Saturday, April 15, 2006

Iowa Fuel Tax Credits: Popular Legislative Folly?

The Iowa House voted 97-1 this week to provide tax credits to Iowa retailers of motor fuels who meet certain targets at marketing ethanol-based fuels. The legislation, H.F. 2754, is designed to move Iowa consumers toward a goal of using targeted percentages of ethanol-based (renewable) fuels. By 2009, the target is 10 percent from renewable fuels; by 2019, the target is 25 percent. (Source: 4/14/06 BNA Daily Tax Report).

The credits reward stations who sell more than the targeted amount, thus giving them an incentive to lower prices and pass this along to consumers who choose ethanol-based fuels.

This legislation is politically popular, as evidenced by overwhelming approval. (I can think of few issues of significance where 97 legislators would agree with one another.) Environmentalists, farmers, ethanol investors (there are getting to be more of these), and those favoring energy independence all think that renewable fuels are good ideas. But in light of that, why do we need to incentivize their purchase with a tax credit?

Furthermore, what is rational about a targeted rate of 10 percent, 25 percent, or any percent, particularly when we are talking about conditions years from now? In a time of technological change, government should wait and let markets sort out which technology will prevail. (One point to be noted here: it takes about 1.56 gallons of E-85 ethanol to produce the same energy as gasoline. Thus, even with an ethanol blend, you need a considerable price advantage to make up for the lowered fuel efficiency.)

This bill seems like good politics, but bad policy. And this opinion comes from someone who satisfies three of the four categories mentioned above. (OK, if you are curious, I not an ethanol investor.)


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