NCPA - National Center for Policy Analysis

One More Subsidy That Won't Go Away

August 18, 1997

Political observers say that this should have been the year Congress killed the tax subsidy for ethanol. But the favorable tax treatment for the gasoline additive typically made from corn survived efforts to kill it by those who see the subsidy as economic nonsense.

  • The ethanol subsidy has cost taxpayers more than $7 billion since it took effect nearly 20 years ago -- and is guaranteed to survive until at least the year 2000.
  • A by-product of the Middle East oil crisis, the subsidy was introduced in 1978 and was intended only as a short-term incentive in the search for alternative fuels.
  • Prices for gasoline blended with ethanol receive a 5.4 cents per gallon reduction in the federal gasoline tax of 18.3 cents a gallon.
  • Today, ethanol -- available mostly in corn belt states -- accounts for less than 1 percent of U.S. fuel production, and the General Accounting Office says that share will not increase even if the subsidy survives another two decades.

Some critics contend that it takes more energy to produce ethanol than is released when it is consumed, but politics keep it alive. To give just one example, Iowa is a major producer. It's also an early stop on the presidential nomination trail. Opposing ethanol there would be the political equivalent of falling on one's sword.

Ethanol's survival, says Sen. John McCain (R-AZ), "is a cautionary tale about what happens to quote unquote temporary subsidies around here. They never go away."

Source: Jackie Calmes, "How Cash, Caucuses Combined to Protect a Fuel on the Hill," Wall Street Journal, August 18, 1997.


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