General Explanations of the

Administration’s Fiscal Year 2011

Revenue Proposal

This document is available in Adobe Acrobat format on the Internet at:

http://www.treas.gov/offices/tax-policy/library/greenbk10.pdf

FUEL TAX PREFERENCES 75

Eliminate Oil and Gas Company Preferences 75

Repeal Enhanced Oil Recovery Credit 75

Repeal Credit for Oil and Gas Produced from Marginal Wells 76

Repeal Expensing of Intangible Drilling Costs 77

Repeal Deduction for Tertiary Injectants 79

Repeal Exemption to Passive Loss Limitation for

Working Interests in Oil and Gas Properties 80

Repeal Percentage Depletion for Oil and Natural Gas Wells 81

Repeal Domestic Manufacturing Deduction for Oil and Gas Production 83

Eliminate Coal Preferences 85

Repeal Expensing of Exploration and Development Costs 85

Repeal Percentage Depletion for Hard Mineral Fossil Fuels 87

Repeal Capital Gains Treatment of Certain Royalties 89

Repeal Domestic Manufacturing Deduction for

Coal and Other Hard Mineral Fossil Fuels 90

Reasons for Change

The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so that the United States can transition to a 21st century energy economy. The credit, like other oil and gas preferences the Administration proposes to repeal, distorts markets by encouraging more investment in the oil and gas industry than would occur under a neutral system. To the extent the credit encourages overproduction of oil, it is detrimental to long-term energy security and is also inconsistent with the Administration’s policy of reducing carbon emissions and encouraging the use of renewable energy sources. Moreover, the credit must ultimately be financed with taxes that result in underinvestment in other, potentially more productive, areas of the economy.