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RCED-95-273R 1 (1995-09-14)

handle is hein.gao/gaobackyc0001 and id is 1 raw text is: AO) United States (3 O General Accounting Office Washington, D.C. 20548 Resources, Community, and Economic Development Division B-265842 September 14, 1995 The Honorable Charles E. Grassley United States Senate Dear Senator Grassley: This report responds to your request for information on the possible effects of eliminating the current tax exemption for ethanol. When blended with gasoline, ethanol (an alcohol that can be made from corn) increases octane levels and provides oxygen to reduce motor vehicle emissions. In 1994, approximately 460 million bushels of corn were used to produce about 1.1 billion gallons of ethanol. Since 1978, the federal government has promoted ethanol use primarily by exempting ethanol-blended gasoline from a portion of the federal excise tax on gasoline.' The tax exemption is scheduled to end in 2000. The Joint Committee on Taxation estimates that about $2.5 billion in tax revenues will be foregone because of the ethanol exemption from 1996 through 2000.2 Specifically, you asked us to estimate the (1) decline in ethanol use if the tax exemption is eliminated and (2) net fiscal effect on the U.S. Treasury as well as the changes in farm income resulting from the decline in ethanol use. To estimate the decline in ethanol use, we relied on the expert opinions of numerous government and industry officials. To measure the effect of changes in demand for 'The tax exemption pertains to alcohols, including ethanol, produced from renewable resources. 2In lieu of the tax exemption, an income tax credit can be used. According to the Congressional Budget Office, the tax credit is, in almost all cases, less valuable than the exemption and is rarely used. In this report, we refer to both the tax exemption and credit as a tax exemption. In addition, the Energy Policy Act of 1992 extended the tax exemption to ethanol blends of less than 10 percent. The blends receive a pro-rated tax exemption. GAO/RCED-95-273R, Ethanol Tax Exemption

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