Talking Point

What's in the U.S. biodiesel tax incentive?
By Mark Palmer | February 01, 2005
Late last year. Congress passed and the President signed the JOBS Creation Act of 2004, H.R. 4520. This bill improves our nation's transportation infrastructure because the full amount of user excise taxes levied will be collected and remitted to the Highway Trust Fund-but more importantly, it establishes the first-ever federal tax incentive for biodiesel.

This sweeping change in the federal tax code will significantly increase biodiesel demand. A USDA study has estimated that biodiesel demand will increase to at least 124 mmgy, but depending on a number of other factors including crude oil prices, the industry projects that demand could grow to as much as 1 billion gallons annually during the next decade. A billion gallons of biodiesel is 33 times the current industry production and would displace almost 24 million barrels of oil annually.

There is currently a surplus of more than 1 billion pounds of soybean oil on the market. That's the equivalent of 133 million gallons of biodiesel-more than four times the current production level estimates. Additionally, estimates show there are currently about 2 billion pounds of recycled cooking oil available, an amount approximately equal to 270 million gallons of biodiesel.

The biodiesel tax provisions will provide an economic surge in several sectors of the U.S. economy, including manufacturing, agriculture and all sectors that provide support services to these industries. It's estimated that the tax incentive could create up to 50,000 jobs in the United States over the next 10 years. ("Construction of new capacity, the production and use of biodiesel, and increased final demand for agricultural products." Source: Urbanchuk, A U.S. Consultant, Jan. 23, 2002).

Highlights of the Volumetric Ethanol Excise Tax Credit:-Establishes the first ever federal biodiesel tax incentive
-Streamlines the excise tax collection process when ethanol is blended with transportation fuels
-Creates a simplified system of excise tax collection complemented by a regimented petroleum, renewable fuel and terminal delivery system

Other biodiesel highlights provisions:
-Creates a new tax credit for biodiesel
(effective Jan. 1, 2005, until 2007).
-The federal excise tax credit is taken at the blender level and will benefit all biodiesel consumers (taxable and tax-exempt markets)
-$1 per gallon for biodiesel made from virgin oils derived from agricultural products and animal fats
-50 cents per gallon for biodiesel made from agricultural products and animal fats
-Allows the credit to be claimed in both taxable and nontaxable markets;
-Tax-exempt fleet fuel programs
-Off-road diesel markets (dyed diesel)
-Streamlines the use of biodiesel at the terminal rack
-The tax structure and credit will encourage petroleum blenders to blend biodiesel as far upstream as possible, which under a Renewable Fuels Standard (RFS)
-Streamlines the tax refund system for below the-rack blenders to allow a tax refund of the biodiesel tax credit on each gallon of biodiesel blended with diesel (dyed or undyed) to be paid within 20 days of blending
-The alternative minimum tax will not be an issue for biodiesel
-Any taxpayer eligible for the bodiesel tax credit will be able use the volumebiodiesel excise tax credit system, which means they will be able to file for a refund for every gallon of biodiesel used in the marketplace without regard to the income of the tax payer or whether the biodiesel is used in a taxed fuel or tax-exempt fuel
-No effect on the Highway Trust Fund-the biodiesel tax credit will be paid for out of the General Fund

Mark Palmer is an attorney and a Washington D.C. representative of the American Soybean Association. He can be reached by e-mail at [email protected]
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