Understanding the Ethanol Subsidy

How the Federal Government's Primary Ethanol Subsidy Works

Gas pump showing prices for Iowa ethanol alternative fuel
Ethanol Prices Soar as Drought Hits Corn Crop. Justin Sullivan / Getty Images

The primary ethanol subsidy offered by the federal government is a tax incentive called the Volumetric Ethanol Excise Tax Credit, which was passed by Congress and signed into law by President George W. Bush in 2004. It took effect in 2005.

The ethanol subsidy, which is commonly referred to as the "blender's credit," offers ethanol blenders registered with the Internal Revenue Service a tax credit of 45 cents for every gallon of pure ethanol they blend with gasoline.

That particular ethanol subsidy cost taxpayers $5.7 billion in foregone revenues in 2011, according to the U.S. Government Accountability Office, the nonpartisan congressional watchdog agency.

Debate Over the Ethanol Subsidy

Supporters of the federal ethanol subsidy argue that it encourages production and use of the biofuel and thereby reduces the amount of foreign oil needed to produce gasoline, a step toward energy independence.

But critics argue that ethanol burns far less efficiently than gasoline, driving up fuel consumption and that it increases demand for corn for fuel and artificially boosts the cost of farm commodities and retail prices of food.

They also say such an incentive is unnecessary because legislation enacted in 2007 requires oil companies to produce 36 billion gallons of biofuels such as ethanol by 2022.

"While born of good intentions, federal subsidies for ethanol have failed to achieve their intended goals of energy independence," U.S. Sen. Tom Coburn, a Republican from Oklahoma and leading critic of the ethanol subsidy, said in 2011.

The effort to Kill the Ethanol Subsidy

Coburn led an effort to repeal the ethanol subsidy in June of 2011, saying it was a waste of taxpayer money - he said the Volumetric Ethanol Excise Tax Credit cost $30.5 billion from 2005 through 2011 - because consumption remained only a small part of the country's fuel use.

His effort to repeal the ethanol subsidy failed in the Senate by a vote of 59 to 40.

"While I'm disappointed my amendment did not pass, taxpayers should remember that when I offered an amendment to defund the Bridge to Nowhere in Alaska in 2005 we lost that vote 82 to 15," Coburn said in a statement. Over time, however, the will of the people prevailed and Congress was forced to scale back this wasteful and corrupting practice.

"Today, the earmark favor factory is mostly closed. Only the tax division remains open. I'm confident this debate, and many more ahead, will expose the tax code for what it is - an abomination that favors the well-connected over working families and small businesses."

History of the Ethanol Subsidy

The Volumetric Ethanol Excise Tax Credit ethanol subsidy became law on Oct. 22, 2004, when President George W. Bush signed the American Jobs Creation Act into law. Included in that piece of legislation was the Volumetric Ethanol Excise Tax Credit.

The initial bill gave ethanol blenders a tax credit of 51 cents for every gallon of ethanol they mixed with gasoline. Congress reduced the tax incentive by 6 cents per gallon as part of the 2008 Farm Bill.

According to the Renewable Fuels Association, gasoline refiners and marketers are required to pay the full rate of tax, which is 18.4 cents per gallon on the total gasoline-ethanol mixture but can claim the 45 cents per gallon tax credit or refund for each gallon of ethanol used in the mixture.

The ethanol subsidy benefits multibillion-dollar integrated oil companies such as BP, Exxon, and Chevron.

The First Ethanol Subsidy

  • The Energy Policy Act of 1978 was the first federal legislative ethanol subsidy. It allowed for a 40-cent tax exemption per gallon of ethanol, according to Purdue University.
  • The Surface Transportation Assistance Act of 1982 increased the tax exemption to 50 cents per gallon of ethanol.
  • The 1990 Omnibus Budget Reconciliation Act extended the ethanol subsidy to 2000 but decreased the amount to 54 cents a gallon.
  • The 1998 Transportation Efficiency Act of the 21st Century extended the ethanol subsidy through 2007 but reduced it to 51 cents per gallon by 2005.
  • Bush's signature on the Jobs Creation Act changed the way the modern ethanol subsidy worked. Instead, it offered a straight tax credit to producers, the legislation allowed for the "blender's credit."

President Trump Protects the Ethanol Subsidy

During his 2016 campaign, President Donald Trump came out as one of the ethanol subsidy’s strongest supporters. Speaking in Iowa, where corn is king, on January 21, 2016, he said, “The EPA should ensure that biofuel . . . blend levels match the statutory level set by Congress,” adding that he was “was “there with you [farmers] 100 percent” on continuing federal subsidy for ethanol. “You’re going to get a really fair shake from me.”

After Trump took office in January 2017, all seemed well with the ethanol subsidy until early October, when his own EPA administrator Scott Pruitt announced that the agency was considering lowering the EPA-mandated subsidy payment level for ethanol “slightly” in 2018. The suggestion sent shockwaves through the Corn Belt and its Republican congressional protectors. Iowa Sen. Chuck Grassley accused Trump of a “bait and switch,” in reference to his empathic campaign promise. Grassley and Iowa’s other Republican senator, Joni Ernst, threatened to block all of Trump’s future EPA appointments. The governors of most Corn Belt states joined in sending Trump warning him than any cutback in the Renewable Fuel Standard program’s subsidies would be “highly disruptive, unprecedented and potentially catastrophic.”

Faced with the potential loss of influence over some of his strongest congressional backers, Trump quickly told Pruitt to back off any future talk of cutting the ethanol subsidy.

On July 5, 2018, Pruitt resigned amid multiple accusations of ethics violations involving his excessive and unauthorized personal use of government funds. He was replace within hours by EPA deputy director Andrew Wheeler, a former lobbyist for the coal industry.  

COVID and the Ethanol Industry

Similar to other travel and transportation-related industries, the American ethanol industry suffered greatly from the COVID-19 pandemic. According to the Renewable Fuels Association, the industry lost an estimated $4 billion in revenue in 2020 and would continue to lose money as the pandemic endured into 2021. Today, many ethanol plants remain closed and transportation fuel demand is falling as additional economic shutdowns occur in many states.

In the final days of 2020, however, Congress passed another coronavirus relief bill providing approximately $900 billion in spending across a variety of sectors. The package includes $11.2 billion in relief to be distributed by the Office of the Secretary of the United States Department of Agriculture, giving newly appointed Tom Vilsack discretion to provide support to biofuel producers. Specifically, the bill states that the Secretary “may make payments to producers of advanced biofuel, biomass-based diesel, cellulosic biofuel, conventional biofuel, or renewable fuels with market losses due to COVID-19.”

The bill includes $13 billion for the USDA to support agriculture and specifically allows for payments to producers of advanced biofuel, biomass-based diesel, cellulosic biofuel, conventional biofuel, or renewable fuel.

In addition, the bill extended several biofuels tax credits including a one-year extension of the biofuel producer tax credit, a $1.01 credit per gallon of second-generation biofuel produced

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Murse, Tom. "Understanding the Ethanol Subsidy." ThoughtCo, Sep. 4, 2021, thoughtco.com/understanding-the-ethanol-subsidy-3321701. Murse, Tom. (2021, September 4). Understanding the Ethanol Subsidy. Retrieved from https://www.thoughtco.com/understanding-the-ethanol-subsidy-3321701 Murse, Tom. "Understanding the Ethanol Subsidy." ThoughtCo. https://www.thoughtco.com/understanding-the-ethanol-subsidy-3321701 (accessed March 22, 2023).