Ethanol Tax Incentives

Present law provides for a partial federal excise tax exemption of 51 cents per gallon for of ethanol blended into gasoline. For example, fuel blended with 10 percent ethanol receives a tax credit of 5.1 cents per gallon. E-85, which is 85 percent ethanol by volume, receives a 43-cent-per-gallon credit. Petroleum blenders – not corn farmers – receive this tax credit. The Volumetric Ethanol Excise Tax Credit (VEETC) legislation passed in 2004 extends the effective date of the tax credit through 2010.

A recent study by the U.S. General Accounting Office found that, since 1968, the oil industry has received approximately $150 billion in tax incentives. By contrast, the ethanol industry has received $11.2 billion through a partial exemption of the federal excise tax and $200 million in income tax credits.

According to Citizen Action, “U.S. taxpayers are providing at least $5 billion a year in tax breaks in the form of foreign tax credits to provide U.S. multinational oil companies with an incentive to invest billions of dollars to find and produce oil overseas so that it can then be exported to the United States.”

A 1997 editorial in the New York Times put the real cost of gasoline – including military expenditures to protect oil interests – at $5 per gallon. Therefore, on balance, ethanol receives fewer tax incentives than other forms of energy.

The VEETC provides other benefits. Because it is assessed on a volume basis, refiners will no longer be limited to the 5.7/7.7/10-percent blend levels dictated by the Clean Air Act's oxygen content provisions that may be made obsolete by RFS legislation anyway. The Internal Revenue Service (IRS), which was involved in the drafting of this provision, also believes the VEETC will greatly reduce the opportunity for fraud that existed with the old excise tax exemption system.