Keep the excise tax credit for U.S. ethanol

More than one in five Americans are trying to figure out where their next paycheck will come from. People from every walk of life are anxious about dependency on oil imported from unstable regions with unfriendly governments, from Mahmoud Ahmadinejad’s Iran to Hugo Chavez’s Venezuela. Greenhouse gas emissions are also a continuing concern for policymakers and the general public.

For all three challenges, biofuels offer hope. Even in the midst of a severe recession, the U.S. ethanol industry produced a record 10.75 billion gallons of the biofuel last year. The industry helped nearly 400,000 Americans keep their jobs or find new ones.  And U.S. ethanol producers contributed $53.3 billion to the Gross Domestic Product, generating $15.9 billion in federal, state and local tax revenues. 

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By providing a steady market for farm products, the industry is a major engine for economic growth in rural communities where the production facilities are located, employing workers, creating jobs and contributing to local and state tax revenues.

Meanwhile, domestic ethanol use is reducing the nation’s appetite for foreign oil by 364 million barrels – the equivalent of 10 months of imports from Venezuela. Moreover, the economics of ethanol use save each driver upwards of $150 a year.

 At the wholesale level, ethanol is roughly 80 cents cheaper than gasoline before any tax incentives are applied. Factoring in the 45 cent blenders credit available to oil refiners, ethanol is $1.25 cheaper than gasoline. At the current blending rate of 10 percent, drivers should be saving a dime or more filling up with ethanol-blended fuel.  

While American ingenuity and hard work built the biofuels industry, two public policies have helped it succeed. The Renewable Fuel Standard (RFS) requires 36 billion gallons of renewable fuels, including at least 16 billion gallons from cellulosic feedstocks, be used in the nation’s fuel supply by 2022. The Volumetric Ethanol Excise Tax Credit (VEETC) provides blenders and marketers with a federal tax credit of 45 cents on each gallon of ethanol blended with gasoline.

These two policies work together. While the Renewable Fuels Standard requires that biofuels be used in motor fuels, the tax credit offers incentives for blending above what’s required, encourages the production of ethanol in the U.S., and saves drivers money. In addition, VEETC works with a tariff on imported ethanol to prevent subsidizing the production and importation of ethanol from other countries and with the Cellulosic Biofuel Producer Tax Credit (CBPTC) to promote the development of the next generation of ethanol from non-grain feedstocks.

With VEETC scheduled to expire at the end of this year, Congress faces a far-reaching choice. In a new study, “Importance of the VEETC to the U.S. Economy and the Ethanol Industry,” the economist John M. Urbanchuk, technical director of the economic consulting firm Entrix, Inc., warns of what would happen if the tax credit were removed.

U.S. ethanol production would drop by as much as 37.7 percent. This amount would be about four billion gallons or the equivalent of the annual production from more than 60 average-sized ethanol plants. The ethanol industry would spend $6.6 billion less on purchases of grain and other raw materials, as well as other goods and services, thereby devastating many rural communities.

The ripple effects would wipe out more than 112,000 jobs in every sector of the economy, reduce the Gross Domestic Product by $16.9 billion, cut household income by $4.2 billion and cost $2.4 billion in lost federal tax revenues and $2.4 billion in state and local revenues.

With VEETC eliminated, Congress would likely see no reason to continue the tariff on imported ethanol. American suppliers would rely on imported ethanol, making the U.S. dependent on foreign countries for biofuels in addition to our addiction to imported oil. Instead of generating good-paying jobs in this country, the Renewable Fuel Standard would become a jobs program for foreign ethanol producers.

Because eliminating VEETC would eventually destroy much of America’s infrastructure for producing, distributing and blending ethanol with gasoline, the next generation of biofuels would be less likely to be designed and developed in the U.S. With the entire industry in decline, the special tax credit for cellulosic ethanol would be unlikely to survive. 

Congress must act. Legislation has been introduced in both the House and Senate that would extend all of these vital incentives through 2015.  By every standard of economic growth, energy security and environmental responsibility, tax incentives for the continued growth of America’s ethanol industry are good public policy.  

Bob Dinneen is the president and CEO of the Renewable Fuels Association, which sponsored the study by John M. Urbanchuk, “Importance of the VEETC to the U.S. Economy and the Ethanol Industry.”