ATR Explains Ethanol Credits & Their Tax Effects


Posted by Brian M. Johnson on Tuesday, January 27th, 2009, 12:15 PM PERMALINK


THE TAX TRUTH BEHIND REPEALING ETHANOL CREDITS

In an effort to create an “all of the above” approach to energy solutions, some organizations (in an earnest attempt to try to be helpful) have recently proposed legislation that centers on repealing Internal Revenue Code (IRC) Section 40(h), the Reduced Credit for Ethanol Blenders, for U.S. energy manufacturers.

Unfortunately, this corporate tax credit has been labeled as a “subsidy”, which confuses an income tax credit with spending. The “tax subsidy” concept is an invention of the Left. It is meant to distort an otherwise clear distinction between taxes and spending. Regardless of its effects on energy policy, this remains a corporate income tax credit.

Current law provides an income tax credit for the production of blended ethanol fuel. This credit is scheduled to expire at the end of 2010. All ethanol reform proposals include reducing or eliminating this income tax credit. This may have implications for the Taxpayer Protection Pledge.

34 Senators and 172 Congressmen have signed the Taxpayer Protection Pledge. In so doing, they promised to their constituents and the American people that they would “oppose any net reduction or elimination of deductions or credits…”

Repealing the ethanol credit IS A CORPORATE INCOME TAX INCREASE and is therefore a PLEDGE VIOLATION unless the increase is offset completely with other income tax cuts.

ATR continues to oppose the current federally mandated use of expensive, inefficient domestic corn ethanol while taxing more efficient, imported ethanol made from sugar cane. This harms both the consumer seeking to purchase ethanol and consequently increases the price of food. However, any attempt to remove this income tax credit must be addressed while remaining tax revenue neutral.

Note: Budget neutrality (which is concerned with deficits) has no role in determining applicability of the Pledge. Rather, tax revenue neutrality (as scored by the JCT) is the only relevant metric for the purposes of the Pledge.

For more information, contact tax policy director Ryan Ellis at rellis@atr.org or federal energy analyst Brian Johnson at bjohnson@atr.org

View the PDF version.

More from Americans for Tax Reform

hidden
×