The Ethanol Tax Credit and Sound Tax Policy

June 16, 2011

Rejecting principles of sound tax 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 credit 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 Tax 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 expenditure, 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.

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A 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.

A 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.