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Query Results Of Targeted Tax Credits

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By Lowell L. Kalapa
(Released on 7/17/11)

Did you enjoy that slice of bacon with your scrambled eggs and toast this morning along with that cup of coffee?

Hopefully you “enjoyed” it without knowing how much it cost to put that slice of bacon on your plate. For those who do the shopping for their households, they know that slice has gotten increasingly expensive in the past few years rising from $3 a pound to more than $7 a pound in recent weeks when it is not on sale. And even if it is on sale, it probably is about $3, but only for 12 ounces. Consumers have seen other meat and poultry products that depend on corn feedstock rise dramatically in recent years.

Bacon is merely a reflection of good political intentions gone bad as elected officials rushed to embrace eco-friendly strategies. In this case, the mantra focused on reducing dependence on fossil fuels by blending ethanol with gasoline to produce what was know as “gasohol” for use in the nation’s automobiles. The search for gasoline alternatives had its impetus in the 1974 oil crisis and ever since then, the pursuit has taken on a fevered pitch to the point where Congress enacted a tax credit to encourage fuel production from ethanol.

At the time of the adoption of the credit, corn was the most likely candidate to be used as the base for producing ethanol followed by sugar, but because the production of corn created a plentiful supply at the time federal lawmakers were encouraged to provide a tax credit of 45 cents for each gallon of ethanol that was blended with gasoline. In the ensuing years, though, the public has learned that ethanol is not the most fuel efficient source of alternate energy and that, in fact, it takes more energy to grow the corn that is used to make ethanol than the energy that the burning of ethanol produces.

Here in Hawaii, eco-conscientious lawmakers jumped on the bandwagon early on and exempted the sales of ethanol blended fuels from the state’s 4% general excise tax as a way to encourage the use of “gasohol.” While that provision kept on getting renewed over a period of 15 years, no one took advantage of it largely because the cost of that blended fuel was still more expensive than plain, old gasoline.

It was not until the former governor signed a mandate that all fuel henceforth was to be blended with at least 10% alcohol did the use of “gasohol” become widespread. That mandate came perhaps in an effort to encourage investors to build an ethanol plant that would use sugarcane as the source for the alcohol production. Lawmakers had also embraced the idea of alcohol-blended fuels a few years earlier by establishing a tax credit to encourage the growing of sugar cane as the feedstock for an ethanol producing plant. But as a result of bureaucratic red tape, the plant never got built, providing an opportunity to reevaluate the use of ethanol.

And perhaps it was a good thing that such an ethanol producing plant never came into fruition during all of these years that the tax credit was available, for in the meantime, as research has shown, making ethanol from corn or sugar cane is not that energy efficient, taking more energy to make the stuff than it produces. As a result, lawmakers in the past couple of sessions have tried to reshape the tax credit for ethanol producing facilities into a tax credit for “biofuel” production as the jury is still out as to what is the most efficient and productive plant source from which to produce alternate energy.

The bottom line is that using public resources, such as tax incentives and tax credits, to supposedly influence human behavior and encourage certain types of activity is inefficient and wasteful. Adopting the federal tax credit for ethanol not only provided a windfall for corn farmers, but it created an artificial demand for corn feedstock and instead of shifting consumption to a more energy-efficient alternative, the tax incentive drove up the cost of corn feedstock as the tax credit created artificial demand which, in turn, increased the price of corn that is used to feed livestock. The result of the latter is the higher costs at the supermarket for meat and poultry products.

Here in Hawaii the tax incentives and the executive order to blend all fuel merely increased the cost for the highway user and shifted the export of consumer dollars from the oil fields of the Middle East and Indonesia to the sugar fields of Brazil. And because of the lost tax revenues, taxpayers had to forego tax relief.

By the way, hope the bacon was crisp!

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.


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