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The Ethanol Tax Credit and Sound Tax Policy

1 min readBy: Jason Sapia

Rejecting principles of sound taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy is as easy as 1, 2, 3. Or in this case 59-40.

Senator Coburn’s (R-OK) efforts to repeal the ethanol tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. before its December 31 expiration date was rejected 59-40 earlier this week, stalling any debate on the immediate future of the Volumetric Ethanol Excise TaxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. Credit (VEETC) signed into law under the American Jobs Creation Act in 2004.

“Instead of protecting taxpayers by reducing our deficit and lowering food prices, many senators chose to protect the desire of Senate leaders to avoid tough issues,” Coburn stated in his response to the failed vote for early repeal. “The Senate’s refusal to save taxpayers $3 billion by ending an ethanol subsidy the beneficiaries themselves don’t want highlights the incompetence and dysfunction of this body.”

The VEETC is a tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit (EITC), child tax credit (CTC), deduction for employer health-care contributions, and tax-advantaged savings plans. , essentially government spending funneled through the tax code, that provides a tax credit of $.45 for each gallon of ethanol that is blended with gasoline. It creates an artificial demand for ethanol and leads to inflated corn and food prices worldwide. This market distortion is bad for consumers and violates a basic principle of sound tax policy: neutrality. As Coburn noted, “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.”

Sound tax policy should be based more on careful economic analysis that generally does not interfere with a free marketplace. Repealing the ethanol tax credit brings us one step closer to this.