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Understanding the Ethanol Subsidy

How the Federal Government's Primary Ethanol Subsidy Works

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Understanding the Ethanol Subsidy

An Iowa farmer plants corn, which is used to make ethanol, in hopes of taking advantage of the increasing demand for alternative energy.

Mark Hirsch / Getty Images
Updated June 15, 2011

The primary ethanol subsidy offered by the federal government is a tax incentive called the Volumetric Ethanol Excise Tax Credit, which was passed by Congress and signed into law by President George W. Bush in 2004. It took effect in 2005.

The ethanol subsidy, which is commonly referred to as the "blender's credit," offers ethanol blenders registered with the Internal Revenue Service a tax credit of 45 cents for every gallon of pure ethanol they blend with gasoline.

That particular ethanol subsidy cost taxpayers $5.7 billion in forgone revenues in 2011, according to the U.S. Government Accountability Office, the nonpartisan congressional watchdog agency.

Debate Over the Ethanol Subsidy

Supporters of the federal ethanol subsidy argue that it encourages production and use of the biofuel and thereby reduces the amount of foreign oil needed to produce gasoline, a step toward energy independence.

But critics argue that ethanol burns far less efficiently than gasoline, driving up fuel consumption, and that it increases demand for corn for fuel and artificially boosts the cost of farm commodities and retail prices of food.

They also say such an incentive is unnecessary because legislation enacted in 2007 requires oil companies to produce 36 billion gallons of biofuels such as ethanol by 2022.

"While born of good intentions, federal subsidies for ethanol have failed to achieve their intended goals of energy independence," U.S. Sen. Tom Coburn, a Republican from Oklahoma and leading critic of the ethanol subsidy, said in 2011.

Effort to Kill the Ethanol Subsidy

Coburn led an effort to repeal the ethanol subsidy in June of 2011, saying it was a waste of taxpayer money - he said the Volumetric Ethanol Excise Tax Credit cost $30.5 billion from 2005 through 2011 - because consumption remained only a small part of the country's fuel use.

His effort to repeal the ethanol subsidy failed in the Senate by a vote of 59 to 40.

"While I'm disappointed my amendment did not pass, taxpayers should remember that when I offered an amendment to defund the Bridge to Nowhere in Alaska in 2005 we lost that vote 82 to 15," Coburn said in a statement. Over time, however, the will of the people prevailed and Congress was forced to scale back this wasteful and corrupting practice.

"Today, the earmark favor factory is mostly closed. Only the tax division remains open. I'm confident this debate, and many more ahead, will expose the tax code for what it is - an abomination that favors the well-connected over working families and small businesses."

History of the Ethanol Subsidy

The Volumetric Ethanol Excise Tax Credit ethanol subsidy became law on Oct. 22, 2004, when President George W. Bush signed the American Jobs Creation Act into law. Included in that piece of legislation was the Volumetric Ethanol Excise Tax Credit.

The initial bill gave ethanol blenders a tax credit of 51 cents for every gallon of ethanol they mixed with gasoline. Congress reduced the tax incentive by 6 cens per gallon as part of the 2008 Farm Bill.

According to the Renewable Fuels Association, gasoline refiners and marketers are required to pay the full rate of tax, which is 18.4 cents per gallon, on the total gasoline-ethanol mixture, but are able to claim the 45 cents per gallon tax credit or refund for each gallon of ethanol used in the mixture.

The ethanol subsidy benefits multibillion-dollar integrated oil companies such as BP, Exxon and Chevron.

The First Ethanol Subsidy

  • The Energy Policy Act of 1978 was the first federal legislative ethanol subsidy. It allowed for a 40-cent tax exemption per gallon of ethanol, according to Purdue University.
  • The Surface Transportation Assistance Act of 1982 increased the tax exemption to 50 cents per gallon of ethanol.
  • The 1990 Omnibus Budget Reconciliation Act extended the ethanol subsidy to 2000 but decreased the amount to 54 cents a gallon.
  • The 1998 Transportation Efficiency Act of the 21st Century extended the ethanol subsidy through 2007 but reduced it to 51 cents per gallon by 2005.
  • Bush's signature on the Jobs Creation Act changed the way the modern ethanol subsidy worked. Instead of offered a straight tax credit to producers, the legislation allowed for the "blender's credit."

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