The uncertain future of the biodiesel tax incentive

The uncertain future of the biodiesel tax incentive


The global market for biodiesel has exploded in recent years and could reach $41.18 billion by 2021. While the largest market by far is Europe, the United States is on its heels. In 2016, there was record growth of the U.S. biodiesel market, which exceeded 360 million gallons in December alone.

A biodiesel tax incentive has been instrumental in stimulating the U.S. biodiesel industry. The National Biodiesel Board reports “a clear correlation between the tax incentive and increased biodiesel production.” Since the incentive’s introduction in 2005, production of biofuel has grown from approximately 100 million gallons to more than 2.9 billion in 2016. However, the biodiesel tax credit expired at the end of 2016 and, to date, has not been reinstated.

Expired tax credit for biofuel blenders

The expired credit of $1 per gallon applied to mixtures of biodiesel and diesel fuel either sold by the producer of the mixture (the blender) to any person for use as a fuel, or used as a fuel by the blender (26 U.S. Code § 6426). In other words, companies that blended biofuel with regular fuel or diesel saved $1 per gallon on the biofuel portion of their fuel blends. Without the tax credit, fuel companies have less financial incentive to include biofuels. According to the Organisation for Economic Co-operation and Development (OECD), “Bio fuel production is not profitable [in many countries] without public support.” Production costs are “a major challenge.”

However, the tax credit has been criticized for benefitting foreign producers of biofuel. Biodiesel imports dramatically increased while the credit was in effect: “In 2015 alone, the U.S. Treasury spent more than $600 million on tax credits for imported biodiesel and renewable diesel.” Much of this fuel had already been subsidized in its country of origin, giving the imported fuel a significant price advantage over domestic biofuel. Now that the credit has expired, there are calls to level the playing field.

Potential tax credit for biofuel producers

The American Renewable Fuel and Job Creation Act of 2017, introduced in both chambers of Congress, seeks to convert the blenders credit to a producers credit and extend it through December 31, 2020. This would close the loophole the blenders credit opened, as imported biofuels would no longer receive a tax advantage over American biofuels.

The biodiesel fuels credit would be $1 per gallon of biodiesel “produced by the taxpayer which during the taxable year:

  • Is sold by the taxpayer for another person
    • For use by such other person’s trade or business as a fuel or in the production of a qualified biodiesel mixture (other than casual off-farm production), or
    • Who sells such biodiesel at retail to another person and places such biodiesel in the fuel tank of such other person
  • Is used by the taxpayer for any purposed described in paragraph (1)”

A small producer credit would also be provided: Biodiesel producers generating less than 15 million gallons per year would be able to claim an additional credit of 10 cents per gallon.

Arguments for and against making the switch

At the end of June, close to 100 American biodiesel advocates descended on Capitol Hill and urged legislators “to bring back the biodiesel tax incentive as proposed in both chambers of Congress.” They have an ally in Senator Chuck Grassley, a self-described “champion of domestic biofuel production” who hails from a major biodiesel producing state (Iowa). Grassley insists the proposed change will incentivize “investment in domestic biodiesel production” and promote “American jobs.”

In introducing the bill this spring, Grassley highlighted the complexity of the expired credit: “The blenders credit can be difficult to administer because the blending of the fuel can occur at many different stages of the fuel distribution. This can make it difficult to ensure that only fuel that qualifies for the credit claims the incentive.” It also allows abuse, he said.

Grassley maintains the credit would “continue to be passed on to the blender” and, ultimately, to consumers. Not all blenders are convinced. Clean Fuels Ohio, a nonprofit dedicated to promoting the use of cleaner domestic fuels and efficient vehicles, addressed the potentially divisive nature of the bill: “Ohio is a state with significant numbers of both biodiesel producers and blenders. The issue divides members of Clean Fuels Ohio on both sides.” For example, the Ohio Soybean Association supports the change, while the blender Benchmark Biodiesel opposes it.

How likely is enactment of a new credit?

There has been much talk of tax reform since President Trump took office, though little concrete action has been taken. The Tax Adviser predicts that “Trump’s support of the fossil fuel industry seems to indicate that tax credits for alternative fuels could fall by the wayside in tax reform legislation.”

On the other hand, Trump often talks of growing American jobs and removing incentives for foreign companies. Supporters of the American Renewable Fuel and Job Creation Act of 2017 say it would do just that. In addition, the Joint Committee on Taxation estimates that replacing the blenders credit with a producers credit would “save U.S. taxpayers $90 million as imports are reduced and domestic production grows.”

Biofuel tax credits were allowed to expire in 2009, 2011, and 2013, and all were retroactively reinstated. There is good reason to believe the credit that expired in 2016 could also return — though perhaps in a new form.

Excise tax compliance is complicated, especially when tax credits expire and are retroactively reinstated. Automating excise tax research, calculation, and filing can increase accuracy and reduce costs. Learn more.

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