Washington (Platts)--14Feb2011/610 pm EST/2310 GMT

The coal industry stands to lose nearly $2.6 billion in federal tax incentives over the next decade as part of the Obama administration's proposed fiscal 2012 budget released Monday.

The administration's proposal is identical to coal incentives cut in its budget last year. The White House is aiming to meet a G-20 climate change agreement from 2009 in which member countries pledged to phase out fossil fuel subsidies.

The mining industry has pledged to fight the proposal, which eliminates four coal-related tax incentives and would hit both coal companies and individuals who lease private mining rights to coal producers.

Repealing the tax provisions would "foster the development of a clean-energy economy and reduce our dependence on fossil fuels that contribute to climate change," the administration said in its budget message. The tax incentives equal less than 1% of the coal industry's revenue over the next 10 years, according to White House projections.

Under the budget proposal, coal companies would no longer be able to expense exploration and development costs; use percentage depletion for hard mineral fossil fuels; or claim domestic manufacturing deductions against coal production income. Royalties from privately owned coal blocks would be treated as regular income rather than capital gains for tax purposes, translating to a higher tax rate.

If passed, the proposed changes would go into effect beginning in 2012.

But the chances of smooth passage are unlikely, given strong industry opposition, said Gilbert Metcalf, an economics professor at Tufts University who studies energy and tax policy.

Such tax preferences, as they are known in economics, were instituted to help nascent domestic energy industries take root in the US. They have remained in place due to the great political clout of the oil, gas and coal industries, Metcalf said.

"You can't use the infant industry argument anymore -- they ought to be able to stand on their own two feet and I think that's the logic behind the Obama administration carrying [these incentive cuts] over," Gilbert said. "The tax preferences that industries have defended for years and years have become indefensible."

But he said it would take a political "tectonic shift" akin to the 1986 tax reform law for such long-standing clout to be overcome -- a point he believes the country may be nearing but has yet to achieve.

The mining industry was preparing to fight any elimination of tax benefits, no matter how small, as well as proposed cuts to coal-related research programs found elsewhere in the Obama budget.

"We just don't think that raising taxes in this economic environment makes sense, it's a disincentive," Luke Popovich, a National Mining Association spokesman, said, calling the budget a "missed opportunity."

--Peter Gartrell, peter_gartrell@platts.com

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