The politics of tax-and-blend

June 2, 2011 |

Let me see if I get this straight.

When I fuel up the car, I pay a fuel tax.

It’s a cousin to the car sales tax, the auto title tax, the registration tag tax, the highway toll tax, the fast lane tax, the parking fees tax, the emission testing tax, and the driver’s license tax.

At some point in all that taxing, governments decided that if you and I had a lower price for ethanol because it wasn’t taxed as much as gasoline, we might buy some more. So they decided to forego some revenue.

The theory? Domestic ethanol would replace some imported oil. So, there would be some extra domestic dollars floating in to local banks for lending to local business, instead of being shipped overseas.

Next Paragraph Option #1, for Republicans.

Well, it goes back to the Reagan Revolution tax cuts of 1981-82. It’s the supply-side thing. The Laffer Curve. Reaganomics. You get less revenue today, but by lowering taxes and producing prosperity, you get more jobs, more income, more profits, and in the end more tax revenue through growth.

Next Paragraph Option #2, for Democrats:

Well, it goes back to the stimulative 1962 tax cuts pushed through by President Kennedy. It’s a stimulus thing. You get less revenue today, but by stimulating a domestic industry, you get more jobs, more income, more profits, and in the end more tax revenue through growth.

Next Paragraph Option #3, for Tea Party Members

Well, it goes back to what Ron Paul has been saying for years. Roll back taxes, and get back to limited government. That government governs best that governs least, as Goldwater said, or was it Jefferson? Produce domestic fuel, and get back to Americans making stuff for Americans.

The Renewable Fuel Standard, which simply mandates some domestically-produced biofuels – seems, on the surface, a more elegant mechanism. It fosters the market for RIN credits, a nice, tradable, low-hassle mechanism for internalizing a cost of carbon into energy prices.

But that doesn’t make the ethanol tax credit, the VEETC, completely evil, on the merits. There’s some precedent in the idea of Congress charging less (or no) tax on things that offer wider societal benefit. It’s the idea behind non-profit corporations. And its a step towards a tax system that focuses on taxing behaviors – such as pollution – rather than the income, or payrolls, or assets that are the engines of economic growth.

It seems like a workable idea. Last night at a small restaurant on the road, I got a bill that separated some taxable items from non-taxable – and the US tax system did not appear to keel over in the process of cutting me a small tax break. It seems like there is an in-place system, built into cash registers, for delivering incentives for selected foods, or domestically produced fuels.

But then, there’s the planet Washington.

Instead of simply not collecting a portion of the fuel tax, the consumer is charged the whole amount, which is collected by the gas station and paid to the government. The government analyzes all this. Oil refiners then file a bunch of forms based on how much ethanol they blended into their fuel. The government analyzes all that.  Auditors, lawyers, and accountants seem to do very well out of all this.

Then the government waives a portion of the tax, in the form of a tax credit. You might have missed it in your latest 1040 filing, and wondered which rich farmer ran away with your tax refund. Or which fat-cat biofuels producer got it through lobbying pals on Capitol Hill.

Except, ah, that the tax credit doesn’t go to the farmer, or the biofuels producer, or the gas station owner, or you. It goes to the oil company.

It goes with the subsidized oil pipelines, the percentage depletion allowance, the nonconventional fuel production credit, the enhanced oil recovery credit, the accelerated depreciation allowances, and the extraction, production and use tax credit. So that the trillion-gallon, global-scale oil industry can more effectively compete with the dread 30 billion gallon biofuels industry.

So, it’s tax and blend, as a substitute for tax and spend.

It’s also a surreal version of David and Goliath — in this case the government puts a usage fee on slingshots and pebbles, then subsidizes the cost of Goliath’s ducking lessons.

Ron Paul called for the elimination of fuel taxes. If there is a benefit in a two-tiered tax structure, why not simply eliminate the fuel tax for domestic fuel, instead of this unwieldy and unpopular system in place today?

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