Importance and Impact of Federal Alcohol Fuel Tax Incentives

GAO discussed issues related to the federal alcohol fuel tax incentives. Specifically, GAO addressed the importance of federal tax incentives to the ethanol industry and the impact of the production of ethanol on agriculture, the federal budget, international trade, national energy security, and other energy industries.

GAO found that federal tax incentives have been vital to the establishment and development of the domestic fuel ethanol industry and, without a subsidy, ethanol could not compete with current gasoline prices and would not be used as a fuel. GAO determined that the ethanol industry has had only a modest impact on the domestic economy, international trade balance, and national energy security. Stockpiling ethanol fuel could reduce U.S. vulnerability to an oil supply disruption. However, GAO questioned the cost effectiveness of stockpiling ethanol fuel. In addition, GAO found that the total value of tax subsidies received by conventional oil and gas industries has historically been much greater than that received by the fuel ethanol industry and other alternative energy sources. Since the conventional fuel industries benefit from these tax subsidies, GAO believes that to withdraw support for the fuel ethanol industry would be inconsistent. GAO determined that continuing the tax incentives until their scheduled expiration date in 1992 would be appropriate because the private sector has invested considerably in fuel ethanol plants with the expectation that the market for the fuel would continue until 1992. GAO concluded that increasing the tax incentives could not be justified because combined federal and state incentives are adequate to make ethanol competitive and suggested that the incentives be reviewed periodically.