Raising A Hidden Tax

Since the administration has apparently ruled out an increase in the gasoline tax to cover declining Highway Trust Fund revenues, it's surprising that it appears to be giving serious consideration to a proposal that would raise a hidden tax on gasoline. This is even more perplexing, when you realize that this increase would actually reduce the government's net take on every gallon of gasoline sold, while simultaneously diminishing the value of the product for consumers. As reported in today's Washington Post, the US ethanol industry is petitioning the government to increase the percentage of ethanol allowable for inclusion in gasoline from 10% to 15%. At the current average gasoline pump price of $1.93 per gallon, this would effectively raise the price by 3.4 cents per gallon, while reducing federal tax revenue by 2.2 cents.

It's entirely understandable that the ethanol industry would seek such a change. Having overbuilt capacity just as demand for the fuel into which their product was blended collapsed and the easy credit that enabled their expansion tightened drastically, ethanol producers aren't in much better shape than Detroit. Several are already in bankruptcy, and others are idling capacity because of poor margins and tight cash flow. And if that weren't bad enough, the primary market for their product--"E10" gasoline, a blend containing 10% ethanol--is approaching saturation at current production levels. Nor have E85 sales grown sufficiently to relieve the pressure created by the combination of a steadily-escalating federal Renewable Fuel Standard and weak motor gasoline sales. However, even if there were no risk of higher ethanol blends damaging the engines and fuel systems of cars not designed as Flexible Fuel Vehicles, increasing the ethanol limit in gasoline would cost us all at the pump.

A gallon of ethanol contains one-third less useful energy than a gallon of petroleum gasoline. This dilution effect is already at work in the standard E10 blend, which contains 3.4% fewer BTUs than "E0". E15 would increase this gap to 5.1%. The Oak Ridge National Laboratory of the Department of Energy recently tested a representative group of cars on fuel blends containing up to 20% ethanol and confirmed a fuel economy loss proportional to the energy dilution effect. An average car driving 10,000 miles per year would require an extra 7 gallons of fuel, compared to one using E10. The extra cost at current pump prices works out to the $0.034/gal cited above. The loss of tax revenue is even more straightforward. Every gallon of ethanol blended into gasoline confers a $0.45/gal excise tax credit on the blender. Blend 10% ethanol and get $0.045 for every gallon of gasoline; blend 15% and receive $0.067.

The long-term success of the government's ethanol policy hinges on increasing the sales of E85 into Flexible Fuel Vehicles, not on foisting inferior mid-level blends of fuel on the public in the guise of "gasoline" without a price discount to reflect its poorer fuel economy, such as has evolved for E85 in most markets. If a soft-drink bottler or beer brewery were watering down its product, while charging the same price, the outcry would be deafening. Yet that's precisely what the government would be encouraging fuel marketers to do, by raising the blend limit. As consumers and taxpayers, we have more than a nickel per gallon at stake in this decision.