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Ethanol Tax Compromise: What is it? Where’s it Going?

July 8, 2011

           

As many of you know by now, Senators Klobuchar, Thune and Feinstein have reached a compromise on legislation to end the current ethanol tax incentive, known as VEETC, and use the funds for debt reduction, infrastructure investment, and cellulosic ethanol investment. Under the compromise, $1.33 billion would be put directly to debt reduction.  To be clear, the ethanol industry is the only industry that is sacrificing some of its tax incentives to help address budget concerns.  Where, for example, are the fossil fuel industries on this issue? The compromise would also reform and extend what's known as the Alternative Fuel Vehicle Refueling Property Credit through December 31, 2014.  The current AFVR PC allows fuel retailers to take a 30% credit for the installation of alternative fuel infrastructure, up to $30,000, including E85 infrastructure.  The compromise reforms and improves the credit for ethanol by allowing the entire cost of dual-use blender pump to qualify for the credit rather than the incremental cost, and allowing a broader range of ethanol blends between E15 and E85, many blender pumps will now qualify.  This is an important change and will help expand the market for ethanol. The compromise, however, reduces the credit to 20%, up to $30,000. Additionally, the compromise would extend the existing $1.01 per gallon tax credit for cellulosic biofuels through 2015.  However, the announced deal would cap how much money could be spent on this incentive at $50 million, $100 million, and $155 million in 2013, 2014, and 2015, respectively.  The RFA and the Advanced Ethanol Council have concerns that such a cap sends the wrong signal to the market and will work to improve this provision before it might become law. The compromise also includes a 1-year extension of the Small Ethanol Producer Tax Credit through 2012, but reduces the value from 10 cents to 7 cents.  It would also extend the depreciation allowance of 50% for cellulosic biofuel plant property through 2015. And, the compromise would end the tariff on imported ethanol as the tax incentive would no longer be available.  A quick reminder here:  American-made ethanol is the cheapest on the market today.  Brazilian ethanol, erroneously believed to be more cost-effective, is more expensive and concerns over the industry have prompted a new round of government intervention in the Brazilian ethanol market. The $64,000 question is, How does this compromise become law?  Unfortunately, the answer is unclear.  Speculation focuses on various House-passed tax bills the Senate could take up and replace with the language of this compromise.  Remember, any provision that raises revenue, as this one would because it is raising taxes on ethanol-blended fuel, must originate in the House.  There are three such bills currently before the Senate.  It is more likely, however, that proponents will attempt to insert this language into the deficit reform package currently being negotiated by the White House as part of the debt limit extension. We will continue to try to encourage constructive improvements to this package, such as the cellulosic concerns raised above, as it moves forward. Please let us know if you have any questions.