(1) In 2004 this exemption, which was 5.2Â¢/gallon and was scheduledto decline to 5.1Â¢ on January 1, 2005, reduced the gasoline excise tax for "gasohol," from 18.4Â¢ to13.2Â¢/gallon. The reduction was realized at the time when the gasoline tax was otherwise imposed:typically when the fuel was loaded from the terminal onto trucks for distribution. The 5.2Â¢exemption could also be claimed later (i.e., when blenders filed their income tax return) as a 52Â¢excise tax credit per gallon of alcohol used to make a fuel mixture, which was also scheduled todecline to 51Â¢ in tandem with the exemption on January 1, 2005. (2) 
The exemption, however, which effectively lowered the excise tax on the blended fuel,reduced revenues for the Highway Trust Fund by an estimated $14, 000 million through FY2004.As a consequence, the Congress enacted the American Jobs Creation Act of 2004 ( P.L. 108-357 ),also known as the "Jobs Bill," which restructured the basic tax subsidy for alcohol fuels. However, both approaches reduce theeffective excise tax burden on each gallon of ethanol used to make a 90:10 gallon of a mixture bythe same amount -- 5.1Â¢/ gallon of a blend or 51Â¢/gallon of ethanol -- regardless of whether thereduction is called a tax credit or excise tax exemption. The reformsbecame effective on January 1, 2005. This exemption was 5.2Â¢ per gallon in 2004 and scheduled to declineto 5.1Â¢ beginning on January 1, 2005, before it is was replaced by the "alcohol mixtures excise taxcredit." Note first that there is no difference between the new excise tax credit and the old excise taxexemption in the actual excise tax paid or remitted to the Treasury (row 3): whether the reductionin taxes per gallon of a 90:10 blend is provided by the an excise tax exemption and or excise taxcredit, the amount actually paid to the Treasury is 13.3Â¢/gallon. Per gallon of ethanol the subsidy value would be 10 timesthat amount or 68Â¢/gallon, rather than 51Â¢/gallon. Table 1. Comparison of the Net, After-Tax Subsidy Value of theNew Mixtures Tax Credit With the Old Excise Tax Exemption
Notes: *Value of tax subsidy includes the tax benefits from the deductibility of the excise taxesagainst income tax liability -- a higher excise tax results in greater tax deductions and a smaller tax.This figure assumes a 25% marginal income tax rate. But, while the excise tax on gasoline alcohol blends generated billions in tax revenue, thelower tax rate due to the exemptions (a tax rate of 13.1Â¢ in 2003 due to an exemption of 5.3Â¢; a taxrate of 13.2Â¢ in 2004 due to an exemption of 5.2Â¢) meant that these blends did not generate as muchrevenue for the HTF as they would have otherwise had the ethanol blends been taxed at the same rateas pure (unblended) gasoline. Revenue Effects of the New Alcohol Fuels Mixtures Tax Credit

The substitution of a tax credit for an exemption against the excise taxes will increaserevenues to the HTF, and reduce revenues by the same amount for the general fund. Asshown in column (3), revenue losses from the new excise tax credit are projected to more thandouble by 2010 if the RFS under the Senate's version of H.R. 6 . The amounts of tax credits is 60Â¢/gallon of either ethanol and methanol. The credit for straight alcohol fuels was not amended by the jobs bill. Casual off-farm production of ethanol does not qualify for this credit. This deduction is currently little used.
Prior to January 1, 2005, alcohol fuel blenders qualified for a 5.2Â¢ tax exemption against theexcise taxes otherwise due on each gallon of blended mixtures (mixtures of 10% ethanol, and 90%gasoline). This exemption, which was scheduled to decline to 5.1Â¢ on January 1, 2005, reduced thegasoline excise tax for "gasohol," from 18.4Â¢ to 13.2Â¢/gallon. The reduction was realized at the timewhen the gasoline tax was otherwise imposed: typically when the fuel was loaded from the terminalonto trucks for distribution. The 5.2Â¢ exemption could also be claimed later, i.e., when blendersfiled their income tax return, as a 52Â¢ excise tax credit per gallon of alcohol used to make a fuelmixture (which was also scheduled to decline to 51Â¢ in tandem with the exemption on January 1,2005). This credit, however, was not as valuable as the exemption because 1) it was taxable asincome, 2) was not available instantaneously as the fuel was blended -- blenders had to wait untiltheir income tax returns were filed to reduce their tax liability by the amount of the credit, and 3) thetax credit was not refundable -- it was only available to the extent of tax liability. Because theprimary benefits from alcohol fuels were realized through an exemption rather than a tax credit,revenue losses from the exemption (or reduced excise taxes) accrued to the Highway Trust Fund(HTF).
The American Jobs Creation Act of 2004 ( P.L. 108-357 ) restructured the basic tax subsidiesfor alcohol fuels: 1) the blender's income tax credits were eliminated and 2) the blender's excise tax exemption was replaced by an "instant" excise tax credit of the same amount -- 5.1Â¢/gallon of a 90:10mixture, which is also equivalent to 51Â¢ per gallon of ethanol in the mixture. These tax reforms wentinto effect on January 1, 2005. As before, the excise tax credit is claimed against the 18.4Â¢ per gallonexcise tax on gasoline, so that the actual excise tax paid and remitted to the Treasury is 13.3Â¢ -- thetax is reduced by 5.1Â¢/gallon just as with the exemption. When income tax effects are considered,however, the new excise tax credit has a greater economic or subsidy value than the exemptionbefore it because income tax deductions are taken at 18.4Â¢ rather then 13.3Â¢. In other words, bylabeling the tax reduction as an excise tax credit rather than an excise tax exemption , the tax lawtreats the blenders as paying the full excise tax of 18.4Â¢/ gallon rather than 13.3Â¢ per gallon. At a25% marginal income tax rate, the additional 5.1Â¢ deduction is valued at 1.7Â¢/gallon of a blend or17Â¢/gallon of ethanol, which means that the total after-tax subsidy for alcohol fuel mixtures iseffectively 68Â¢/gallon of ethanol rather than the nominal rate of 51Â¢.
By nominally increasing the excise tax on gasohol by 5.1Â¢/gallon, an extra $1,500 millionin FY2006 is projected to be allocated into the HTF from the general fund, which implies that HTFexpenditures, and budget deficits can be expected to be higher than under the exemption. In additionto the alcohol fuel mixture excise tax credit there are three other federal tax subsidies that areavailable for the production and use of alcohol transportation fuels (but are little used).Comprehensive energy policy legislation H.R. 6 , as passed by the Senate, includes arenewable fuels standard that would, by 2010, more than double both the use of ethanol and therevenue loss from the new alcohol fuels tax incentives.