The Senate Finance Committee Tuesday overwhelmingly passed an energy tax package that provides $28.5 billion in tax incentives for clean and alternative fuels, of which domestic oil and natural gas producers would pay more than $20 billion of the tab.

The revised tax measure offered by committee Chairman Max Baucus (D-MT) includes a 13% severance tax on oil and gas production in federal waters in the Gulf of Mexico. The tax is expected to raise $10.64 billion over a 10-year period, according to the Joint Committee on Taxation.

The measure would allow producers to credit against the severance tax an amount equal to their royalties paid under federal law. Consequently, the measure appears to be a penalty tax on future production from the flawed leases issued by the Interior Department in 1998 and 1999 that excluded the critical price thresholds, the Wall Street Journal reported. The tax would apply to crude oil or natural gas produced after enactment of the initiative.

The severance tax is in addition to a provision in the tax package that would revoke the domestic manufacturing credit for oil and gas companies, a move that would deprive the industry of $9.433 billion in benefits over the next decade.

The tax package, which was voted out of committee 15-5, is expected to be included in the broad energy legislation (HR 6) that is now in its second week of debate on the Senate floor.

Producers were quick to voice their objections to the Baucus tax measure. The Natural Gas Association of America (NGSA), which represents major oil and gas producers, "supports federal policies that provide Americans with access to the energy they want at competitive prices. This tax packages does none of that, and would, in fact, be counterproductive to the goal of ensuring reliable supplies," the group said.

"To ensure that the United States retains a vibrant position in competitive global markets, Congress should be looking for ways to enhance all of our energy resources, but without penalizing those that now power the nation's economy," the NGSA said.

"Anything that increases the burden on our industry is bad and is going to result in less production offshore," said Doug Morris, a spokesman for the American Petroleum Institute, a major producer group.

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