Leveling the Tax Playing Field for LNG

On July 31, 2015, President Obama signed a provision to the three-month extension of the federal highway funding bill into law. The provision will allow LNG (liquefied natural gas) to be taxed at the same rate as diesel fuel at the federal level. This means that the fuel will be taxed based on energy content instead of volume, as it is today.

The change to the excise tax structure for LNG, which will go into effect on January 1, 2016, is notable as it reduces the tax rate on LNG from 41.3 cents per diesel gallon equivalent (DGE) to 24.3 cents per DGE, the same rate as diesel. This 17 cent per DGE cost reduction for LNG users is significant and may encourage more fleets to consider conversion to LNG.

Since 2011, LNG has been taxed at the same rate as diesel, but based on its volume in gallons because the fuel is in liquid form and this was the easiest approach. The problem with this method is that a gallon of diesel contains 68% more energy than a gallon of LNG. So LNG users currently pay 68% more tax for the same energy as a diesel user.

This new provision bases excise taxes on LNG on DGE, which equalizes this energy content discrepancy between LNG and diesel. Because LNG has less energy content per gallon, it will now be taxed at a lower per gallon rate.

In many ways, the federal government will be incentivizing the use of LNG to power fleets because LNG costs less than diesel and is more price stable than diesel. Now that the excise tax rates are equalized, more companies may consider moving over to LNG. The environmental benefits of natural gas are also well documented and companies are jumping on the bandwagon not only for tax incentive programs, but also for the ability to differentiate from competitors and achieve goodwill by announcing their fleets are environmentally friendly. Current users of LNG, like UPS, will also be rewarded as they see their tax bills decrease and their profit margin increase without making any operational changes.

Only time will tell the extent the effect this new excise tax provision will have on the LNG industry, but it is a step in the right direction for proponents of US energy independence and environmentally sustainability. LNG producers probably aren’t too upset about it either.