Eliminating or scaling back tax expenditures that promote production and consumption of fossil fuels would reduce the budget deficit, promote economic efficiency, and be a step towards more environmentally friendly tax law.
Tax expenditures are provisions in the U.S. federal tax code that provide special tax benefi ts for selected economic activities or taxpayers. A number of tax expenditures add to greenhouse gas emissions by encouraging production and consumption of fossil fuels.
This policy brief examines four tax expenditures listed by the Joint Committee on Taxation—each with an annual revenue loss of over $1 billion—that increase consumption of fossil fuels. The first three—expensing of exploration and development costs, percentage depletion, and the alternative fuel production credit—encourage domestic production of fossil fuels. The fourth—exemption of qualified parking expenses—encourages commuting by automobile.
Eliminating or scaling back these and other tax expenditures that promote production and consumption of fossil fuels would reduce the budget deficit, promote economic efficiency, and be a first step toward making the tax law more environmentally friendly. However, the effects of the proposed tax reforms on greenhouse gas emissions would be small—so addressing tax expenditures, while desirable for a number of reasons, can be only one part of a broader strategy to reduce climate change.