Federal Fuel Ethanol Tax Incentives

GAO discussed tax incentives to promote the development of the domestic fuel ethanol industry. Gasohol, a blend of ethanol and gasoline, is partially exempt from the federal gasoline excise tax. In addition, many states provide exemptions for gasohol from state excise taxes. GAO noted that the fuel ethanol industry appears to be dependent on tax incentives because of the disparity between the prices of gasoline and gasohol. While technological advances could decrease the cost of ethanol production, it is believed that such reductions will be marginal if corn remains the primary feedstock for ethanol production. However, there is some likelihood that demand will increase for ethanol as a component of high octane gasoline. GAO also noted that the fuel ethanol industry has had a limited impact on the economy because the demand for gasohol as a percentage of total demand for gasoline is very small. However, GAO estimated that demand for fuel ethanol caused slight increases in farm income and the national average price of corn and decreased the national average price of soybeans. GAO stated that effects on local markets around ethanol plants can be more dramatic. Finally, GAO noted that the overall impact of the fuel ethanol industry on oil imports has been very small, also because the industry's output represents a small fraction of total gasoline demand.