WASHINGTON – Sen. Chuck Grassley today is advancing his bipartisan proposal to reshape the ethanol excise tax exemption – along with a number of pro-Iowa renewable energy tax incentives – so that ethanol-blended fuels make the same contribution to the highway trust fund as regular gasoline while also retaining an important incentive to promote the use of domestic, renewable fuels.

"It makes common sense for ethanol taxes to contribute just as much to building highways as traditional gasoline taxes," Grassley said. "It isn't logical for a smaller portion of ethanol taxes to contribute to highways than the taxes from traditional gasoline. All types of vehicle fuel taxes should contribute equally to highway construction and maintenance."

Grassley is chairman of the Senate's tax-writing Finance Committee. He included his ethanol proposal, co-sponsored by Sen. Max Baucus, ranking member of the Finance Committee, and committee members Sens. Tom Daschle, the Senate Democrat Leader, and Jim Jeffords, the ranking member of the Committee on Environment and Public Works, in his chairman's version of comprehensive energy tax legislation under consideration by the committee this morning.

This overall legislation – the Energy Tax Incentives Act of 2003 – contains a series of Grassley-sponsored pro-Iowa tax incentives encouraging alternative and traditional energy production and conservation and energy efficiency.

The bill includes extension of the wind-energy tax credit Grassley authored in 1992. The legislation also extends the tax credit for biomass production; provides an income tax credit and excise tax rate reduction for biodiesel fuel mixtures; helps smaller, cooperative ethanol producers; creates a production tax credit for electricity generated from swine and bovine waste; and, establishes a tax credit for the manufacture and use of super energy-efficient washing machines and refrigerators.

"We need to use the federal tax code to encourage the production and use of the kind of clean-burning alternative energy we make in Iowa," Grassley said.

The ethanol excise tax reform proposal under consideration today is significant because under the current gasoline excise tax system, the federal excise tax paid for gasoline is 18.4 cents per gallon. The full tax is deposited into the federal government's General Fund. The leaking underground storage tank transfer is deducted at .1 cents. The remainder is transferred to the Highway Trust Fund. After the 18.3 cent transfer of revenue from the General Fund, the Highway Trust Fund transfers 2.86 cents to the Mass Transit Account of the Highway Trust Fund.

Because of the partial excise tax exemption, ethanol-blended gasoline remits 13.2 cents to the General Fund. Of that 13.2 cents, .1 cents goes to the leaking underground storage tank transfer. Generally, 2.5 cents goes to the General Fund for deficit reduction. Thus, under current law, the Highway Trust Fund receives 10.3 cents from the excise tax on ethanol-blended gasoline. Of the 10.3 cents, 2.86 cents is transferred to the Mass Transit Account.

Under the current system, an estimated $2 billion a year is lost from the Highway Trust Fund.

Grassley's proposal would ensure that 18.4 cents a gallon tax would be paid into the Highway Trust Fund on every gallon of gasoline or gasoline/ethanol blends of fuel. His proposal also would eliminate the 2.5 cents currently withheld by the General Fund. This would ensure that all ethanol-blended fuels would make the same contribution to the improvement and maintenance of the nation's highway and bridge network as regular gasoline.

Grassley's proposal also would create a new ethanol tax credit in a new section of the tax code that allows blenders to take an excise tax credit on the gallons of ethanol blended with gasoline. This credit would be on the gallons of ethanol used and is based on the current 52 cents per gallon income tax incentive (which equates to 5.2 cents on a 10 percent blend of ethanol with 90 percent gasoline).

In addition, the Grassley proposal would allow for the elimination of "blend rate tiers" (i.e. 5.7 percent, 7.7 percent, and 10 percent) and all future credits will be based on the renewable fuel gallons blended. This would streamline the tax code and provide refiners with added flexibility to meet regional air quality needs.

"Our highway needs are great. Our dependence on imported fuel should decrease," Grassley said. "This restructuring of ethanol excise taxes contributes to both of those priorities. At the same time, it preserves all incentives to use the clean-burning, renewable, domestically produced ethanol, the fuel of the future."

Grassley has a long history of promoting expanded use of renewable sources of energy. In addition to sponsoring the first-ever wind energy production, in 1997, he led the successful effort to extend the ethanol tax credit for ten years. In February, Grassley introduced legislation with Sen. Blanche Lincoln, of Arkansas, to provide an income tax credit and excise tax rate reduction for biodiesel fuel mixtures.

"Renewable fuels like ethanol and biodiesel will improve air quality, strengthen national security, reduce the trade deficit, decrease dependence on Saddam Hussein for oil, and expand markets for agricultural products," Grassley said.

Grassley's ethanol excise tax proposal won the support of an historic coalition of highway and ethanol groups. The text of the coalition's letter follows.

April 1, 2003

Dear Chairman Grassley and Senator Baucus:

As Congress begins debate on energy policy legislation and reauthorization of the federal surface transportation programs, several modest revisions to the federal tax code could facilitate two critical objectives: promoting the use of alternative fuels and improving the nation's highway and bridge network. One of the ways in which the U.S. seeks to decrease its dependence on foreign oil is through the use of alternative fuels, such as gasohol (a blend of ethanol and gasoline). Meanwhile, highway capital improvements are financed primarily through the collection of highway user fees, including an excise tax on gasoline, diesel and alternative fuels. We strongly support the legislation you have developed that would allow Congress to meet both objectives in a constructive manner.

Under the gasoline excise tax system, the Federal Excise tax paid for gasoline is 18.4 cents per gallon. The tax is collected on a quarterly basis using the IRS excise tax Form 720. The full tax is deposited into the General Fund (GF). The leaking underground storage tank (LUST) transfer is deducted at .1 cents and the remainder is transferred to the Highway Trust Fund (HTF). After the 18.3 cent transfer of revenue from the GF, the HTF transfers 2.86 cents to the Mass Transit Account of the Highway Trust Fund.

Because of the partial excise tax exemption, ethanol blended gasoline remits 13.2 cents to the General Fund (18.4 –5.2). Of that 13.2 cents, .1 cents goes to LUST and either 2.5 or 2.8 cents (depending on whether it was an "above" or "below" the rack blend) is withheld by the GF for deficit reduction purposes. Thus, under current law, the HTF receives 10.3 cents from the excise tax on ethanol-blended gasoline. Of the 10.3 cents, 2.86 cents is transferred to the Mass Transit Account.

Promoting the use of alternative fuels is clearly in the national interest, but the reduced gasohol excise tax and the portion of the gasohol excise retained in the GF have reduced revenues for highway improvements (mass transit currently receives 2.86 cents a gallon tax on every gallon of gasoline or gasoline/ethanol blends of fuel and is not affected by this proposal). Under current federal excise tax policy, it is anticipated that on average, approximately $2 billion per year would be foregone in HTF revenues (approximately 5.2 cents plus 2.5 cents per gallon for deficit reduction purposes).

We look forward to working with you in the U.S. Senate to incorporate your legislative proposal into law this year. Currently, the 5.2 cents deduction from the federal tax on gasoline is a gasohol excise tax exemption, a subparagraph of the gasoline excise tax in the Internal Revenue Code (IRC). Your proposal would eliminate the IRC subparagraph that allows the 5.2 cents exemption – which means that 18.4 cents a gallon tax would be paid into the Highway Trust Fund on every gallon of gasoline or gasoline/ethanol blends of fuel. Your proposal would also eliminate the 2.5/2.8 cents currently withheld by the GF. This would ensure that all ethanol blended fuels would make the same contribution to the improvement and maintenance of the nation's highway and bridge network as regular gasoline.

Secondly, your proposal would create a new ethanol tax credit in a new section of the IRC that allows blenders to take an excise tax credit on the gallons of ethanol blended with gasoline. This credit would be on the gallons of ethanol used and is based on the current 52 cents per gallon income tax incentive (which equates to 5.2 cents on a 10 percent blend of ethanol with 90 percent gasoline).

In addition, the proposal would allow for the elimination of "blend rate tiers" (i.e. 5.7 percent, 7.7 percent, and 10 percent) and all future c redits will be based on the renewable fuel gallons blended. This would streamline the tax code and provide refiners with added flexibility to meet regional air quality needs.

The result of your proposal would allow all excise taxes collected to be deposited in the Highway Trust Fund and all credits accrued for the purchase of renewable fuels to be based on actual gallons purchased that displace fossil fuel. As such, two important national priorities would be achieved: ensuring all users of the nation's highway network contribute equally to its improvement; and decreasing U.S. dependence on imported fuel.

Again, we strongly support your proposal. And we will urge your colleagues in the Senate and House to do the same. Your longstanding leadership on transportation investment and renewable fuels policy continues to be greatly appreciated.

Sincerely,