Little impact if U.S. ethanol tax breaks end: Study

WASHINGTON Tue Jul 20, 2010 2:55pm EDT

WASHINGTON (Reuters) - U.S. ethanol production would drop a modest amount if tax incentives costing $6 billion a year are eliminated, a think tank at Iowa State University said on Tuesday.

The incentives -- a 45-cent a gallon excise tax credit for U.S.-made ethanol and a 54-cent a gallon tariff on imports -- are scheduled to expire at the end of the year. Almost all fuel ethanol is distilled from corn

Imports would remain at low levels if the tariff is removed, said the study by the Center for Agricultural and Rural Development(CARD), and domestic output in 2011 would be 700 million gallons, or roughly 6 percent, lower than with the tax credit.

CARD said U.S. consumption of ethanol primarily is set by a 2007 law that guarantees renewable fuels a share of the motor fuel market -- 12.95 billion gallons this year and rising to 36 billion gallons from 2022, with advanced biofuels to supply 21 billion gallons of it. Ethanol production has tracked the mandate in recent years because of the economic slowdown.

The U.S. market for fuel ethanol is saturated at present and Brazilian demand for the fuel is strong, so elimination of the tariff would have little impact on U.S. imports, said CARD.

If the tax credit ends and ethanol output drops slightly, corn prices would be 23 cents a bushel lower, said CARD.

The major effect of the tax credit, which goes to blenders who mix the renewable fuel with gasoline, is to encourage production above the mandated levels, said CARD.

"Elimination of the tax credit would shift the burden of meeting mandates from taxpayers to blenders and consumers," it said. "Taxpayers would save more than $6 billion through elimination of the tax credit, or almost $7 per gallon."

Analyst Mark McMinimy of the consultants Washington Research Group said a short-term extension -- one or two years -- of the tax credit and possibly at a lower rate "appears most likely" on Capitol Hill.

Foodmakers and environmentalists say the incentives are wasteful. They held a telephone news conference on Monday to call for an end to the incentives.

"We think it will have a moderating effect on corn prices," said J Patrick Boyle, head of the American Meat Institute, a trade group for meatpackers. In turn, it would hold down meat prices, said Boyle.

Ethanol trade groups and farm groups generally support a long-term extension of the ethanol incentives. One group, Growth Energy, suggested last week that the credits be converted into supports for ethanol pipelines and "blender" pumps and then phased out.

The study, "Costs and Benefits to Taxpayers, Consumers, and Producers from U.S. Ethanol Policies," is available on the Internet at wwww.card.iastate.edu.

(Reporting by Charles Abbott; Editing by Sofina Mirza-Reid)

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