On February 9, 2016, Treasury released its explanation of the tax proposals in the Obama Administration's FY2016 Budget (the Budget), which includes both general tax proposals and proposals reserved for revenue-neutral business tax reform. The "Green" Book describes Budget proposals to eliminate various oil, gas and coal preference items. The proposals are nearly identical to those made in the FY 2011, 2012, 2013, 2014, 2015 and 2016 budgets. The only addition is a $10.25 fee per barrel of oil. The proposals are listed below. Please see Tax Alert 2015-245 for last year's more detailed discussion of the proposals.

Impose an oil fee

The Budget proposes imposing an oil fee of $10.25 per barrel (adjusted for inflation from 2016) phased in evenly over five years beginning October 1, 2016. The fee would be fully phased in beginning October 1, 2021. Although there are many details yet to be determined about the proposed oil fee, the fee would be assessed on both domestic and imported oil. Exported petroleum products would not be subject to the fee and there is a temporary exemption applied to home heating oil. Once fully phased in, the fee will apply to all petroleum produced or imported into the United States. According to the budget documents, the oil fee would be dedicated to a "21st Century Clean Transportation Plan" that will upgrade transportation systems.

Prior proposals sought to increase the Oil Spill Liability Trust Fund tax to 10 cents per barrel of domestic crude oil and on imported petroleum products. The tax increases to 9 cents per barrel after December 31, 2016. The fund pays costs associated with oil spills and funds agencies and programs dedicated to preventing oil pollution.

Oil and gas company preferences

— Repeal exemption from the corporate income tax for publicly traded partnerships (NEW)
— Repeal percentage depletion
— Repeal deduction for Intangible Drilling and Development Costs (IDC)
— Terminate enhanced oil recovery credit
— Terminate credit for producing oil and gas from marginal wells
— Terminate deduction for tertiary injectants
— Reinstate and expand Superfund taxes
— Repeal passive loss limitation exemption for oil and gas working interests
— Increase geological and geophysical (G&G) amortization period for independent producers to seven years
— Deny Section 199 domestic production deduction

Coal company preferences

— Repeal expensing of exploration and development costs
— Repeal percentage depletion
— Repeal capital gains treatments for coal and lignite royalties

Modify the tax rules for dual-capacity taxpayers

Implications

There are few details provided on how the oil fee would be structured, but the White House has indicated that the tax would be assessed at the well head and that the Administration would welcome working with Congress to iron out the administrative details. Republicans leadership in Congress has indicated that the proposed oil fee has little or no chance for passage into law, suggesting that the tax would fall upon lower and middle-class taxpayers as the fee would be passed on to consumers. The recent debate surrounding the Highway Trust Fund showed that Congress was unwilling to raise the gasoline tax, which has not been raised since the Clinton Administration. An oil fee of this nature seems highly unlikely to pass Congress.

This proposal may, however, open up debate around carbon taxes or other similar means of raising tax revenue through environmental or climate initiatives.

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