By DOUG SCHMITZ
Iowa Correspondent URBANA-CHAMPAIGN, Ill. — With a 45-cent-per-gallon incentive on ethanol blenders set to expire at the end of next month, University of Illinois at Urbana-Champaign agricultural economists have developed a proposal for a variable incentive program they said could save U.S. taxpayers more than $13 billion.
“There are proposals that would eliminate the tax credit entirely and others to keep it exactly as is,” said Scott Irwin, ag economist. “We decided to take a look at a different form of a tax credit that would be keyed to the incentives of the blenders themselves, rather than just giving them a fixed amount of tax credit regardless of the economics of blending.”
Since the late 1970s, tax incentives have been in place for the blending of ethanol in gasoline supplies, he said. Before 2009, the incentive was 51 cents per gallon on domestically produced and blended ethanol.
Last year, the incentive was lowered to 45 cents, with a corresponding tariff of 54 cents per gallon on imported ethanol, which negates the tax credit, Irwin added. Currently, he said, the tax credit incentive arrangement is a direct payment with considerable expense associated with it, which would be about $4 billion-$5 billion per year.
Produced by Irwin and fellow UoI ag economists Darrel Good and Mindy Mallory and published on the UI’s farmdoc website, Irwin said the proposal attempts to more efficiently target the incentives to the blenders of ethanol when it’s needed. One example he cited is targeting the blenders’ credit to the price of crude.
“When the price of crude oil is very high, blenders might not need a credit, and when it is very low, they may need a large credit as an incentive to blend ethanol,” he said.
“The problem is that there is quite a bit of volatility among energy prices.”
Irwin said subtracting the price of ethanol from the price of gasoline can give a measure for the incentives to blend ethanol. “When that number is positive, that means ethanol is cheaper than gasoline and so blenders will want to include it in the gasoline at the retail supply,” he said. “When that number is negative, that means that the price of ethanol is higher than the price of gasoline, and you wouldn’t want to use ethanol in terms of the basic market economics. So, we key our rule to zero.
“Whenever that margin is negative, meaning that they would otherwise not want to blend ethanol, that’s when the blenders’ credit kicks in,” he explained. “The credit is a maximum of the current 45 cents per gallon. So our proposal is to cover negative margins up to 45 cents per gallon and nothing above zero.”
Since 2007, the UoI team found the current fixed-rate policy cost U.S. taxpayers about $15 billion. “Our proposed new variable blender’s rate credit would only cost about $2.5 billion,” Irwin said.
“These are just rough estimates because we’re just running the numbers backwards historically, not accounting for the fact that when you change the rules of the game like this, people can change their behavior.”
But Mindy Larsen-Poldberg, government relations director at the Iowa Corn Growers Assoc. and the Iowa Corn Promotion Board, said the UoI report is actually misleading on many levels.
“Since its inception, the ethanol blender’s credit was designed to enhance the production and use of ethanol, and has been a fixed rate per gallon,” she said. “The U of Illinois proposal covers up the real challenge facing lawmakers today: Will the domestic ethanol industry remain economically viable and domestically produced?”
A recent study by John Urbanchuck, technical director at Entrix in Houston, Texas, indicated the Renewable Fuel Standard (RFS) alone “wouldn’t ensure a reliable supply, and more importantly, one produced in the U.S.,” Larsen-Poldberg said.
“By encouraging and incentivizing production of ethanol in the United States, Volumetric Ethanol Excise Tax Credit’s market-based structure ensures the RFS volume requirements will be filled mostly with homegrown fuel,” she said.
Larsen-Poldberg added that models by Iowa State University’s Food and Agricultural Policy Research Institute predict a decline in domestic ethanol production following down ethanol markets would, in turn, raise ethanol prices “thereby offsetting the full reduction of the tax credit, so that the total impact on ethanol prices would be slightly smaller than the full amount of the tax credit.”
According to Larsen-Poldberg, eliminating the tax credit would result in lost jobs (more than 112,000 in all sectors), lower gross domestic product by an estimated $16.9 billion and household income by an estimated $4.2 billion, and reduce tax revenue (state and local by $2.7 billion and federal, by $2.4 billion).
“As corn growers who produce corn for ethanol production, we realize the vital value-added ethanol industry and will continue to work to ensure that tax credits that sustain the ethanol industry are supported,” she said.
Comparing the UoI plan to Congress reapproving the 45 cent blender’s credit, Larsen-Poldberg said, “Simply put, the extension of the blender’s credit would keep ethanol production in the U.S., provide jobs for American workers and keep our ethanol, corn farmers and U.S. economy afloat.” To read the report, Could a Variable Ethanol Blenders’ Tax Credit Work? visit www.farmdoc.illinois.edu/policy/apbr/apbr_10_01/apbr_10_01.html |
