Excise tax abatement bolsters Illinois biodiesel industry as other states struggle

By Bryan Sims | October 25, 2010
The wait for the federal government to reinstate the $1 a gallon federal blender tax credit has left the biodiesel industry in most states suffering. Illinois, on the other hand, had policies in place that have allowed its industry to thrive more so than others.

A major driving force behind Illinois' success rides on the fact that it has excise tax abatement for biodiesel blends of B11 or higher sold in the state, which is good through Dec. 31, 2013. Created in 2003, the sales tax incentive provides a partial sales tax exemption of 20 percent on biodiesel blends from B1 to B10. Blends above B10 receive a total exemption from the state sales tax of 6.25 percent, effectively creating an Illinois-specific market for B11.

For those involved exclusively in downstream operations of the industry, waiving the sales tax on B11 or higher blends provides a significant cost advantage for retailers looking to blend biodiesel with No. 2 on-road diesel fuel, according to Kevin Lockart, energy consultant for Tremont, Ill.-based agricultural cooperative Ag-Land FS Inc.

"With that tax incentive, B11 still has a five-cent advantage over regular diesel even without the $1 per gallon blenders tax credit," Lockart said. "That tax abatement is everything to us."

Biodiesel producers such as Iowa-based Renewable Energy Group Inc. have taken full advantage of the excise tax abatement as a means of leveraging upstream and downstream market capabilities, according to REG's director of marketing Jon Scharingson. "For us, the value of the Illinois excise tax abatement more than offsets the lack of the $1 per gallon blenders tax credit," he said. "It's made it risk-free and still profitable for retailers to consume biodiesel in Illinois because of the tax abatement in the state."

Currently, Illinois has five operating biodiesel plants with a combined installed capacity of 170 MMgy. REG captured a significant amount of that total when it acquired two biodiesel plants in the state: the 60 MMgy facility in Seneca, and the 45 MMgy plant in Danville. "Without that Illinois excise tax abatement we would not have acquired those plants, and those plants would likely not be running," Sharingson noted.

The remaining three plants in the state include Incobrasa Industries Ltd., which operates a 31 MMgy facility in Gilman; Midwest Biodiesel Products LLC, which operates a 12 MMgy plant in South Roxanna; and Stepan Co., which operates a 22 MMgy facility in Joliet.

"Illinois is a very attractive market to sell into because of the B11 sales tax exemption and, because of that, a lot of biodiesel is consumed in the state," said Terry Zintel, president of privately-held Midwest Biodiesel Products LLC.

REG estimates total national production of biodiesel to be between 350 MMgy and 400 MMgy, according to Sharingson, with 25 to 35 percent of that volume coming out of Illinois. "Without that [excise tax abatement] in Illinois, the biodiesel market in the U.S. would be well below 300 MMgy," he added.

Last year, Illinois passed a law that increased the biodiesel blend required for use by state and local government fleets from B2 to B5. Illinois also offers an attractive loan guarantee program that provides funds to existing in-state biodiesel producers to modify or retrofit their facilities. Proposed projects in the state with a capacity of at least 30 MMgy are also eligible for this grant.
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