Summary

In the late 1970s and early 1980s, Congress enacted tax incentives for biomass-derived alcohol fuels. Proponents maintained that the incentives would reduce U.S. dependence on petroleum imports and would provide an additional market for U.S. agricultural products. Subsequent environmental legislation has boosted the demand for alcohol fuels, which are blended with gasoline to increase its oxygen content in areas of the country with mandatory minimum oxygen requirements for transportation fuel. In recent months, Congress has debated the need for continuing the tax incentives for alcohol fuels. This report answers the following questions on tax incentives for alcohol fuels: Whom do the incentive benefit and harm economically? What environmental benefits have the incentives produced? Have the incentives increased the nation's economic independence? To what extent has the partial exemption from the excise tax for alcohol fuels reduced the flow of revenue into the Highway Trust Fund?

GAO found that: (1) the value of the ethanol tax incentives is shared among different groups in the economy, including alcohol fuel blenders, ethanol producers, and corn farmers; (2) according to the analysts GAO contacted or whose work GAO read, the tax incentives allow ethanol to be priced to compete with substitute fuels; (3) without the incentives, ethanol fuel production would largely discontinue; (4) by raising the prices for corn and soybeans, the tax incentives may cause farmers who raise livestock to pay higher prices for feed; (5) the recent changes in government farm policy may cause farmers' responses to price changes to differ from historical experience because farmers' planting decisions will now be based more on market forces than on government programs; (6) the producers of some fuels may be adversely affected because increased competition from ethanol may cause the producers of these fuels to lower their prices, however, the available evidence indicates that the decrease in the price of a gallon of fuel is likely to be small; (7) the price decrease that adversely affects producers will benefit the consumers of these fuels; (8) the price increases that benefit farmers may adversely affect the consumers of some food products; (9) available evidence, including the views of analysts GAO interviewed, indicates that the ethanol tax incentives have had little effect on the environment; (10) the substitution of other fuels for ethanol, if the tax incentives were removed, would likely have little effect on air quality given current technologies for ethanol production; (11) according to analysts GAO interviewed, if ethanol use were eliminated there would likely be small changes in emissions in areas which already meet existing air quality standards that would have both positive and negative effects on air quality; (12) the effect on global environmental quality through changes in greenhouse gas emissions that would occur if ethanol fuel were not subsidized is likely to be minimal; (13) although available evidence suggests that the tax incentives for alcohol fuels increase ethanol fuel use, it also indicates that these incentives do not significantly reduce petroleum imports and, therefore, the tax incentives do not significantly contribute to U.S. energy independence; (14) more importantly, ethanol tax incentives have not significantly enhanced U.S. energy security because the tax incentives have not created enough usage to reduce the likelihood of oil price shocks and their consequences; and (15) GAO estimates that the partial exemption for alcohol fuels reduced motor fuels excise tax revenues by about $7.1 billion from fiscal years 1979 to 1995.