The latest in a NYT series on how well the federal government treats the oil and gas industry shows just how wasteful this nice treatment is.

The article focuses on an Interior Department study that found almost no benefit to giving energy companies a royalty break for drilling on public property. Over 40 years, these breaks will cost around $48 billion- and probably won't produce a drop of oil that wouldn't have otherwise been pumped.

The report estimates that the current incentives would have a tiny impact that is far exceeded by swings in market prices.

The report predicted that the current incentives would lead to the discovery of only 1.1 percent more reserves than if there had been no incentives at all. Total oil production from 2003 to 2042 would be about 300 million barrels more, or less than 1 percent, than it would have been anyway. Natural gas production would be 0.6 percent greater than it would have been otherwise.

But the cost of those royalty incentives would be high: about $48 billion less in royalty payments over the 40-year period. That loss would be offset by a slight increase in the prices that companies pay when bidding for leases in government auctions, but analysts said the net cost would still be above $40 billion.

What a great study. Could the government do one of these studies on every revenue break we give to businesses? That could give the 110th Congress much more "low-hanging fruit" to pay for programs under PAYGO. We might even get a better government out of it, too.

AMT reform is a thorny issue, discussed at length here, which will confront Congress in 2007.

Now comes A Progressive Solution to the AMT Problem from Citizens for Tax Justice (CTJ). The key elements of their four-year, revenue-neutral plan:

• extend the 2006 AMT exemptions through 2010, indexed for inflation
• remove the 15 percent tax rate on capital gains and dividends, treating from capital gains them the same as other income, but only for AMT purposes

CTJ's proposal clearly does some important things. Why AMT was not originally indexed -- let alone has not been indexed since -- is a good question. So let's finally do it. The plan is also more progressive than AMT. And striving for revenue neutrality in any AMT reform solution probably makes just as much sense since we may all soon will be living under PAYGO budget process constraints.

Query whether there may sufficent support in Congress today for a doubling of any given individual income. And the proposal does not address what to do about what remains of the AMT problem after 2010, which still could be several hundred billion dollar problem.

Still, fiscally responsible, progressive AMT reforms ideas have been few and far between (but not unheard of from this corner) so we applaude the effort.

Syracuse University's TRAC has finally obtained data from the IRS on auditing trends regarding large corporations. Unsurprisingly, the released data shows that the annual audit rate for large corporations has declined this last year.

IRS audited 35.3 percent of all corporations with assets of $250 million or more, down from 44.1 percent last year. The projected rate of hours of work spent per audit also fell from 978 hours/audit to 958.

These releases, compelled by a court order, complicate the picture of IRS enforcement Commissioner Mark Everson presented in November. He announced then that IRS auditing activities had netted more money this year, claiming that " ... no matter how you look at our results, they show a strong rebound in our enforcement efforts."

Everson was right that the IRS brought in more money. But given that enforcement decreased, TRAC speculates that the IRS isn't responsible for the revenue increase (emph. mine).

Some economists and tax experts believe that other explanations are possible, namely that a massive surge in non-compliance is believed to have swept through corporate America. Although government enforcement activities can be measured, accurately tracking the number individuals or corporations who secretly decide to break the law is extremely difficult. In recent years, however, Commissioner Everson, his immediate predecessor and many others have argued that case-by-case evidence strongly suggests more and more corporations are skirting the law. The bottom line: a real increase in the number of non-compliant taxpayers may explain the increase in enforcement revenues.

In other words, there probably was a much bigger bang for the auditing buck this year. So why do less of it?

Incoming Senate Budget chair Kent Conrad (D-ND) said today that the strictures of PAYGO would not block an extension of middle-class tax breaks such as the child tax credit, which make up about two-thirds of Bush's tax policies expiring in 2011. These extensions "are gonna sail through here even if they're not paid for," he said, adding that PAYGO rules, as currently contemplated, could be waived with a supermajority vote.

Conrad also noted that PAYGO would most likely be adopted as a Senate rules change or as part of the budget resolution, because Bush will not sign it into law.

In the early morning hours on Saturday, the Senate voted 79-9 to combine and adopt two House bills in a sprawling $45.1 billion tax, trade, energy, and health package entitled the Tax Relief and Health Care Act of 2006."

The final version of the bill differed little from the version summarized here.

The $35.9 billion in tax break extensions includes the following major provisions (costs of two-year two extensions -- covering 2006 retroactively and 2007; five-year costs indicated by *):

• R&D tax credit -- $16.5 billion
• State and local sales tax dedecution -- $5.5 billion
• College tuition dedeuction -- $3.3 billion
• Welfare-to-Work credit -- $980 million *
• Teachers' Classroom Expenses -- $380 Million

The bill also included a $4.9 billion provision to lift federal spending for retired miners' health benefits and abandoned mine reclamation, $3.5 billion in (mostly alternative) energy tax breaks, and $1 billion in health savings accounts incentives.

This last provision was snuck into the bill, according to the Washington Post, by "several major business lobbies eager to reduce their medical-insurance costs [and] Ways and Means Committee Chairman Bill Thomas (R-CA) [who] championed it and pressed it through to final approval in the wee hours Saturday morning."

This afternoon, the House defeated, 205-207, an amendment by Rep. Edward J. Markey (D-MA) to require oil companies with royalty-free offshore leases to renegotiate those deals before winning new leases in certain areas.

Rep. Charles Rangel (D-NY), the House Ways and Means ranking Democrat, had added language to the amandment, CQ ($) reports "to allow a 2007 “patch” for the alternative minimum tax that would have cost $48 billion."

Given incoming Speaker Nancy Pelosi's First 100 Hours agenda, this may have been Congress' last opportunity to approve such a patch without having to find $48 billion in offsets.

Though popular, the tax extenders package that seems headed for approval today is not without its perverse aspects.

For instance, a funding patch for the State Children's Health Insurance Program (SCHIP) was stripped out of the package, at the same time that funding for Health Savings Accounts (HSA) was added. SCHIP benefits low-income children- HSAs the wealthy and privileged.

For more, see this statement by Robert Greenstein of the Center on Budget and Policy Priorites.

It has been known all year that without additional SCHIP funding, 17 states would face SCHIP shortfalls in 2007. The Administration included a proposal in its budget to address these shortfalls. Various bills to resolve the problem were introduced in Congress. But when decision time came, Congressional leaders declined to act. Coverage for up to 600,000 low-income children will be at risk as a result.

As business draws to a close on the penultimate day of the 109th Congress, House and Senate negotiators have substantially agreed on the terms of a tax extenders package. Cost: $45 billion over 10 years.

The package features a broader array of tax break extensions and modifications than had been part of the package in the reconciliation, pension, and trifecta bills earlier in the year (the largest element of which is the R&D credit, at $16.5 billion). Cost: $35.9 billion

It also includes:

• other, miscellaneous provisions, most notably, for surface mining reclamation expensing. Cost: $4.7 billion
• nearly a dozen -- mostly renewable -- energy tax provisions. Cost: $3.4 billion
• several health savings accounts provisions. Cost: $1 billion

The JCT has published itemized details of the package in its current form. The House is expected to vote on the package late this evening and send it to the Senate, which is expected take it up tomorrow.

Back in September, you may recall a series of reports based on an internal investigation of the Interior Department that, essentially, showed that gas and oil companies were getting away with skimping on royalty payments. Interior just wasn't auditing these companies enough to compel the royalties they owed for extracting natural resources from public property.

Now, CBS News reports that not only were they not auditing enough, they didn't actually do the auditing they said they did. Interior misrepresented the number of audits they had been doing all along!

If the report's correct, that's pretty bold stuff. It seems almost a certainty that Democrats will hold hearings on this issue in 2007.

House-Senate negotiations on the oft-deferred tax extenders package broke down today. With adjournment for the year expected by week's end, prospects now look more likely for a lump of coal than a compromise.

The sticking point: a provision to forestall a scheduled five percent cut in Medicare payments to physicians, scheduled to take effect in January. The provision would cost an estimated $10.8-12 billion over five years.

Still, the Senate may float the provision, along with numerous trade measures -- "a Hail Mary pass" over to the house, in the words of one Senate GOP aid.

With the clock ticking before the sands run out on the 109th Congress and Democrats take the reins for the first time in 12 years, retiring Senate Majority Leader Bill Frist is working feverishly to assure passage of the set of two-year tax break extensions (known as the extenders."

He is working to pass a clean version of the popular package, unencumbered by Christmas tree ornaments. He is working to pass a version with a provision delaying implementation of cuts in Medicare payments to physicians. "I've got both tracks working," he said yesterday.

Let's see if he can avoid a train wreck this time.

On Dec. 1, National Public Radio's Morning Edition ran a short segment by John Ydstie on the Alternative Minimum Tax (AMT), entitled "Democrats Promote Relief from the Alternative Minimum Tax."

3.5 million taxpayers had to file income tax returns under the AMT in 2006. Unless addressed by Congress, this number will increase to 23.4 million in 2007, as we have noted.

The segment indicates that the average AMT filer must pay $3,000 more in taxes each year than under the regular system.

Meanwhile, the 10-year cost of ATM repeal is estimated by CBPP to be around $1.2 trillion.

An excellent overview of the ATM, the program segment (listen here) brings home how powerfully this issue is likely to play in the media over the coming months.

New York Times tax and budget beat reporter David Cay Johnston, endorsed the general concept of ATM reform rather than repeal in his his book Perfectly Legal. Johnston indicated to us today that he hadn't heard discussion of any compromise solution that would mend AMT, not end it.

Today, 3.5 million taxpayers file income tax returns under the Alternative Minimum Tax (AMT). If the current AMT fix expires at the end of the year, the number will increase dramatically to 23.4 million in 2007 and to 32.4 million by 2010. If the Bush tax cuts are extended, 52.6 million taxpayers will pay the AMT in 2017.

Amid a rapidly-growing bipartisan congressional consensus that the AMT's creep reaches into the middle class must be stopped, two solutions are propounded:

1) continue annual patches fixing the number of taxpayers filing AMT returns -- estimated cost: $20 billion in FY2007, increasing annually
2) repeal ATM entirely and immediately at an estimated cost of $25 billion in FY 2007 and $1.2 trillion for the 2006-2015 period.

Under the rules of the brave new PAYGO world the Democrats have committed to establishing, the cost of repeal would require $1 trillion-plus in tax hikes and/or spending cuts and mean a decade of extreme pain.

Compromise Prescription: re-instate the original intent of the AMT framers by limiting liability to millionaires and, this time, index it to inflation, so the middle class is held harmless.

Cost: Using Tax Policy Center figures, when the AMT is applied only to millionaires, we project total AMT revenues through 2017 to be about $200 billion.

To get this statistic, we projected current millionaires' liability through 2017, extrapolated the growth rate in the number of millionaires liable, calculated the additional interest expense from foregone revenue, and came up with a total figure of $197 billion in savings over continued annual patches or full AMT repeal (credit to my colleague Craig Jennings, who provided the back of his envelope).