Tax Incentives and Enhanced Oil Recovery Techniques

GAO discussed the use of tax incentives for increasing domestic oil production and exploration, focusing on enhanced oil recovery (EOR) techniques. GAO noted that: (1) Congress only sporadically reviewed tax expenditures, rarely compared their effectiveness to alternative mechanisms for achieving similar goals, and did not subject them to overall limits to control their total budgetary impact; (2) tax incentives for domestic oil production, in the form of building up the strategic petroleum reserve or such trade restrictions as tariffs or quotas, would increase production; (3) government subsidies for the use of EOR techniques would encourage firms to undertake risky petroleum exploration activities that could result in financial loss; (4) the tax expenditure approach favored projects that were close to being viable without the tax break and generated fewer inefficient projects than direct subsidies; (5) tax expenditures aimed at certain activities, such as EOR methods, offered the potential for giving a better return on the tax dollar; (6) it would be more cost-effective to target tax incentives at activities that did not already receive substantial tax breaks than at types of investments that already were eligible for favorable treatment; and (7) environmental effects must be considered in evaluating costs and benefits of the increased use of EOR.