Moonshine to Motorfuel: Tax Incentives for Fuel Ethanol

Article excerpt

ABSTRACT

Biofuels have been embraced by supporters ranging from President George W. Bush to the Natural Resources Defense Council Before 1930, the U.S. Treasury focused on shutting down small alcohol producers. After 1978, U.S. energy policy sought to encourage ethanol production to reduce dependence on foreign oil Federal and state incentives have been credited with increasing ethanol production from 175 million gallons in 1980 to 6.8 billion gallons in 2007. The Internal Revenue Code contains three income tax credits designed to encourage ethanol use: the alcohol mixture credit, the pure alcohol credit, and the small ethanol producer's credit. The credits, together with other subsidies, come close to making the price of ethanol competitive with petroleum-based fuels. This article examines the tax incentives for ethanol and considers their economic and environmental effectiveness. In theory, ethanol use could reduce dependence on foreign oil and greenhouse gas emissions. In practice, the environmental benefits of ethanol are in doubt. Using the tax system to encourage conservation and discourage driving may be a better way to reduce greenhouse gas emissions and oil dependency.

I. INTRODUCTION

In 1876, incoming Commissioner of Internal Revenue, Green B. Raum, declared war on ethanol producers. (1) A few years later, Henry Ford "built the first flex fuel vehicle: a 1908 Model T designed to operate on either ethanol or gasoline." (2) Nearly a hundred years later, in 1978, Congress enacted the first tax incentives for ethanol production to reduce dependence on foreign oil. (3) In the search for oil and gas substitutes, biofuels have emerged as another panacea. Touting diverse supporters such as President George W. Bush and the Natural Resources Defense Council (NRDC), biofuels are receiving worldwide attention and money. (4) For example, federal incentives are credited with increasing ethanol production from 175 million gallons in 1980 to 6.8 billion gallons in 2007. (5) The first major federal subsidy exempted ethanol from the motor fuel excise tax. (6) Revised in 2005 and 2008, federal tax law now contains three income tax credits designed to encourage ethanol use. (7) These credits, together with other subsidies, stimulate ethanol production by making ethanol prices competitive with petroleum-based fuels.

Despite its possibilities for reducing dependence on traditional fuel sources, ethanol is not universally viewed as the solution to reducing petroleum use. Scientific studies draw different conclusions about whether ethanol produces a net energy gain when the energy used in planting, growing, harvesting, and processing the raw materials is considered. (8) Concerns expressed by critics of wide-scale ethanol production include: that using food crops for fuel would exacerbate world hunger; that ethanol subsidies amount to corporate welfare for large agricultural firms; and that the United States' capacity to produce ethanol would be overstimulated by subsidies, resulting in bankruptcies and industry collapse. (9)

Ethyl alcohol is found in alcoholic beverages. (10) The largest single use of ethanol is as a motor fuel and fuel additive. (11) Ethanol produces less energy per gallon than gasoline and costs more to produce per unit of energy. (12) In addition, U.S. import tariffs protect domestic production and increase industry prices of ethanol. Currently, the economic survival of the U.S. ethanol business depends on government support. (13) The web of government support is extensive and complicated. Federal support includes tax incentives and use mandates. States also provide financial support to the ethanol industry. (14) Today, the ethanol industry is well placed to benefit from government support that is anticipated to increase. (15) Ethanol production, in the United States has quadrupled over the past ten years, and with the addition of new ethanol plants under construction, it is anticipated to double again by 2009. …