In the most recent tax and spending proposal released Dec 15, congressional leaders have proposed to reinstate the expired biodiesel tax incentive, affective Jan. 1, 2015 through Dec. 31, 2016. The National Biodiesel Board commended the proposal, but they also want government to take things one step further: they want to change the incentive from a blending credit to a domestic production credit.
Why the NBB wants this change:
NBB Vice President of Federal Affairs Anne Steckel says, “Restoring this tax incentive will create jobs and economic activity at biodiesel plants across the country, so we want to thank leaders in the House and Senate for proposing this extension. Unfortunately the impact would be muted because this proposal would continue allowing foreign biodiesel to qualify for the tax incentive. This not only costs taxpayers more money but it paves the way for foreign fuels that already receive incentives in their home countries to undercut U.S. production.”
She added, “We have yet to hear any member of Congress articulate why U.S. tax dollars should be used to support foreign production. Clearly, incentivizing predatory biodiesel imports was not the intent of Congress, so we will continue urging Congress to make this reform.”
The history of the biodiesel tax credit:
The biodiesel tax credit was initially implemented in 2005, and since then it has allowed blenders of biodiesel to claim a credit of $1 per gallon against their U.S. federal tax liability. The tax credit has expired four times since 2009 and subsequently reinstated retroactively three times.
The tax credit has played a key role in stimulating growth in the U.S. biodiesel industry which has grown from about 100 million gallons in 2005 when the incentive was first implemented to almost 1.8 billion gallons in 2014. By helping biodiesel compete on a more level playing field with petroleum, the industry is able to create jobs, strengthen U.S. energy security, reduces harmful and costly emissions, diversify the fuels market, and ultimately lower costs to the consumer.
Unlike the billions of dollars in petroleum tax incentives written permanently into the tax code, the biodiesel tax incentive has always been written with an expiration date. This has created uncertain and disruption in the industry each time the annual threat of losing the tax incentive comes up again. Consequently, growth is often stunted. With only about seven years of commercial-scale production, biodiesel remains a young but maturing industry that needs stable tax policy to continue meaningful growth.
The proposed amendment:
On July 21st, 2015, the Grassley-Cantwell amendment was passed by the U.S. Senate Finance Committee making the much sought after change from a blender to a producer credit starting January 1, 2016. The senate finance committee approved it unanimously. If signed into law, it will move to a producer tax credit on Jan. 1, 2016.
As the law stands now, the biofuels credit includes a $1 per gallon biodiesel mixture credit, a $1 per gallon biodiesel mixture excise tax credit, and a $1 per gallon biodiesel credit for fuel not in a mixture. The excise tax credit is coordinated with the income tax credit such that credit for the same biodiesel cannot be claimed for both income and excise tax purposes. An additional 10 cents per gallon small agri-biodiesel producer credit is available for qualified small producers.
The amendment would convert the biodiesel fuels credit to a $1 per gallon production credit for fuel produced in the United States. However, an eligible discretionary blender would be able to claim the $1 per gallon mixture credit with the appropriate documentation by a biodiesel producer indicating they are forgoing the production credit. Biodiesel will be further converted to a taxable fuel in 2016 with the excise tax paid by the taxpayer eligible to elect the credit. In the case of eligible small biodiesel producers, the $1 per gallon credit would be worth an additional 10 cents per gallon. (A qualified discretionary blender is a diesel fuel blender registered with the IRS that blended 10 million or more gallons of biodiesel or renewable diesel in the previous calendar year.)
Those against the change:
NATSO, a national trade association representing the travel plaza and truckstop industry, has been a leading voice in the debate along with five petroleum and biofuel trade groups. They want the tax credit to stay in its traditional form as a blender credit, rather than converting it to a producers credit.
In a letter to the House Ways and Means Committee, the groups said they believe that “converting the tax credit to a producer’s credit and denying its availability to imported fuels will benefit a small group of biodiesel producers and come at the expense of fuel retailers who have incurred significant costs to purchase and maintain the equipment to dispense blended fuels and at the expense of the nation’s consumers who will pay higher prices for the shipment of goods.”
The group went on to credit the blenders’ incentive as being responsible for “successfully creat[ing] a market for biodiesel and renewable diesel and building consumer acceptance.” And that “Continuing the policy that allows truckers to share in the value of the credit and encourages acceptance of biofuels benefits American consumers, those who blend those fuels, and those who provide the feedstocks that make biofuels.”
NATSO believes this change would fundamentally alter blending economics and increase the price of diesel fuel with no offsetting benefits.
The benefits of the Producers Tax Credit, according to the National Biodiesel Board:
Currently biodiesel produced overseas that is blended with diesel in the U.S. qualifies for the tax credit. Consequently, imports have risen sharply. In 2012, the U.S. imported fewer than 100 million gallons of biodiesel. This year, imports will exceed 650 million gallons, and the Energy Information Administration recently estimated that volume will grow to more than 700 million gallons in 2016.
The vast majority of imports are coming from companies in Argentina, Asia, and Europe, and in most cases, the imported fuel has already received significant policy support from its country of origin. This double incentive encourages a level of imports that undercut U.S. producers.
From an environmental standpoint, many of these imports (such as palm biofuels) do not meet the strict sustainability requirements set by the U.S. renewable fuel standard (RFS.)
Additionally, narrowing the scope of the credit to domestic production would save approximately $90 million, according to the Joint Committee on Taxation.
Furthermore, the proposed reform is inconsistent with existing manufacturing tax incentives such as bonus depreciation, the R&D tax credit, and the domestic manufacturers deduction.
For more about the specific benefits, the NBB has a great PDF.
What happens next:
The full Senate has not yet considered the legislation, nor has the House Ways and Means Committee. Once both bodies review the legislation, the two will have to reconcile their respective measures.