GAO Report: Ethanol Tax Credit Is Unnecessary, Costly

By Susan Daker
Of DOW JONES NEWSWIRES

HOUSTON (Dow Jones)--The investigative arm of the U.S. Congress said a federal tax incentive granted to ethanol blenders is unnecessary and may no longer be needed to stimulate the production of corn-based fuel.

In a report released Friday, the Government Accountability Office said the 45-cent-per-gallon federal tax credit is costing the Treasury billions of dollars in revenue, while advances in ethanol technology and a government mandate to boost production of renewable fuels make the subsidy unnecessary and redundant. The GAO also suggested that Congress address the potential environmental impact of increased biofuels production.

The news deals a new rhetoric blow to the domestic ethanol industry, which has had trouble making profits despite a surge in the use of vegetable-based fuel. Moreover, ethanol producers and blenders have had to face criticism from environmentalists and economists who argue that fuel made out of corn increases the price of foodstuffs, and is unlikely to be a long-term, viable alternative to fossil fuels.

Biofuel industry representatives said the incentive has been effective in developing the ethanol industry. Matt Hartwig, spokesman for the Renewable Fuels Association in Washington D.C., said the credits should stay in place.

"Which direction does the country want to go - more petroleum or more renewable fuels?" said Hartwig, noting the petroleum industry receives favorable tax treatment from the government.

The U.S. Department of Agriculture called the report "too negative," though it did not dispute most of its findings, according to a letter from the agency to the GAO.

Unless crude prices skyrocket this year, the tax credit won't stimulate more ethanol production than that spurred by the federal mandate, known as the Renewable Fuel Standard, the report said. The standard requires that 10.5 billion gallons of renewable fuels be blended into gasoline this year, with the amount growing to 36 billion gallons by 2022. It means that most of the gasoline currently sold in the U.S. contains up to 10% ethanol.

Taking the credit away means there won't be much incentive for major oil companies to blend ethanol into gasoline, said Jerrod Kitt, an ethanol analyst with Linn Group Inc., a commodities brokerage at the Chicago Board of Trade.

"What it will end up doing, it will raise the price at the pump and hurt the American consumer," Kitt said.

The report also said the ethanol industry has matured and the production process is well-understood. However, the development of more advanced biofuels - made from nonfood sources such as switchgrass, algae or agricultural waste - is still risky. There is a separate $1.01-per-gallon tax credit for the production of cellulosic biofuel.

"The [ethanol tax credit] was important in helping to create a profitable corn starch ethanol industry when the industry had to fund investment in new facilities," the report said. "It is less important now for sustaining the industry because most of the capital investment has already been made - ethanol production can now be profitable as long as the revenue that producers receive is sufficient to cover operating costs and depreciation."

At the same time, the U.S. Treasury lost $4 billion in 2008 on the tax credit and could lose $6.75 billion in 2015, the report said.

The nonpartisan study by the Government Accountability Office was requested by Senators Susan Collins, R-Maine, and Barbara Boxer, D-Calif., the chairwoman of the Committee on Environment and Public Works.

-By Susan Daker, Dow Jones Newswires; 713-547-9208; susan.daker@dowjones.com