A New Farm Bill

A New Farm Bill

June 01, 2008 | By Keith Martin in Washington, DC

A new farm bill enacted in late May made several changes in law that affect segments of the US energy market.

The biofuels market is the most significantly affected.

The bill includes a new tax credit of $1.01 a gallon for producing cellulosic biofuel. The credit is reduced to 40¢ a gallon if what is produced is ethanol and to 31¢ a gallon if it is another form of alcohol. (That’s because these forms of fuel also qualify potentially for other existing tax credits.) The credit can be claimed on fuel produced during the period 2009 through 2012. The haircut in the credit for ethanol and other alcohol fuels only applies through 2010, unless Congress extends two existing tax credits for ethanol blenders and small ethanol producers beyond their current expiration date in 2010. Congress suggested that fuel will be considered cellulosic biofuel if it is produced from “dedicated energy crops and trees, wood and wood residues, plants, grasses, agricultural residues, fibers, animal wastes and other waste materials, and municipal solid waste.”

It is not enough merely to produce the fuel. The producer must also do one of four things with it to qualify for tax credits. He or she must either blend it with gasoline or a “special fuel” and sell the mixture to someone else who will use the mixture as fuel in his business, sell it to a blender who will mix and sell the mixture to such a user, sell the biofuel to someone who will use it directly as fuel in business without mixing, or sell the biofuel at retail, without mixing, to people who put it directly in their fuel tanks.

The new credit can only be claimed on fuel that is both produced and used in the United States. If the fuel is alcohol, then, it must be at least 150 proof.

Other ethanol producers suffered a nickel reduction in their tax credit. The farm bill reduces an existing tax credit of 51¢ a gallon for blending ethanol with gasoline or for selling ethanol at retail to 46¢ a gallon. The change takes effect next year, but only if at least 7.5 billion gallons of ethanol are produced or imported into the United States during 2008. If US ethanol falls short of this figure, then the nickel reduction will be delayed until the first year after the target is hit.

The bill extends a US tariff on imported ethanol for another two years through 2010. The tariff is 54¢ a gallon. It had been scheduled to expire at the end of this year. A fair amount of ethanol enters the US duty free or at reduced tariffs under treaties. Blenders who blend imported ethanol with gasoline can still claim the existing 51¢ blender’s credit even though the ethanol comes from overseas.

The bill allows 50% of the cost of new equipment and buildings put in service in Kiowa County, Kansas and surrounding areas to be deducted immediately. The rest of the cost can be depreciated using the regular depreciation schedules. This is a part of Kansas that has been hard hit by tornadoes. It applies only to equipment put in service between May 5, 2007 and December 31, 2008. There is an extra year to put buildings in service. Most power projects are considered “self constructed.” Significant construction cannot have started before May 5, 2007.

Finally, the bill bars US Customs from changing the way it calculates duties on imported goods before 2011. Duties are currently collected on the price actually paid. However, in cases where goods are not purchased directly from the manufacturer, the duty can be based on the wholesale price charged by the manufacturer, ignoring resales by middlemen, if the initial sale was at arm’s-length and the goods were clearly destined for the United States.

Customs proposed in January to start charging duties based on the last sale price before the goods enter the United States. This has importers up in arms over the prospect of having to pay higher duties. Congress blocked implementation of the proposal until Customs can collect data about its economic impact. 

Keith Martin