Federal excise taxes imposed on natural gas, propane and other alternative fuels can significantly add to their cost and can create a disincentive to their use compared with more traditional fuels such as diesel and gasoline, with the deterrent effect depending upon the level of such taxes. Legislation has recently been introduced in Congress that if enacted will serve to (i) reduce the excise taxes imposed on liquefied natural gas (LNG) and propane and (ii) make related changes to tax credits that are available to reduce these excise taxes. Such changes could affect the energy industry by benefitting the LNG and propane sector while simultaneously harming their competitor fuels such as diesel and gasoline. Congress will now undertake the difficult balancing act of determining if these proposed changes should be adopted wholesale, modified or rejected.
On March 26, 2015, Reps. Todd Young (R-IN), John Larson (D-CT), Mac Thornberry (R-TX), and Ron Kind (D-WI) introduced H.R. 1665, the Alternative Fuel Tax Parity Act. The proposed legislation would measure excise taxes with respect to LNG and propane based on energy output, as opposed to liquid volume; it would also base the alternative fuel tax credit on energy output, inasmuch as it relates to LNG. Because LNG and propane have relatively low energy outputs per gallon compared to diesel and gasoline, respectively, the enactment of H.R. 1665 would have the effect of reducing excise taxes applicable to LNG and propane, and reducing the alternative fuel tax credit available for selling LNG. H.R. 1665 is similar in key respects to two other recently proposed bills, although neither of those proposed bills would modify the alternative fuel tax credit.
Code Section 4041 imposes an excise tax of 24.3 cents-per-gallon on certain sales and uses of LNG and diesel. Similarly, both propane and gasoline are subject to an excise tax of 18.3 cents-per-gallon. However, according to a statement posted on Congressman Young’s website, a gallon of LNG produces just 58% of the energy output of a gallon of diesel, and a gallon of propane produces just 72% of the energy of a gallon of gasoline. Thus, LNG and propane are subject to the same per-gallon “effective” tax rates as diesel and gasoline, respectively, despite having lower per-gallon energy outputs.
H.R. 1665 attempts to eliminate this perceived disparity by taxing both LNG and propane on an energy equivalent basis, modeled on the current taxation of compressed natural gas. Under the proposal, the excise tax on LNG would equal 24.3 cents per energy equivalent of a gallon of diesel, with “energy equivalent of a gallon of diesel” being defined as the amount of LNG having a Btu content of 128,700 (lower heating value), or 6.06 lbs of LNG. Similarly, propane would be taxed at a rate of 18.3 cents per energy equivalent of a gallon of gasoline, and “energy equivalent of a gallon of gasoline” would be defined for this purpose as the amount of propane having a Btu content of 115,400 (lower heating value), or 5.75 lbs of propane.
H.R. 1665 would also modify the alternative fuel tax credit available under Section 6426(d) with respect to certain sales of LNG (but not propane). Section 6426(d) currently allows a 50 cents-per-gallon tax credit to sellers of certain alternative fuels, including LNG and propane. H.R. 1665 would set the amount of tax credits available for selling LNG equal to 50 cents times the per energy equivalent of a gallon of diesel. Because LNG has relatively low per-gallon energy output compared with diesel, a taxpayer would need to sell more than a gallon LNG to receive the same 50 cent credit. Thus, H.R. 1665 would generally be expected to reduce the alternative fuel credit available for selling LNG.
The proposed legislation is similar in key respects to two recently proposed bills: S. 344, which was introduced by Sens. Michael Bennet (D-CO) and Richard Burr (R-NC) on February 3, 2015; and H.R. 898, which was introduced by Rep. Mike Kelly (R-PA) on February 11, 2015. Unlike H.R. 1665, neither of these proposed bills would modify the alternative fuel credit with respect to LNG.
Impact on Proposed Legislation
Since H.R. 1665 measures certain excise taxes with respect to LNG and propane based on energy output, as opposed to liquid volume, the proposed law has the effect of reducing excise taxes applicable to LNG and propane, and would also be expected to reduce the amount of alternative fuel tax credits from selling LNG. While the proposed legislation would aid LNG and propane, it would not benefit all sectors of the energy industry. Other more traditional energy sectors such as diesel and gasoline would be placed at a competitive disadvantage due to their increased relative tax burden.
Congress will now undertake the task of deciding whether to approve or reject these proposals or whether to modify them in ways that only the future can tell. Given the importance of energy production and tax revenues to the country, as well as the contention which often surrounds these issues, no certainty can be had as to the eventual outcome of such legislative deliberations, but we will keep you updated.