Refined Coal Production Tax Credit: Coordinated Agency Review Could Help Ensure the Credit Achieves Its Intended Purpose
Fast Facts
Since 2004, the federal government has offered a tax credit that supports the production of refined coal, which could help reduce air pollution. Producers claimed nearly $9 billion in these credits since 2010. To claim the credit, producers must certify that burning refined coal emits fewer pollutants than conventional coal.
The credit potentially overlaps with other federal programs, but IRS, Treasury, Energy, and EPA haven't reviewed potential overlap or whether the tax credit has achieved its purpose.
If Congress extends the credit, which expires in December 2021, a coordinated agency review could help determine if changes are needed.
Highlights
What GAO Found
According to Internal Revenue Service (IRS) data, refined coal producers have claimed approximately $8.9 billion in refined coal production tax credits since tax year 2010, when IRS last updated its guidance. The credits these producers claimed increased annually from about $9 million in 2010 to about $1.6 billion in 2019.
IRS's 2010 guidance requires taxpayers claiming the credit, which GAO generally refers to as producers, to demonstrate that burning refined coal reduced emissions of nitrogen oxides (NOx) by at least 20 percent and either sulfur dioxide (SO2) or mercury generally by at least 40 percent through field, laboratory, or pilot-scale testing. Producers told GAO they typically used pilot-scale testing at an offsite facility, among other reasons, to control variables that can affect emissions levels, thereby helping them to attribute any observed emissions reductions directly to burning refined coal. However, GAO found that use of pilot-scale testing limited the federal government's understanding of actual emissions reductions. For example, Department of Energy (DOE) officials told GAO it is difficult to conduct pilot-scale tests that accurately reflect emissions at full scale because the effects of variables such as coal properties, treatment processes, and boiler conditions are not well understood, particularly for tests with a pilot-to-field scale that exceeds 1:10. According to representatives of a facility that conducted pilot-scale tests for some producers, the test scales typically ranged from 1:10,000 to greater than 1:100,000.
According to officials, IRS, the Department of the Treasury, DOE, and the Environmental Protection Agency (EPA) coordinated to develop the credit's guidance, but they have not coordinated to review the credit's performance. Based on GAO's review of some EPA emissions reduction programs and interviews with representatives from power plants that burned refined coal, GAO determined that the credit potentially overlaps with other federal programs such as EPA programs that regulate mercury emissions. However, IRS, Treasury, EPA, and DOE officials told GAO they had not coordinated to identify or address potential overlap or duplication. Moreover, officials from these agencies told GAO they had not reviewed whether the credit had achieved its intended purpose. Treasury officials told GAO they had not reviewed the credit's performance, in part because the credit period for refined coal production facilities expires on December 31, 2021, and the department does not typically focus its resources on credits that Congress may not extend.
GAO's tax expenditure guide states that greater scrutiny of tax expenditures, such as periodic coordinated reviews, could help Congress and federal agencies determine how well specific tax expenditures work to achieve their intended purpose. Similarly, GAO has reported that coordinated reviews of tax credits with related federal spending programs could help policymakers reduce overlap and direct scarce resources to the most effective or least costly methods to deliver federal support.
Why GAO Did This Study
Coal is a key domestic fuel source and an important contributor to the U.S. economy. In the U.S. power sector, burning coal accounts for most of the sector's emissions of NOX, SO2, and mercury. According to EPA, these pollutants can harm human health by contributing to neurological impairment, serious respiratory illness, and premature death. Since 2004, the federal government has offered tax credits to support the production of refined coal, which could help to reduce these emissions. IRS last updated its guidance for claiming this credit in 2010.
GAO was asked to review the federal government's implementation of the credit. This report examines (1) the extent to which producers have claimed the refined coal production tax credit since tax year 2010; (2) what the federal government knows about the extent to which producers have demonstrated the emissions reductions required to claim the credit; and (3) the extent to which the federal government's implementation of the credit aligned with selected criteria for assessing tax expenditure performance.
GAO reviewed IRS summary data, relevant laws and regulations, and other agency documents. It interviewed IRS, Treasury, EPA, and DOE officials, as well as representatives from producers that publicly reported claiming the credit, randomly selected power plants, and a testing facility. GAO selected criteria that were most relevant by analyzing its guide to assessing the performance of tax expenditures, which include tax credits.
Recommendations
If Congress extends the credit, Treasury, IRS, EPA, and DOE should coordinate to review the performance of the refined coal production tax credit in achieving its intended purpose and identify and implement, as appropriate, any improvements towards achieving that intended purpose, such as adjustments to allowable emissions testing methods. EPA agreed with GAO's recommendation; IRS and DOE neither agreed nor disagreed; and Treasury provided no comments.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of the Treasury | If Congress extends the refined coal production tax credit, the Secretary of the Treasury should coordinate with IRS, EPA, and DOE to review the performance of the credit in achieving its intended purpose and identify and implement, as appropriate, any improvements towards achieving that intended purpose, such as adjustments to allowable emissions testing methods. (Recommendation 1) |
In September 2022, the Department of the Treasury (Treasury) stated that it supports the goal of this recommendation but notes that the refined coal production tax credit has not been extended. According to Treasury, eligible property had to be placed in service before January 1, 2012, and the credit was for qualified refined-coal production during the 10-year period beginning on the date the facility was originally placed in service. Therefore, according to the department, there could be no refined-coal production credit claims starting in 2022. Treasury stated that, as Congress has chosen not to extend this tax credit in recent energy legislation, the department does not plan on reviewing its performance at this time. If Congress reinstates the tax credit after fiscal year 2024, we will confirm what actions Treasury has taken in response to our recommendation and provide updated information.
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| Internal Revenue Service | If Congress extends the refined coal production tax credit, the Commissioner of the IRS should coordinate with Treasury, EPA, and DOE to review the performance of the credit in achieving its intended purpose and identify and implement, as appropriate, any improvements towards achieving that intended purpose, such as adjustments to allowable emissions testing methods. (Recommendation 2) |
In a May 2022 letter, the Internal Revenue Service (IRS) stated that because our recommendation is conditional and predicated on the refined coal production tax credit being extended beyond 2021, the agency took our recommendation under advisement. IRS stated that the tax credit was not extended by Congress and that the agency plans to take no further actions. If Congress reinstates the credit after fiscal year 2024, we will confirm what actions IRS has taken in response to our recommendation and provide updated information.
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| Environmental Protection Agency | If Congress extends the refined coal production tax credit, the Administrator of the EPA should coordinate with Treasury, IRS, and DOE to review the performance of the credit in achieving its intended purpose and identify and implement, as appropriate, any improvements towards achieving that intended purpose, such as adjustments to allowable emissions testing methods. (Recommendation 3) |
The Environmental Protection Agency (EPA) agreed with our recommendation. In a May 2022 letter, EPA stated that it generally agrees with our findings and conclusions. EPA officials noted that the agency plans to take no further actions, since the recommendation is conditional and predicated on the refined coal production tax credit being extended beyond 2021. If Congress reinstates the refined coal production tax credit after fiscal year 2024, we will confirm what actions EPA has taken in response to our recommendation and provide updated information.
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| Department of Energy | If Congress extends the refined coal production tax credit, the Secretary of Energy should coordinate with Treasury, IRS, and EPA to review the performance of the credit in achieving its intended purpose and identify and implement, as appropriate, any improvements towards achieving that intended purpose, such as adjustments to allowable emissions testing methods. (Recommendation 4) |
In an April 2022 letter, the Department of Energy (DOE) concurred with our recommendation. If Congress reinstates the credit after fiscal year 2024, we will confirm what actions DOE has taken in response to our recommendation and provide updated information.
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