NCPA - National Center for Policy Analysis

After Three Decades, Tax Credit for Ethanol Expires

January 5, 2012

A federal tax credit for ethanol expired on December 31, ending an era of strong federal government support for the product.  While the tax breaks associated with ethanol had long seemed untouchable, Congress' preoccupation with deficits and debt brought pressure to bear.  Fiscal conservatives joined liberal environmentalists to kill it, with help from a diverse coalition of outside groups, says the New York Times.

  • Most domestic ethanol is produced from corn with nearly 40 percent of the domestic corn crop going to ethanol and byproducts.
  • Ethanol also constituted 10 percent of the nation's gasoline supply.
  • The tax credit that helped subsidize ethanol production, which cost the government nearly $6 billion in 2011, has cost an aggregate $20 billion over its lifetime.

Many who opposed the continued tax break for ethanol emphasized the maturity of the sector.  Explaining that suppliers are well-established and that most potential development had already been reached, they argued that the sector did not need to continue to be coddled by a generous, three-tiered government safety net:

  • Federal law requires that certain minimum amounts of renewable fuels like ethanol be blended into gasoline.
  • Refiners received the aforementioned tax credit for meeting this standard.
  • Finally, the government imposed a tariff on imported ethanol, protecting the domestic industry.

Other concerns focused on the higher prices that were caused by the government's protection of ethanol.  By artificially stimulating demand for the product in the gasoline industry, the price of corn and other related goods were increased as a result.  Meat and poultry producers, big food companies and other suppliers faced higher input costs because of expensive corn and higher land costs.  These higher costs are passed onto the consumer.

In addition, ethanol production's use of pesticides, fertilizer and heavy industrial machinery, which cause soil erosion and air and water pollution, are heavily criticized by the environmental lobby.

Source: Robert Pear, "After Three Decades, Tax Credit for Ethanol Expires," New York Times, January 1, 2012.

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