The Federal tax code contains five tax incentives that benefit alcohol fuels: the 5.4 cents excise tax exemption, the 54 cents per gallon blender's tax credits, the 10 cents per gallon small ethanol producers' credit, the income tax deduction for alcohol-fueled vehicles, and the alternative fuels production tax credit. These tax incentives were enacted to encourage substitution of renewable alcohol fuels for gasoline and diesel, to conserve petroleum in the transportation sector, and reduce dependence on petroleum imports. The alcohol fuels tax incentives - particularly the 5.4 cents exemption - are anticipated to receive greater scrutiny by the Congress as a result of a recent Environmental Protection Agency (EPA) mandate that 30% of the oxygenate in reformulated gasoline must be made from renewables. The EPA mandate, if implemented, will result in a larger aggregate Federal subsidy for ethanol when tax subsidies (which are equivalent to $23 per barrel of oil displaced) are taken into account. Of all the existing tax incentives, the 5.4 cents per gallon exemption from the motor fuels excise taxes has been the most effective in stimulating alcohol fuels development. Also, tax incentives are a more efficient way to stimulate alcohol fuels development than mandates. For four reasons, however, the alcohol fuels tax incentives are economically less efficient than alternative energy tax policies. (1) They provide subsidies to alcohol fuel producers when economic principles suggest that no subsidy, and maybe even a tax should be imposed. (2) They fail to fully tax users of alcohol fuels in transportation on a par with users of gasoline and commensurate with the benefits received from the system of national highways. (3) The tax component that corrects for the negative environmental externalities from the combustion and evaporation of alcohol in vehicles is the same as gasoline when theory and evidence suggests that it be less than for gasoline. (4) As a policy to stimulate alternative fuels, targeting alcohol subsidizes more expensive fuel when economic theory suggests that the market will determine the least expensive fuels to use. Inefficiency leads to lower national income by distorting resource allocation. Raising the price of gasoline by increasing the excise tax on gasoline would be more economically efficient tax policy.


  • English

Media Info

  • Features: Appendices; Tables;
  • Pagination: 25 p.

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Filing Info

  • Accession Number: 00803664
  • Record Type: Publication
  • Files: TRIS
  • Created Date: Dec 27 2001 12:00AM