The Volumetric Ethanol Excise Tax Credit: History and Current Policy

The Volumetric Ethanol Excise Tax Credit: History and Current Policy

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The Volumetric Ethanol Excise Tax Credit (VEETC) is the largest subsidy to corn ethanol, the most common biofuel in the U.S. The tax credit is worth 45 cents per gallon of ethanol blended with gasoline, costing U.S. taxpayers $5.16 billion in 2009. Congress began subsidizing ethanol during a fuel shortage in the late 1970s by exempting gasoline blended with ethanol from gasoline excise taxes and establishing a tax credit for ethanol use. In 2004, the American Jobs Creation Act implemented the VEETC to replace these two historical subsidies as a combined excise tax exemption and tax credit.

Ethanol and the VEETC

The inflated value of corn also encourages large-scale agriculture that may not be environmentally sustainable. In addition, ethanol refineries use large amounts of fossil fuels to distill ethanol and turn it into a usable product, making ethanol’s ability to reduce greenhouse gas emissions questionable.

VEETC Does Not Encourage Ethanol Production

Because of the impacts of the Renewable Fuels Standard, various government agencies agree that the VEETC is no longer needed to encourage ethanol production. The Congressional Research Service (CRS) has indicated that the RFS will increase demand for ethanol. Accordingly, the Government Accountability Office (GAO) concludes that since the RFS guarantees a market for corn ethanol, taxpayers no longer need to support ethanol through the VEETC.

Based on current ethanol production levels, GAO projects that the VEETC does not stimulate ethanol production beyond the government mandate. The CBO supports this conclusion, finding that the RFS mandate determines production levels and so the VEETC no longer increases production. As a result, removing the VEETC would not lower demand for corn ethanol, the income of corn growers or the income of ethanol refiners—the main party affected would be large oil companies that blend ethanol with gasoline. Furthermore, GAO concludes that subsidies cannot be legitimized to establish or expand the ethanol industry, which has already invested in production facilities and is capable of meeting RFS requirements. GAO notes that many economists now agree that the VEETC should be phased out or eliminated altogether.

It’s Time to Let VEETC Expire

The VEETC subsidizes large oil and gas companies who blend ethanol with gasoline. Ethanol producers and blenders already benefit from government mandates and small producer credits; the VEETC only adds to the layers of subsidies for corn ethanol. If the VEETC is not phased out or eliminated, the GAO estimates it will cost taxpayers $6.75 billion a year by 2015, when the RFS mandates that up to 15 billion gallons of corn ethanol be blended with U.S. gasoline. Congress should stop the bottomless pit of subsidies for the ethanol industry and immediately end the VEETC and save taxpayers

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Year Escalating Cost of VEETC to Taxpayers
2006 $3,340,000,000
2008 $5,160,000,000
2010 $21,560,000,000

For more information, please contact Autumn Hanna (202) 546-8500 x112 or Autumn [at] taxpayer.net.

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