President Carter's 1978 Energy Tax Act introduced the excise tax exemption for alcohol fuelblends (at 100% of the gasoline tax, which was then 4Â¢/gallon) to achieve energy and, more recently,certain environmental and agricultural policy objectives. (1) In 2004 this exemption, which was 5.2Â¢/gallon and was scheduledto decline to 5.1Â¢ on January 1, 2005, reduced the gasoline excise tax for "gasohol," from 18.4Â¢ to13.2Â¢/gallon. The reduction was realized at the time when the gasoline tax was otherwise imposed:typically when the fuel was loaded from the terminal onto trucks for distribution. The 5.2Â¢exemption could also be claimed later (i.e., when blenders filed their income tax return) as a 52Â¢excise tax credit per gallon of alcohol used to make a fuel mixture, which was also scheduled todecline to 51Â¢ in tandem with the exemption on January 1, 2005. From 1978-2004, this exemptionfrom the motor fuels excise taxes provided the major subsidy to the ethanol fuel industry -- withoutthe exemption the ethanol fuels industry would either not exist or be substantially smaller. (2) The exemption, however, which effectively lowered the excise tax on the blended fuel,reduced revenues for the Highway Trust Fund by an estimated $14, 000 million through FY2004.As a consequence, the Congress enacted the American Jobs Creation Act of 2004 ( P.L. 108-357 ),also known as the "Jobs Bill," which restructured the basic tax subsidy for alcohol fuels. It replacedthe excise tax exemption with a new excise tax credit: the "alcohol fuel mixtures excise tax credit."Although, the two incentives are equivalent in gross, before-tax terms -- they are both equal to 51Â¢per gallon of ethanol -- interactions between the excise tax credit and the income tax system increasethe value of the incentives under this restructured or reformed system. In addition to the new"alcohol fuel mixtures excise tax credit," current federal tax law provides for a small ethanolproducer credit, and several other tax incentives that, although little used, might further benefitalcohol fuels in the future. The Senate version of H.R. 6 , the Energy Policy Act of 2005, proposes to notonly expand the small ethanol producer credit, but to introduce a renewable fuels standard (whichis effectively an ethanol standard), a requirement that gasoline suppliers (refiners and blenders) blendat least 8 billion gallons of renewable fuels per year in producing gasoline. Such a requirement, ifenacted, would more than double the amount of ethanol blended with gasoline above the currentprojected baseline level of ethanol use, and significantly increase federal tax revenue losses. This report explains the provisions of the new alcohol fuels mixtures tax credit and comparesthe tax benefits under the new credit with the tax benefits under the old exemption. An exampleillustrates the mechanics of the new credit and compares it with the old exemption. The secondsection examines the revenue and Highway Trust Fund implications of the new tax incentive bothwith and without a renewable fuels standard. The final section discusses the remaining three taxsubsidies for alcohol fuels, which, although little used, are nevertheless part of the current federaltax laws and might be used in the future. Under the new alcohol fuels mixtures tax credit, Â§40 of the Internal Revenue Code (IRC),gasohol blenders may claim a 51Â¢/gallon tax credit for alcohol used to produce a qualified mixture(a mixture of alcohol and gasoline, or a mixture of alcohol and any other special motor fuel). (3) Unlike most tax credits, which are claimed against income tax liability (because the incometax otherwise owed is reduced or "credited" by the amount of the credit), the new alcohol mixturescredit is claimed against the motor fuels (gasoline) excise tax. However, both approaches reduce theeffective excise tax burden on each gallon of ethanol used to make a 90:10 gallon of a mixture bythe same amount -- 5.1Â¢/ gallon of a blend or 51Â¢/gallon of ethanol -- regardless of whether thereduction is called a tax credit or excise tax exemption. This new excise tax credit, which becameeffective on January 1, 2005, will replace the old excise tax exemption as the basic tax incentiveclaimed on most sales of fuel ethanol -- it will provide the biggest subsidy to the industry. (4) As under the previous exemption, to qualify for the full 51Â¢ tax credit, the alcohol must beat least 190 proof (95% pure alcohol, determined without regard to any added denaturants orimpurities). The credit is 37.78Â¢ per gallon if the ethanol is between 150 and 190 proof; no creditis provided for alcohol below 150 proof. This mixture credit is available only to the blender, whomust not only produce the mixture but must either use the mixture as a motor fuel in a trade orbusiness or sell it for use as a fuel. The blender may be the producer, the terminal operator, or thewholesaler, distributor, or marketer. Technically, both ethanol and methanol qualify for theexemption as long as they are not derived from petroleum, natural gas, coal, or peat. In practice,however, virtually all fuel alcohol is ethanol produced from corn; very little, if any, methanol isproduced from wood and other biomass (or renewable) sources because it is generallyuneconomic. (5) Currentlymost methanol is produced from natural gas, is too expensive as a blended motor fuel and does notqualify for the tax breaks. As did the exemption before it, the new federal tax credit for alcohol fuels also applies tocertain fuel additives called oxygenates, provided they are produced from renewables such as cornand not from fossil fuels such as natural gas. ETBE is a compound derived from a chemical reactionbetween ethanol and isobutylene (a byproduct of both the petroleum refining process and natural gasliquids). (6) In this reaction,the ethanol is chemically transformed and is not present as a separate chemical in the final product. In 1995, the IRS ruled that blends of ETBE (ethyl tertiary butyl ether) and gasoline would alsoqualify for the reduced partial excise tax exemption. In effect these rulings ensured that theoxygenate required under the Clean Air Act would also qualify for the tax subsidies. AllowingETBE to qualify for this tax exemption was intended to further stimulate the production of ethanol. Allowing ETBE to qualify for the federal tax subsidies reduces the growth of MTBE (methyl tertiarybutyl ether), its main competitor. ETBE costs more to produce and therefore, without the taxsubsidies, could not otherwise compete with the less costly MTBE. The recent banning andphasing-out of MTBE by many states (California, New York, and Connecticut, and others) reducesthe competitive advantage of MTBE and also increases the demand for ethanol as an oxygenate. (7) The Credit for Methanol. The mixtures credit isalso available for methanol blended with gasoline at the rate of 60Â¢ per gallon of methanol -- theequivalent of 6.0Â¢ on 90:10 blends -- if the alcohol is at least 190 proof, and 45Â¢ if the methanol isbetween 150 and 190 proof. No credit is available for either ethanol or methanol that is less than 150proof. As noted above, the alcohol in methanol cannot be produced from any fossil fuels -- it mustbe produced from organic or biomass materials. As already discussed, the new alcohol fuels mixtures excise tax credit is claimed against theexcise tax, primarily the gasoline excise tax -- it reduces the excise tax otherwise owed and remittedto the federal government. So, despite the reforms of the alcohol fuels tax incentives in 2004, thebasic incentive -- the 51Â¢/gallon tax credit -- is still connected with the gasoline excise tax (and othermotor fuels excise taxes); understanding how the tax credit works requires a brief explanation ofthe structure of the current federal excise taxes on motor fuels. The Structure of Motor Fuels Excise Taxes. Virtually all transportation fuels are taxed under a complicated structure of tax rates and exemptionsthat vary by type of fuel (gasoline, diesel, propane, etc.) and transportation mode or how the fuel isused (cars, trains, buses, airplanes, etc.). Gasoline used in highway transportation -- the fuel usedmore than any other -- is taxed at a rate of 18.4Â¢ per gallon, composed of: an 18.3Â¢ Highway TrustFund rate, which generates most of the revenue for the federal highway trust fund (HTF); and a 0.1Â¢ rate that is earmarked for the Leaking Underground Storage Tank Trust Fund (LUST). (8) Diesel fuel for highway use-- the fuel used mostly by trucks -- is taxed at 24.4Â¢ per gallon, also consisting of two components: a 24.3Â¢ rate that is allocated into the HTF, and 0.1Â¢ that goes into the LUST fund. In addition,special motor fuels (gasoline substitutes), jet fuel, railway diesel fuel, motorboat fuel, and virtuallyevery other transportation motor fuel that is not specifically exempt, are also subject to tax. (9) Compressed natural gas (CNG)has, since 1993, been subject to an excise tax of 48.54Â¢ per MCF (thousand cubic feet) -- markingthe onset of the taxation of gaseous transportation fuels. (10) Excise Tax Exemption. The tax subsidies foralcohol fuels were restructured -- the excise tax exemption became an excise tax credit -- under theAmerican Jobs Creation Act of 2004 ( P.L. 108-357 ), enacted on October 22, 2004. The reformsbecame effective on January 1, 2005. Before the restructuring of the alcohol fuels tax incentives in 2004, the most important taxincentive for alcohol fuels -- the one most responsible for the development of the alcohol fuelsmarket -- was the partial exemption from the otherwise standard excise tax rates on gasoline, diesel,and other transportation fuels. This exemption was 5.2Â¢ per gallon in 2004 and scheduled to declineto 5.1Â¢ beginning on January 1, 2005, before it is was replaced by the "alcohol mixtures excise taxcredit." Thus, mixtures of 90% gasoline and 10% alcohol (typically called gasohol) were taxed at13.2Â¢ per gallon -- they were exempt from 5.2Â¢ of the tax (11) In all these cases, theexemption equated to 52Â¢ per gallon of ethanol, for 2004, which is the same as a 52Â¢/gallon incometax credit. (12) Table 1 compares the net, after-tax value of the new 51Â¢/ gallon alcohol fuel mixture excisetax credit (column 3) as it is applied on 90:10 blends (90% gasoline, 10% ethanol), with the old5.1Â¢/gallon excise tax exemption (column 2) on those same blends. For perspective, these arecompared with the tax on a gallon of pure gasoline. The example assumes the ethanol is 190 proof. Subsidy value is measured in terms of its effects on the marginal costs of supplying fuel relative tothe unsubsidized shift in the marginal cost curve under the 18.4Â¢/gallon gasoline tax. The model isdescribed in the Appendix in greater detail. Note first that there is no difference between the new excise tax credit and the old excise taxexemption in the actual excise tax paid or remitted to the Treasury (row 3): whether the reductionin taxes per gallon of a 90:10 blend is provided by the an excise tax exemption and or excise taxcredit, the amount actually paid to the Treasury is 13.3Â¢/gallon. There is a difference, however, inthe subsidy value between the two ways of reducing the excise taxes. In particular, Table 1 showsthat the new alcohol fuels excise tax credit has a higher subsidy value than the excise tax exemptionin effect under the pre-2005 tax law. As the sixth row, third column shows, the net-after tax subsidyvalue of the new excise tax credit per-gallon of a 90:10 blend is 6.8Â¢/gallon as compared to5.1Â¢/gallon under the exemption. Thus, the value of the excise tax credit is 1.7Â¢ greater, or 33.3%greater, than the value of the exemption. Per gallon of ethanol the subsidy value would be 10 timesthat amount or 68Â¢/gallon, rather than 51Â¢/gallon. Table 1. Comparison of the Net, After-Tax Subsidy Value of theNew Mixtures Tax Credit With the Old Excise Tax Exemption Notes: *Value of tax subsidy includes the tax benefits from the deductibility of the excise taxesagainst income tax liability -- a higher excise tax results in greater tax deductions and a smaller tax.This figure assumes a 25% marginal income tax rate. See the Appendix for more detail. The higher subsidy value under the excise tax credit is due to the deductibility of excise taxesas an expense against the income tax. The 2004 reforms changed the terminology of a tax subsidy:Rather than claiming an instant exemption of 5.1Â¢/gallon, blenders can now claim an instant credit of 5.1Â¢/gallon. However, the substitution of a tax credit for an equivalent exemption means thatblenders are treated nominally as paying the full 18.4Â¢/gallon excise tax; they will get higher incometax deductions, which increases the effective amount of the new tax credit. Assuming a marginalincome tax rate of 25% -- the rate usually assumed by the Joint Tax Committee and other analysts-- the value of the new tax credit increases by 1.7Â¢ per gallon (or by 33.3%). Thus, the effectivevalue of the tax credit is not 51Â¢/gallon but 68Â¢/gallon. From FY1932, when it was first enacted, until FY2003, the gasoline tax has generated over$400,000 million in gross tax revenues; billions more have been generated from the tax on diesel andother special highway motor fuels. (13) Net revenues have been about 25%, or about $100,000 million,less due to the deductibility of the excise taxes as a cost of doing business, leaving a net total ofabout $300,000 million. In FY2003, the year for which the latest data are available, the gasoline tax alone generated$20,100 million in tax revenues for the Highway Trust Fund; $8.6 billion more were generated fromthe excise tax on diesel; and millions more were generated from the excise taxes on other highwaymotor fuels. In total, the HTF collected $33,700 billion in excise tax receipts in FY2003, about 90%from motor fuels taxes and most of that from the gasoline tax. (14) These totals includereceipts generated from the taxation of gasoline blended with alcohol, almost all ethanol, whichtotaled in gross terms about $4,100 million in FY2003 (about $3,000 million net due to about $1,000million in income tax offsets). But, while the excise tax on gasoline alcohol blends generated billions in tax revenue, thelower tax rate due to the exemptions (a tax rate of 13.1Â¢ in 2003 due to an exemption of 5.3Â¢; a taxrate of 13.2Â¢ in 2004 due to an exemption of 5.2Â¢) meant that these blends did not generate as muchrevenue for the HTF as they would have otherwise had the ethanol blends been taxed at the same rateas pure (unblended) gasoline. From 1978, when the excise tax exemption for alcohol fuels was firstenacted, to FY2004, it is estimated that the exemption cost the federal treasury approximately$14,000 million in foregone federal revenues in net terms (i.e., gross excise tax receipts less incometax receipts). Gross receipts (i.e, losses to the HTF) would have been about $18,600 million. ForFY2003, for example, had ethanol blends been taxed at 18.4Â¢/gallon (instead of the actual13.1Â¢/gallon because the exemption was 5.3Â¢/gallon), gross revenues for the HTF would have beenabout $1,400 million higher. The net revenue loss was $350 million or 25% less, again because thelower tax rate implied a smaller income tax offset. The above effects on the HTF exclude additional losses in receipts due to a tax codeprovision, enacted in 1990 and repealed by the 2004 jobs bill, which allocated 2.5Â¢ of the taxableportion of the excise tax on ethanol blends (the 13.1Â¢ in 2003) to remain in the general fund. IRCÂ§9503 (b) provided that part of the taxable portion of the tax on gasohol blends (the 13.1Â¢ for 90:10blends, the 14.342Â¢ for 92.3:7.7 blends, and the 15.422Â¢ for 94.3:5.7 blends) was not allocated tothe HTF in 2003, but was instead allocated into the general fund. More specifically, for the 90/10blends, the law in 2003 provided that 3.1Â¢ of the 13.1Â¢ tax remain in the general fund; for blendscontaining less than 10% ethanol, 2.5Â¢ remains in the general fund and is not allocated into the HTF. For 2003 about $700 million was allocated to the general fund instead of the HTF under thisprovision. Thus the total HTF revenue loss resulting from the alcohol fuels exemption was about$2,100 million for FY2003. The substitution of a tax credit for an exemption against the excise taxes will increaserevenues to the HTF, and reduce revenues by the same amount for the general fund. Based on currentprojections by both the Office of Management and Budget (OMB) and the Joint Committee onTaxation, foregone revenues from the excise tax credit is projected to be about $1,5000 million forFY2006. Table 2 shows the two revenue loss projections. Table 2. Projections of Revenue Losses to the General Fund (andIncreases to the HTF) from the New Alcohol Fuels Mixtures Excise Tax Credit($millions) Sources : Executive Office of the President. Office of Management and Budget. Budget Documentof the United States: Analytical Perspectives, FY2006, p. 323; Joint Committee on Taxation. Estimates of Federal Tax Expenditures for Fiscal years 2005-2009. (JCS-1-05), Jan. 12, 2005. However, because the income tax offset or deductibility takes place at the 18.4Â¢ rate, the net incomeoffsets are higher relative to the non-subsidized full gasoline tax rate -- there are additional netrevenue loss due to this higher income tax deduction. At the assumed 25% marginal income taxrate, these offsets are estimated at 1/4 of the gross revenue losses in Table 2 . Thus, for FY2006,using the OMB estimated gross revenue losses of $1,550 million, income tax offsets (i.e., foregoneincome tax receipts into the general fund) are estimated at $387.5 million. Combined with the renewable fuels standard (RFS) proposed in the Senate's comprehensiveenergy policy bill, the new tax credit for alcohol fuels mixtures is projected to raise revenue lossessignificantly over those baselines already projected by the OMB. This is illustrated in Table 3 . Asshown in column (3), revenue losses from the new excise tax credit are projected to more thandouble by 2010 if the RFS under the Senate's version of H.R. 6 is enacted. Table 3. Projected Ethanol Use and Corresponding RevenueLosses to the General Fund (and Increases to the HTF), Baseline vs. the Renewable Fuels Standard(RFS), FY2006-2012 Sources : Author's calculations based on OMB data and data in H.R. 6 . OMB data isfrom Executive Office of the President, Office of Management and Budget, Budget Document ofthe United States: Analytical Perspectives, FY2006, p. 323; Although the new alcohol fuels mixtures excise tax credit will, as the exemption before it,become the major tax incentive for ethanol fuels, there are also others. An income tax credit is also available for straight (or "neat") alcohol (known as E85 or, inthe case of methanol, M85) used as fuel -- fuels that contain a minimum of 85% alcohol, and are thusnot mixtures. The amounts of tax credits is 60Â¢/gallon of either ethanol and methanol. This creditis available only to the user directly (who must use it in a trade or business), or to the seller who mustsell it at retail to the ultimate user (as long as it is placed in the fuel tank of the buyer's vehicle). Inall these cases, the alcohol may be either ethanol or methanol but must not be produced from fossilfuels, effectively limiting the tax credit to ethanol from corn. The market for these straight, or neatfuels, is very small. The credit for straight alcohol fuels was not amended by the jobs bill. Current law provides for an income tax credit of 10Â¢ per gallon ($4.20 per barrel) for up to15 million gallons of annual ethanol production by a small ethanol producer, defined as one withethanol production capacity of 30 million gallons per year or less (about 2,000 barrels per day). Thiscredit, which was enacted as part of the Omnibus Budget Reconciliation Act of 1990 ( P.L. 101-508 ),is strictly a production tax credit available only to the manufacturer who sells the alcohol to anotherperson for blending into a qualified mixture in the buyer's trade or business, for use as a fuel in thebuyer's trade or business, or for sale at retail where such fuel is placed in the fuel tank of the retailcustomer. Casual off-farm production of ethanol does not qualify for this credit. The small ethanolproducer credit is limited in the same way as the blender's tax credit. The amount of the credit isreduced to take into account any excise tax exemption claimed on ethanol output and sales. The 2004"Jobs Bill" allowed the flow- or pass-through of the small ethanol producer credit to the patrons ofa cooperative, thus allowing farmer cooperatives that produce ethanol to also benefit from theprovision. (15) Individuals or businesses that purchase alternative fuel vehicles (AFVs) can claim a taxdeduction from adjusted gross income for the incremental costs of new vehicles and upgrades toexisting conventionally fueled vehicles. The maximum tax deduction for cars is $2,000, but fortrucks it can go as high as $50,000. A tax deduction is also available, up to $100,000, forinvestments in any equipment needed in dispensing the alternative fuels -- for storing and dispensingthe clean fuel and otherwise refueling clean fuel burning vehicles. For both of these tax incentives,alternative fuels are defined as compressed natural gas, liquefied petroleum gas, liquefied naturalgas, hydrogen, and electricity, and they include 85% (neat) alcohol fuels, ether, or any combinationof these produced from biomass. The deduction is reduced by 75% in 2006 -- the $2,000 deductionwould become $500 -- for clean fuel vehicles (or refueling property) purchased during 2006, and by100% thereafter i.e., it is eliminated after December 31, 2006. This deduction is currently little used. An income tax credit is also available for the production of a broad variety of fuels derivedfrom various alternative energy resources (such as oil from tar sands or shale, gas from coalbeds,brine or tight formations, synthetic fuels, etc.). This is the alternative fuels production tax credit,also known as the Â§29 tax credit (because it is part of Internal Revenue Code section 29), which in2004 was $6.47 per barrel of oil equivalent. Certain types of alcohol fuels -- either ethanol ormethanol produced synthetically from coal or lignite -- could qualify for this non-refundable taxcredit. Alcohol fuels produced from biomass do not qualify for this credit, although gas producedfrom biomass does qualify. There is little if any production of liquid synthetic fuels from coal in theUnited States so that, based on current information, this credit is not claimed on alcohol fuels usedin transportation. (16) This technical appendix calculates the economic or subsidy value of the new alcohol fuelsexcise tax credit as compared to the old excise tax exemption and the non-subsidized 100% gasoline. That subsidy value is measured as the difference in marginal costs for a profit-maximizing gasolinesupplier. Pre-income tax profits, with a unit excise tax, such as a gasoline tax, is: (1) where P is price, Q is output, C (Q) is a total cost function, and T 1 is a unit excise tax. Maximizing before-tax profits with respect to output Qleads to the following condition: (2) which implies that, (3) i.e., profit maximization leads the firm to produce at that point where price P is equal to the marginalcost C'(Q) and the excise tax T 1 . In other words, in a competitive market, a profit maximizing firmfacing a unit tax on gasoline faces a higher marginal cost curve by the amount of the tax -- themarginal cost curve shifts up (or is higher than the non-taxed marginal costs) by 18.4Â¢/gallon. A pure income or profits tax t is completely neutral (it does not affect the profit maximizinglevel of output) under these conditions, as is shown next. (4) (5) which implies that, (6) Equation (6) is the same as equation (3) because the (1 - t) term cancels -- the equilibrium level ofoutput and price is unaffected by the pure business income tax even with the imposition of a unit tax,such as the 18.4Â¢ gasoline tax. Now, however, assume that there are two unit excise taxes, T 1 is the excise tax per gallonactually paid, and T 2 is the excise tax rate deductible for purposes of the income tax. Then, theafter-tax profit function becomes: (7) (8) Finding the level of Q that maximizes profits lead to the following condition: (9) which reduces to: (10) Where P and C'(Q) are, as before, price and marginal costs, and [ T 1 - t Â· T 2 ]/(1- t) is the shift in themarginal cost curve after allowance for the deductibility of excise taxes as an expense against theincome tax. To illustrate, when a gasoline distributor is paying 18.4Â¢/ gallon ( T 1 = 18.4Â¢), and deductingthe same amount against the income tax (T 2 = 18.4Â¢) then the tax terms in equation (10) become: (11) Note that because T 1 = T 2 the (1 - t ) terms cancel and the shift in marginal cost is simply T 1 = 18.4Â¢. This is also true when a gasoline blender is paying 13.3Â¢ because of the exemption -- the blender isalso deducting 13.3Â¢ against the income tax and the shift or increase in marginal costs equals theamount of the tax, 13.3Â¢. However, when T 1 and T 2 differ, as they do under the new restructured alcohol fuels taxincentives, then the shift in marginal costs is defined by equation (10). Under present law, i.e., sinceJanuary 1, 2005, T 1 = 13.3Â¢, but T 2 = 18.4Â¢. Thus, assuming the marginal corporate income tax rateis 25% (t = .25), the tax term in equation (10) -- the shift or increase in marginal costs -- becomes: (12)13.3Â¢ - .25 (18.4Â¢)/ (1 - .25 ) (13)= 13.3Â¢-4.6Â¢/.75 (14)= 11.6Â¢ That represents the increase in marginal costs under the new alcohol fuels excise tax credit (row 4,column 3 in Table 1 ). This is 6.8Â¢ less than the increase under the gasoline tax, and 1.7Â¢ less thenthe increase in costs under the old exemption (the subsidy value is 6.8Â¢/gallon rather than5.1Â¢/gallon). 

Summary: Prior to January 1, 2005, alcohol fuel blenders qualified for a 5.2Â¢ tax exemption against theexcise taxes otherwise due on each gallon of blended mixtures (mixtures of 10% ethanol, and 90%gasoline). This exemption, which was scheduled to decline to 5.1Â¢ on January 1, 2005, reduced thegasoline excise tax for "gasohol," from 18.4Â¢ to 13.2Â¢/gallon. The reduction was realized at the timewhen the gasoline tax was otherwise imposed: typically when the fuel was loaded from the terminalonto trucks for distribution. The 5.2Â¢ exemption could also be claimed later, i.e., when blendersfiled their income tax return, as a 52Â¢ excise tax credit per gallon of alcohol used to make a fuelmixture (which was also scheduled to decline to 51Â¢ in tandem with the exemption on January 1,2005). This credit, however, was not as valuable as the exemption because 1) it was taxable asincome, 2) was not available instantaneously as the fuel was blended -- blenders had to wait untiltheir income tax returns were filed to reduce their tax liability by the amount of the credit, and 3) thetax credit was not refundable -- it was only available to the extent of tax liability. Because theprimary benefits from alcohol fuels were realized through an exemption rather than a tax credit,revenue losses from the exemption (or reduced excise taxes) accrued to the Highway Trust Fund(HTF). The American Jobs Creation Act of 2004 ( P.L. 108-357 ) restructured the basic tax subsidiesfor alcohol fuels: 1) the blender's income tax credits were eliminated and 2) the blender's excise tax exemption was replaced by an "instant" excise tax credit of the same amount -- 5.1Â¢/gallon of a 90:10mixture, which is also equivalent to 51Â¢ per gallon of ethanol in the mixture. These tax reforms wentinto effect on January 1, 2005. As before, the excise tax credit is claimed against the 18.4Â¢ per gallonexcise tax on gasoline, so that the actual excise tax paid and remitted to the Treasury is 13.3Â¢ -- thetax is reduced by 5.1Â¢/gallon just as with the exemption. When income tax effects are considered,however, the new excise tax credit has a greater economic or subsidy value than the exemptionbefore it because income tax deductions are taken at 18.4Â¢ rather then 13.3Â¢. In other words, bylabeling the tax reduction as an excise tax credit rather than an excise tax exemption , the tax lawtreats the blenders as paying the full excise tax of 18.4Â¢/ gallon rather than 13.3Â¢ per gallon. At a25% marginal income tax rate, the additional 5.1Â¢ deduction is valued at 1.7Â¢/gallon of a blend or17Â¢/gallon of ethanol, which means that the total after-tax subsidy for alcohol fuel mixtures iseffectively 68Â¢/gallon of ethanol rather than the nominal rate of 51Â¢. By nominally increasing the excise tax on gasohol by 5.1Â¢/gallon, an extra $1,500 millionin FY2006 is projected to be allocated into the HTF from the general fund, which implies that HTFexpenditures, and budget deficits can be expected to be higher than under the exemption. In additionto the alcohol fuel mixture excise tax credit there are three other federal tax subsidies that areavailable for the production and use of alcohol transportation fuels (but are little used).Comprehensive energy policy legislation H.R. 6 , as passed by the Senate, includes arenewable fuels standard that would, by 2010, more than double both the use of ethanol and therevenue loss from the new alcohol fuels tax incentives.