administration Proposal
Enhanced Oil Recovery Credit $7.79 billion This credit allows companies to reduce their tax liability by 15 percent of the qualified costs associated with enhanced oil recovery projects. Enhanced oil recovery involves more complex methods of extracting oil from a well, such as injecting steam, liquid, or certain chemicals. The Biden proposal would eliminate the credit.
Credit for Marginal Oil and Gas Wells $516 million As of 2019, this provision provides a tax credit of $3.90 per barrel of oil and 65 cents per 1,000 cubic feet of natural gas produced by marginal oil and gas wells, and these values are adjusted for inflation. Marginal oil wells are defined as wells producing on average no more than 15 barrels a day, wells that produce heavy oil, and wells that produce at least 95 percent water. Meanwhile, marginal gas wells are wells that produce less than 90 MCF (thousand cubic feet) of natural gas per day (90 MCF being equivalent to 15 barrels of oil). The Biden proposal would eliminate the credit.

Sources: United States Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” May 2021,; and Brian Americus, Trey Cornelius, Jeff Wright, and Jacob Aguero, “The Return of Enhanced Oil Recovery Credits, Marginal Gas Well Credits, and Other Oil and Gas Tax Considerations in Today’s Pricing Environment,” TAXES—The Tax Magazine, Sept. 6, 2016,


The enhanced oil recovery credit (enacted in 1991) and the marginal well tax credit (enacted in 2004) only phase in when the price of oil or natural gas falls below a certain point. The general goal of the policy is to keep partially depleted or small wells online despite price fluctuations that make them temporarily unviable. Between 2005 and 2016, both credits were unavailable.[15] Even in 2020, when oil and gas prices declined significantly, the credit for marginal oil wells remained phased out.[16]

Unlike the cost recovery provisions, the tax credits for marginal wells and enhanced oil recovery constitute non-neutral support for the fossil fuel industry and lead to inefficient investment in less productive (and potentially more environmentally harmful) oil drilling operations.[17] However, some argue it makes sense to support the continued operation of marginal wells to fully deplete their reserves so they do not end up getting abandoned with some reserves still underground.[18] In addition to the loss of domestic production from those abandoned wells, which some view as a potential problem for U.S. energy independence, state and local governments could also have had to deal with more orphan wells, if the producers themselves go bankrupt.[19]

Category 4: Other Provisions ($2 billion)

The Green Book contains a handful of other domestic tax provisions designed to raise revenue from the fossil fuel industry.

Table 4: Other Domestic Fossil Fuel Tax Changes in the Biden Budget
Tax Provision 10-Year Budget Cost Description of Current Law and Biden Administration Proposal
Treatment of Publicly Traded Fossil Fuel Partnerships $1.027 billion Publicly traded partnerships are generally taxed as corporations, unless they derive 90 percent or more of their gross income from passive investments including from depletable natural resources, real estate, and commodities. The Biden proposal would tax publicly traded fossil fuel partnerships as C corporations.
Capital Gains Tax Treatment for Royalties $455 million Gains from the sale of the rights to lignite and coal held by the original owner for more than one year are treated as long-term capital gains. The Biden proposal would tax these gains as ordinary income.
Excise Tax Exemption for Crude Oil from Bitumen and Kerogen-Rich Rock $395 million The Oil Spill Liability Trust Fund (OSLTF) is dedicated to financing responses to oil spills and is funded by a 9 cent excise tax on domestic crude oil and imported crude oil and petroleum products. However, the existing tax does not include oil derived from bitumen and kerogen-rich rock. The Biden proposal would apply the excise tax to oil from those sources.
Exemption to Passive Loss Limitation for Working Interest in Oil and Gas $86 million Losses from a working interest in oil and gas held directly in a partnership (or other form with unlimited liability) are not subject to passive loss limitations, whether or not the taxpayer was involved in the operation. Typically, taxpayers face limits to how much in losses they can deduct when those losses were from an activity they had no direct hand in running. The Biden administration proposal would repeal the exemption.

Sources: United States Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” May 2021,


Taxing publicly traded fossil fuel partnerships as C corporations would subject their income to two levels of taxation: the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. at the entity level and the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. on dividends and capital gains. Ideally, all income would be subject to one level of taxation.[20] Similarly, if taxpayers could deduct savings when they first earn income, then it would make sense to tax royalties on coal as ordinary income, but the proposal as it is would not be consistent with neutral taxation. It also makes sense to allow taxpayers to deduct losses incurred in business activity, but passive loss deductions present opportunities for tax avoidance, thus creating the justification for limits.[21]

So-called “Superfund” taxes are designed to get companies that engage in environmentally risky behavior to internalize the potential costs of those activities in case a spill occurs and needs to be cleaned up. As such, repealing the excise tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. for certain kinds of crude oil production makes sense.[22] However, one concern with Superfund taxes is that they tend to carry high compliance and administrative costs without generating substantial revenue.[23]

Category 5: International Provisions ($86.2 billion)

In addition to those provisions related to domestic oil production, the Biden plan also includes proposals to raise tax on foreign fossil fuel production by modifying the rules regarding foreign oil and gas extraction income (FOGEI), foreign oil related income (FORI), and dual capacity taxpayers.

Table 5: Proposed Changes to the Tax Treatment of Foreign Fossil Fuel Income in the Biden Budget
Tax Provision 10-Year Budget Cost Description of Current Law and Biden Administration Proposal
Rules for Foreign Oil and Gas Extraction Income (FOGEI) and Foreign Oil Related Income (FORI) $84.8 billion The Tax Cuts and Jobs Act introduced new rules for Global Intangible Low-Taxed Income (GILTI), taxing income earned abroad from intangible assets such as intellectual property. However, GILTI does not target specific asset classes, instead taxing earnings above a 10 percent return on tangible assets, assuming that such “supernormal” returns are derived from intangibles. FOGEI is currently exempt from GILTI. The Biden proposal would subject FOGEI to GILTI rules and expand the definition of FOGEI and FORI to include income from shale oil and tar sands.
Rules for Dual Capacity Taxpayers $1.4 billion Dual capacity taxpayers are taxpayers who pay some form of levy to a foreign government in exchange for a particular economic benefit, such as payment in exchange for drilling rights in publicly held land. Under current law, companies cannot claim that levy as a tax paid for purposes of determining foreign tax credits, although some can be partially claimed as equivalent to taxation. The Biden proposal would tighten these rules.

Sources: United States Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” May 2021,; Cody Kallen, “Options for Reforming the Taxation of U.S. Multinationals,” Tax Foundation, Aug. 12, 2021,; and Daniel Bunn, U.S. Cross-border Tax Reform and the Cautionary Tale of GILTI,” Tax Foundation, Feb. 17, 2021,


It is not clear what principle is guiding these international tax changes, beyond merely raising tax on U.S. multinational oil and gas companies. GILTI is designed to tax income from assets that are intangible and highly mobile, like intellectual property, that is subject to low rates of foreign tax. Oil and gas production is the opposite: it’s tangible, unlike a patent or copyright; oil and gas reserves are stuck in the ground, as far from mobile as one gets; and, as the next section demonstrates, the oil and gas industry is subject to relatively high rates of foreign tax. As such, foreign oil and gas income should be exempt from GILTI.

Regarding dual capacity, there is no demonstrated need to tighten the rules, as current regulations require taxpayers to prove the extent to which foreign levies are in fact income taxes rather than payments in exchange for economic benefits. The proposal would artificially limit foreign tax credits claimed, which would result in double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. (the income would be taxed first by foreign governments and then by the U.S. government).

Raising tax on the foreign income of U.S. multinational oil and gas companies would mainly serve to disadvantage U.S. companies in accessing and producing oil and gas from foreign sources, allowing foreign-based producers to fill the void since they are not subject to U.S. tax. There are several large multinational oil and gas companies based outside the U.S., mainly in the UK and Europe, Saudi Arabia, China, and Russia. To the extent these foreign-based companies have access to the same or similar technology and technical know-how as U.S. companies, raising tax on U.S. companies’ foreign income would over time result in American companies ceding control of larger and larger shares of worldwide production to those foreign competitors like Gazprom and CNOOC. Studies indicate that the reduced foreign footprint of U.S. companies, and corresponding reduced foreign investment, would entail a reduction in domestic operations for those companies, i.e., less domestic investment and employee compensation.[24]

Taxes Paid by the Industry

Because oil and gas deposits are immovable, foreign countries already tax oil and gas companies heavily.[25] For example, in many countries the tax rate that applies to oil and gas income is above the normal corporate tax rate and above 50 percent in some cases.[26] The Tax Foundation Multinational Tax Model, based on IRS and other government data, indicates U.S. multinational companies engaged in foreign oil and gas extraction and coal mining pay the highest average foreign tax rate of any industry, at 34.6 percent—a rate that is nearly three times the average foreign tax rate across all industries (12.5 percent).[27] By subjecting foreign oil and gas income to GILTI, the Biden proposals would increase the total average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. on the foreign fossil fuel income of U.S. multinationals to 36.7 percent, which would put them at further disadvantage to Chinese and Russian state-owned energy companies.

The fossil fuel industry also pays relatively high rates of tax to the U.S. federal government and state and local governments. For example, the latest available data from the IRS indicates that in 2018 the oil and gas extraction industry paid $160 million in federal corporate income tax, or 19.3 percent of net income, compared to 10.6 percent on average for all industries (companies normally pay an effective tax rate that is lower than the statutory rate due to loss carryovers and other features).[28] The same IRS data indicates the oil and gas extraction industry paid $7.2 billion in state and local taxes and licenses, or 89.7 percent of net income (excluding those expenses), compared to 16.5 percent on average for all industries.

Environmental Impact

The impact of the domestic changes on oil and gas prices and consumption is expected to be quite small, partly because the tax changes are small, representing about 1 percent of industry revenues.[29] Furthermore, oil and gas prices are determined in a world market in which U.S. production accounts for a small share—the U.S. produces about 20 to 25 percent of world oil and gas production.[30]

A study from economist Gilbert Metcalf considered the impact of repealing three major provisions: the domestic manufacturing deduction (since repealed as part of the Tax Cuts and Jobs Act), expensing for intangible drilling costs, and percentage depletion. He found this would have a negligible effect on greenhouse gas emissions and global oil markets, with global oil prices rising by less than 1 percent. Domestic markets would respond more, with domestic oil and gas production expected to fall by 4-5 percent, as domestic natural gas prices would rise between 7 and 10 percent.[31]

As mentioned above, raising taxes on the foreign production of U.S. multinationals mainly disadvantages U.S. companies, allowing foreign companies to exploit the same foreign fossil fuel reserves. This would mean little impact on world production, prices, or consumption.

Better Alternatives

A more effective means of protecting the environment, controlling greenhouse gases, and funding infrastructure investment, that would also be less harmful to American producers relative to foreign ones, would be to tax consumption, or the demand for fossil fuels. This could be done, for instance, through an increase in the gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. , a tax on vehicle miles traveled (VMT), or a carbon tax with a border adjustment.[32]

As an example, British Columbia’s carbon tax reduced emissions by 5-15 percent after four years, with a negligible impact on economic performance.[33] Northern European countries such as Norway, Finland, Sweden, Denmark, and the Netherlands, some of the first places to adopt carbon taxes, saw significant declines in emissions as well.[34]

In addition, these policies would raise considerable revenue for the federal government with minimal damage to the economy. For example, we estimate increasing the federal gas tax by 35 cents per gallon and adjusting it for inflation would raise about $758 billion over 10 years for the federal government (conventionally estimated), reducing gross domestic product (GDP) by 0.1 percent over the long run and eliminating 103,000 jobs.[35] We estimate a carbon tax of $25 per metric ton of carbon would boost federal revenue by about $1 trillion over 10 years, reducing GDP by 0.2 percent over the long run and eliminating 149,000 jobs.[36]


As a general rule, policymakers should aim to treat the fossil fuel industry as fairly and as simply as possible, accounting where necessary for particular features of the industry. Full deductions for costs, such as intangible drilling costs, are non-distortionary and should remain in place. On the other hand, tax credits and other provisions that provide tax benefits beyond deductions for input costs deserve scrutiny and may be worth eliminating in exchange for a lower general tax rate for all industries. Regarding foreign income, the GILTI regime should not apply to the foreign fossil fuel income of U.S. multinationals—the income is neither intangible, nor mobile, nor low-taxed—and denial of foreign tax credits would constitute double taxation.

If the Biden administration aims to protect the environment and reduce carbon emissions, taxing consumption of fossil fuels is clearly more beneficial than taxing production, both because it is more environmentally effective and raises considerable revenue for the federal government at minimal cost to the economy. That the Biden administration has chosen to tax production instead indicates its priorities are elsewhere.

Appendix: Comparing Cost Depletion, Percentage Depletion, and Expensing

It’s useful to compare the processes for calculating cost depletion, percentage depletion, and expensing to see how they work, depending on the circumstance.

Consider a small oil producer that purchases the rights to oil reserves below a new well for $100,000. Let’s say there are 10,000 barrels of oil in total below the well, and over the next five years, they will produce 2,000 barrels of oil per year.

Under Scenario 1, the price of a barrel of crude oil rises over time, from $50 per barrel in year 1 to $100 per barrel in year 5. If the well produces the same amount every year, that means gross income rises, and the deduction values would rise.

Table 6 Scenario A, Rising Oil Prices
Year Oil Sold (Gallons) Price Gross Income
1 2,000 $50.00 $100,000
2 2,000 $60.00 $120,000
3 2,000 $70.00 $140,000
4 2,000 $95.00 $190,000
5 2,000 $100.00 $200,000
Table 7: Scenario B, Flat Oil Prices
Year Oil Sold (Gallons) Price Gross Income
1 2,000 $50.00 $100,000
2 2,000 $50.00 $100,000
3 2,000 $50.00 $100,000
4 2,000 $50.00 $100,000
5 2,000 $50.00 $100,000
Table 8: Deductions Under Expensing (both scenarios)
Year Deduction Present Value of Deduction
1 $100,000 $100,000
2 $0 $0
3 $0 $0
4 $0 $0
5 $0 $0
Table 9: Deductions Calculated Under Cost Depletion (both scenarios)
Year Deduction Present Value of Deduction
1 $20,000 $20,000
2 $20,000 $19,047.62
3 $20,000 $18,140.59
4 $20,000 $17,276.75
5 $20,000 $16,454.05
Table 10: Percentage Depletion Calculations by Year (Scenario 1)
Year Deduction Present Value of Deduction
1 $15,000 $15,000
2 $18,000 $17,142.86
3 $21,000 $19,047.62
4 $28,500 $24,619.37
5 $30,000 $24,681.07
Table 11: Excess over Cost Depletion (Scenario 1)
Year Deduction Present Value of Deduction
1 $20,000 $20,000
2 $20,000 $19,047.62
3 $21,000 $19,047.62
4 $28,500 $24,619.37
5 $30,000 $24,681.07
Total Present Value of Deductions $107,395.68

So in this example, excess over cost depletion allows the company to deduct more than the cost of acquiring the rights to the oil reserves. However, under a different scenario with steady prices, percentage depletion adds nothing for the company.

Under this scenario, percentage depletion never comes into play, and the company ends up being able to deduct less than the real cost of purchasing the reserves. These scenarios end up strengthening the argument for expensing as a replacement for both of these systems: matching the real value of the cost incurred to the amount deducted.

[1] United States Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,” May 2021,

[2] Tax Foundation, “Full ExpensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. ,” TaxEDU,

[3] Erica York and Alex Muresianu, “The TCJA’s Expensing Provision Alleviates the Tax Code’s Bias Against Certain Investments,” Tax Foundation, Sept. 5, 2018,

[4] Stephen J. Entin, “The Tax Treatment of Capital Assets and Its Effect on Growth: Expensing, DepreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. , and the Concept of Cost Recovery in the Tax System,” Tax Foundation, Apr. 24, 2013,

[5] Alex Muresianu, “How the CARES Act Shifted the Composition of Tax Expenditures Towards Individuals,” Tax Foundation, Mar. 24, 2021,

[6] Stephen J. Entin, “The Tax Treatment of Capital Assets and Its Effect on Growth: Expensing, Depreciation, and the Concept of Cost Recovery in the Tax System.”

[7] Julia Kagan, “Percentage Depletion,” Investopedia, Jan. 17, 2021,

[8] Congressional Research Service, “Tax Expenditures: Compendium of Background Materials on Individual Provisions,” December 2020,

[9] See Appendix A for more details.

[10] Garrett Watson and Erica York, “Three Reasons Why Full Cost Recovery Is Right, Even If Asset Increase in Value,” Tax Foundation, Aug. 5, 2021,

[11] Gilbert E. Metcalf, “Taxing Energy in the United States: Which Fuels Does the Tax Code Favor,” Manhattan Institute, January 2009,

[12] Alan Krueger, “Oil and Gas Tax Provisions: A Consideration of the President’s Fiscal Year 2010 Budget Proposal,” Senate Finance Committee, Sept. 10, 2009,

[13] Energy & Industrial Advisory Partners, “The Economic Impacts of Eliminating the Percentage Depletion Allowance,” National Stripper Well Association, February 2021,

[14] Tax Foundation, “Tax Credit,” TaxEDU,

[15] Molly F. Sherlock and Phillip Brown, “Low Oil Prices May Trigger Certain Tax Benefits, But Not Others,” Congressional Research Service, May 11, 2020,

[16] KPMG, “Tax Provisions in Biden Administration’s FY22 Budget Proposals: Energy and Natural Resources,” June 18, 2021,

[17] Jacob A. Deighton, Amy Townsend-Small, Sarah J. Sturmer, Jacob Hoschouer, and Laura Heldman, “Measurements Show Marginal Wells Are a Disproportionate Source of Methane Relative to Production,” Journal of the Air and Waste Management Association 70:10 (August 2020),

[18] Charles T. Dillon, “Oil Industry Tax Benefits Helping the Environment,” University of Baltimore Journal of Environmental Law 7 (1999-2000),

[19] Sophie Quinton, “Why ‘Orphan’ Oil and Gas Wells Are a Growing Problem for States,” Stateline, Pew, July 9, 2018,

[20] Erica York, “An Overview of Capital Gains Taxes,” Tax Foundation, Apr. 16, 2019,

[21] Alex Muresianu, “1980s Tax Reform, Cost Recovery, and the Real Estate Industry: Lessons for Today,” Tax Foundation, July 23, 2020,

[22] Thomas A. Barthold, “Issues in the Design of Environmental Excise Taxes,” Journal of Economic Perspectives 8:1 (Winter 1994),

[23] Don Fullerton, “Why Have Separate Environmental Taxes?” Tax Policy and the Economy 10 (January 1996),

[24] See, for example, Mihir A. Desai, c. Fritz Foley, and James R. Hines, “Domestic Effects of the Foreign Activities of US Multinationals,” American Economic Journal: Economic Policy 1:1 (February 2009):181-203,

[25] Scott A. Hodge, “Oil Industry Taxes: A Cash Cow for Government,” Tax Foundation, July 2010,

[26] See, for instance, PwC, “Worldwide Tax Summaries,”

[27] Cody Kallen, “Options for Reforming the Taxation of U.S. Multinationals,” Tax Foundation, Aug. 12, 2021,

[28] IRS Statistics of Income, “Table 5.3 Returns of Active Corporations, other than Forms 1120S, 1120-REIT, and 1120-RIC,” The data include only C corporations subject to corporate income tax, as opposed to S corporations and other pass-through entities that are subject to individual income tax.

[29] Maura Allaire and Stephen Brown, “Eliminating Subsidies for Fossil Fuel Production: Implications for U.S. Oil and Natural Gas Markets,” Resources for the Future, December 2009,

[30] U.S. Energy Information Administration, “What Countries Are the Top Producers and Consumers of Oil?”; and Global Energy Statistical Yearbook 2021, “Natural Gas Production,”

[31] Gilbert E. Metcalf, “The Impact of Removing Tax Preferences for Oil and Natural Gas Production: Measuring Tax Subsidies by an Equivalent Price Impact Approach,” Journal of the Association of Environmental and Resource Economists 5:1 (January 2018),

[32] Ulrik Boesen, “Who Will Pay for the Roads,” Tax Foundation, Aug. 25, 2020,,

[33] Brian Murray and Nicholas Rivers, “British Columbia’s Revenue-Neutral Carbon Tax: A Review of the Latest ‘Grand Experiment’ in Environmental Policy,” Energy Policy 86 (November 2015),

[34] Assaad Ghazouani, Wanjun Xia, Medhi Ben Jebli, and Umer Shahzad, “Exploring the Role of Carbon Taxation Policies on CO2 Emissions: Contextual Evidence from Tax Implementation and Non-Implementation European Countries,” Sustainability 12:20 (2020),

[35] Tax Foundation, “Option 48: Increase the Gas Tax by 35 Cents Per Gallon and Inflation Adjust Going Forward,” in Options for Reforming America’s Tax Code 2.0 (Washington, D.C.: Tax Foundation): April 2021,

[36] Tax Foundation, “Option 50: Institute a Carbon Tax,” in Options for Reforming America’s Tax Code 2.0 (Washington, D.C.: Tax Foundation): April 2021,


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