Springfield State Journal Register

April 3, 2003

Burning ethanol
Tax incentive reshaped in Senate committee


WASHINGTON - The Senate Finance Committee Wednesday approved a proposal to reshape ethanol tax incentives to appease highway advocates who want to generate more funds for road projects.

The bipartisan plan would redirect, but not eliminate, incentives for refiners to use corn-based ethanol in blending gasoline.

The highway lobby had sought to kill the tax break for refiners in order to increase funds for road building, but agreed to the compromise because it would add $1.4 billion more a year to the Highway Trust Fund.

"It makes common sense for ethanol taxes to contribute just as much to building highways as traditional gasoline taxes," said Senate Finance Committee Chairman Charles Grassley, R-Iowa, a major ethanol supporter who negotiated the compromise. "It isn't logical for a smaller portion of ethanol taxes to contribute to highways than the taxes from traditional gasoline. All types of vehicle fuel taxes should contribute equally to highway construction and maintenance."

Highway advocates, including House Transportation Committee Chairman Don Young, R-Alaska, had been considering eliminating the ethanol tax incentive as a way to increase revenues for much-needed highway improvements.

"This really relieves the pressure" on ethanol, said Monte Shaw, spokesman for the Renewable Fuels Association. "The only thing people like better than ethanol is building roads and bridges."

Almost one in every five rows of Illinois corn last year was sold to produce ethanol.

The compromise plan, which was approved 18-2 by the committee, was praised by groups on both sides of the issue, from the National Corn Growers Association to the American Road & Transportation Builders Association.

The agreement "unites a broad constituency group who in the past has not seen eye to eye on many issues," said Jon Doggett, NCGA vice president for public policy.

The agreement is expected to be wrapped into an energy bill being written in another committee before it comes to the Senate floor for a vote later this spring.

Supporters say a similar provision is expected to be introduced in the House.

Gasoline blended with ethanol to reduce pollution is taxed 13.2 cents per gallon, while the rate imposed on regular gasoline is 18.4 cents per gallon.

The compromise proposal would replace the current ethanol excise tax exemption with a new ethanol tax credit, shifting the cost of the ethanol incentive from the Highway Trust Fund to the general fund. Refiners and gasoline marketers would claim the ethanol tax credit when they file their quarterly excise taxes.

Under the plan, the entire 18.4-cents-per-gallon excise tax on ethanol would flow into the Highway Trust Fund, while the 5.2-cents-per-gallon tax credit would result in a loss of revenue to the general fund.

The change would have virtually no financial impact on refiners and gasoline marketers and so would continue to provide an incentive for them to use ethanol, supporters said.

Grassley worked out the compromise with Montana Sen. Max Baucus, the senior Democrat on the committee, as well as Sens. Tom Daschle, D-S.D., and Jim Jeffords, a Vermont independent.

In another victory for the road lobby, the compromise plan would shift 2.5 cents of the current 13.2-cent ethanol tax that currently goes to the general fund to the Highway Trust Fund. President Bush supported that shift in his fiscal 2004 budget proposal to Congress. The shift would add another $600 million a year to the Highway Trust Fund.

The Senate committee also approved another high-priority item for ethanol supporters. The bill would fix a technical glitch that makes it difficult for farmer-owned cooperative ethanol plants to participate in the program that provides a 10-cent-per-gallon tax credit for the first 15 million gallons of production by a small plant.

If enacted, the provision would give each farmer-owner of a small cooperative a 10-cent-per-gallon tax credit on his share of the company's production in any given year. A small producer would be defined as one who produces 60 million gallons a year, up from the current 30 million gallons. Farmer-owned plants now routinely produce 40 million to 50 million gallons a year.

The bill also would extend tax credits for wind energy and biomass production, provide an income tax credit and excise tax rate reduction for biodiesel mixtures, create a production tax credit for electricity generated from animal waste, and establish a tax credit for manufacture of more energy-efficient washing machines and refrigerators.

Meanwhile, the House Energy and Commerce and Senate Environment and Public Works committees are working on energy bills that would require a large-scale increase in ethanol production.

Last year, the Senate passed a bill that would have required 5 billion gallons of ethanol or other renewable fuels to be produced by 2012. But the bill died in negotiations with the House, which had no such mandate. This year, for the first time, the bill advanced by House Energy and Commerce Chairman Billy Tauzin, R-La., contains a mandate calling for ethanol production of 5 billion gallons by 2015. The ethanol industry produced 2.1 billion gallons in 2002.