No More Ethanol Tax Break

By Will Nissen, Fellow, January 9, 2012 at 4:00 pm

At the end of 2011, policymakers in Washington allowed a long-standing 45 cent-per-gallon tax credit on corn-based ethanol expire. Just for future reference it was called the Volumetric Ethanol Excise Tax Credit (VEETC). While the credit helped buoy and support a fledgling emerging technology that, although controversial, provides a transportation fuel option that is not oil, it’s time for ethanol to stand on its own.

The biggest reason we can live without the ethanol tax credit? The industry doesn’t need it. Leading up to the New Year the ethanol industry’s biggest lobbyist, Growth Energy, publicly stated that although the tax credit was critical in getting corn-based ethanol off the ground, the industry needs a competitive open fuels market without tax credits or subsidies.

Another reason is that the recipients of the tax credit are often the oil companies that own and blend the fuel sold at gas stations. Farmers in the Midwest, including Minnesota, who provide the corn used in ethanol blends usually don't get the roughly $6 billion annual tax break realized by the VEETC. However, demand for corn does raise commodity prices significantly.

The ethanol tax credit highlights the benefits of early government investment in emerging technologies that might otherwise fail to reach the market. The private sector can achieve amazing feats of production and innovation through economies of scale, open competition and meeting market demands. But its driving force behind these feats is also what hinders it when it comes to emerging technologies: profit motive.

Many emerging techs are simply not an economically profitable investment at their outset. They're competing against dominant industry players that have established infrastructure, technology and market share. In some cases, public investment from previous generations fueled this dominance.

In ethanol's case, early public investment played a key role in helping the new and promising technology emerge, now it's ripe for private investors. (One example that comes to mind is the Internet.)

Corn-based ethanol no longer needs tax breaks to remain a competitive and viable industry. The billions of dollars lost every year to the credit could support research and development in other emerging alternative energy technologies or fund energy efficiency programs right here in Minnesota.