GAO Questions Efficacy Of US Biofuel Tax Credit

by Mike Godfrey, Tax-News.com, Washington

08 October 2009

A federal tax credit designed to support the growth of ethanol as an alternative fuel in the US is not expected to stimulate consumption unless there is a dramatic rise in crude oil prices, the Government Accountability Office concluded in a recent report.

Asked to examine the state of the industry by Senators Barbara Boxer, a California Democrat, and Susan Collins, a Maine Republican, the GAO concluded that the Volumetric Ethanol Excise Tax Credit (VEETC), a 45-cent per gallon federal tax credit, may no longer be needed to stimulate conventional corn ethanol production because the domestic industry has matured.

The GAO report observed that the processing of corn ethanol is now "well understood," and its capacity is already near the effective 'renewable fuel standard' limit of 15 billion gallons per year set by Congress in December 2007.

According to the report, the VEETC’s annual cost to the Treasury in forgone revenues could grow from USD4bn in 2008 to USD6.75bn in 2015 for conventional corn starch ethanol, even though the 2008 Farm Bill reduced the VEETC from 51 cents to 45 cents per gallon for ethanol starting in 2009.

"Because US ethanol consumption is unlikely to exceed the 10.5 billion gallons allowed under the RFS in 2009, unless crude oil prices rise significantly, GAO and others have found that under current market conditions the VEETC does not stimulate additional ethanol consumption," the report stated.

The United States also controls ethanol imports, which qualify for the VEETC, by imposing a tariff of 54 cents per gallon plus 2.5% of the ethanol’s value. The Farm Bill 2008 also created a separate USD1.01 tax credit for producing advanced cellulosic biofuels.

The GAO concluded that Congress should consider whether these separate incentives for domestic production are working efficiently, or whether such "duplicative" incentives should be minimized. "Options could include maintaining the VEETC, reducing the amount of the tax credit or phasing it out, or modifying the tax credit to counteract fluctuations in crude oil prices."

The GAO also recommended that the US government give priority to research and development on process technologies that produce biofuels that can be used by the existing petroleum-based storage and transportation infrastructure.

The report was dismissed, however, by the Renewable Fuels Association (RFA), which said that the study contained "little in the way of new information or analyses" of the biofuels industry.

“The tax incentive has been instrumental in helping to build a renewable fuels industry in this country. It should remain," the RFA responded. "As long as petroleum and fossil fuel companies that dominate the energy market continue to receive preferential tax treatment and hidden subsidies, incentives are needed to develop renewable alternatives such as ethanol.”

Recommended