The Tax Treatment of Alternative Transportation Fuels

Salvatore Lazzari
Economics Division
Updated March 19, 1997
97-195 E

CONTENTS:

Introduction

Structure of Motor Fuels Excise Taxes
-- Traditional Fuels
-- Alternative Fuels
-- Effective Tax Rates
-- Conclusions

Evolution of Federal Highway Taxes on Transportation Fuels
-- Deficit Reduction
-- Highway Finance
-- Energy Policy Considerations

SUMMARY

Historically, federal energy policy, including energy tax policy, promoted the development of oil and gas at the expense of alternative fuels and nonconventional forms of energy. Beginning in the 1970s, there was a shift in the focus of energy tax policy away from oil and gas toward energy conservation and toward the development of alternative fuels and nonconventional forms of energy. Energy policy considerations also began to influence both the level of motor fuel taxation and, more importantly, the structure of tax rates. The Energy Tax Act of 1978 introduced the excise tax exemptions for alcohol fuels; subsequent tax legislation expanded this incentive and broadened the tax exemptions to include other alternative fuels. The Energy Policy Act of 1992 included tax incentives applied to alternative fuel vehicles and to refueling facilities for alternative fuels. The Omnibus Budget Reconciliation Act of 1993, in addition to imposing a new tax on compressed natural gas (CNG), raised the tax rate on motor fuels used in highway transportation by 4.3 cents per gallon.

As a result of a series of independent actions taken over many decades, during most of which there was no contemporary interest in the current policy goal of increased use of domestic nonpetroleum fuels, the current structure of excise taxes on alternative transportation motor fuels has evolved into a complex structure, with per gallon tax rates varying by type of fuel both on a statutory basis and, more importantly, when adjusted for the differences in energy content among the fuels (that is, on a British thermal unit basis).

Compared with gasoline, three fuels -- electricity, compressed natural gas (CNG), and gasohol blended with 10% ethanol from biomass -- are favored: electricity by not being viewed as a highway fuel and thus not carrying a highway tax burden at either the federal or state level; CNG by virtue of being taxed at the federal level only at the newly imposed additional deficit reduction rate, and ethanol gasohol because of its 5.4 cents per gallon exemption. Three other fuels -- propane (LPG), liquefied natural gas (LNG), and pure methanol fuels -- are significantly disadvantaged, because given the level at which they are taxed and their lower energy densities than gasoline (and the energy-equated CNG) they bear a higher effective tax rate per unit of energy. LPG is the most disadvantaged of any alternative fuel.

For the past 5 years, Congress has gradually increased emphasis on the role that alternative motor fuels might play as a means to reduce oil imports, improve urban air quality, and provide domestic jobs. As a result of these legislative actions, there may be as many as 3 million alternative fuel vehicles on the road by 2010. No action has been taken to rationalize the disparate federal highway taxes applied to the different fuels. However, the 105th Congress has on its agenda many transportation policy issues that might raise questions about the present tax differentials on alternative transportation fuels. A task force of the House Committee on Ways and Means is to examine the current complex structure of transportation excise taxes.

INTRODUCTION

Historically, federal energy policy, including energy tax policy, promoted the development of oil and gas at the expense of alternative fuels and nonconventional forms of energy. As a result of the two energy crises of the 1970s (the 1973 oil embargo and the Iran/Iraq war of 1979-80 that precipitated a tenfold increase in crude oil prices) there was a shift in the focus of energy tax policy away from oil and gas toward energy conservation and toward the development of alternative fuels and nonconventional forms of energy.

In the transportation sector, which is the single largest petroleum consuming sector in the United States, federal energy tax policies became focused on reducing petroleum consumption, stimulating the production and use of alternative fuels, and reducing petroleum import dependence. Beginning in 1978, the Energy Tax Act provided gasohol (a blend of gasoline and 10% ethanol produced from corn and other grains or agricultural products) a total exemption from the 4 cent per gallon gasoline tax. Numerous subsequent tax bills 1) raised the gasohol exemption and 2) introduced exemptions for methanol and other alternative fuels (compressed natural gas) and a variety of other tax breaks for alternative and nonconventional fuels. The Energy Policy Act of 1992 included tax incentives applied to alternative fuel vehicles and to refueling facilities for alternative fuels. The Omnibus Budget Reconciliation Act of 1993 introduced an excise tax for compressed natural gas (CNG), a gaseous transportation fuel.

In more recent years, Congress has been gradually increasing emphasis on the role that alternative motor vehicle fuels might play not only as a means to reduce oil imports, but also to improve urban air quality and provide domestic jobs. It has passed several nontax bills that mandate the use of alternative fuel vehicles designed to stimulate the technology, economics, and infrastructure needed for these fuels to compete with the incumbent fuels: gasoline and diesel. However, no action has been taken to rationalize the disparate highway taxes applied to the different fuels as a result of a series of independent actions taken over many decades.

The 105th Congress has on its agenda many transportation policy issues that might raise questions about the present tax differentials on alternative transportation fuels: Ways and Means Committee Chairman Archer established a bipartisan transportation task force to examine the structure of motor fuels excise taxes; the 105th Congress is also currently in the beginning stages of the reauthorization of the Interstate Surface Transportation program; some have called for reallocating the 4.3 cent general fund tax component of the various transportation fuel taxes to the highway trust fund, with a small share 0.1 cents going to Amtrak; others have proposed a substantial reduction, and even complete elimination, of the federal gasoline tax combined with allowing the states to pick up the rate -- this is the so called "turnback" or devolution proposal. In addition, bills have been introduced to take the transportation trust funds off budget. Also to be examined in the 105th Congress are the ethanol tax credits, the nonconventional tax credits under code section 29, and other energy tax subsidies and incentives, which will likely also draw attention to the current structure of exemptions (excise tax rates) on alternative fuels.

This report reviews the current federal tax treatment of different types of alternative motor fuels in comparison with the traditional petroleum highway motor fuels: gasoline and diesel. Given that there may be a significant discussion of energy taxation in the 105th Congress, the purpose of this report is to describe the current status of federal highway fuel taxation. (See Endnote 2.)

STRUCTURE OF MOTOR FUELS EXCISE TAXES

Traditional Fuels

The Internal Revenue Code (IRC) imposes excise taxes on most motor fuels used in a wide variety of transportation modes, with the tax rates per gallon varying by type of fuel (gasoline, diesel, or other) and use (highways, water, air, or rail). Generally, any type of liquid motor fuel used in transportation that is not specifically exempted is subject to tax. (See Endnote 3.)

The more typical, and most widely used fuels -- gasoline and diesel -- are taxed at 18.3 cents per gallon and 24.3 cents per gallon, respectively (IRC Section 4081). These tax rates have two components: for gasoline, a 14.0 cent highway trust fund rate (which goes into the Federal Highway Trust Fund), and a 4.3 cent deficit reduction rate (which is designated to the general fund for deficit reduction). The 24.3 cent diesel tax rate comprises the 20.0 cent highway trust fund rate and the 4.3 cent deficit reduction rate (Section 4091, and Section 4041(a)). An additional 0.1 cent Leaking Underground Storage Tank (LUST) trust fund rate expired at the end of 1995. (See Endnote 4.)

In addition to the more traditional fuels, aircraft fuels, train fuels, and motorboat fuels are also taxed at varying rates. Table 1 shows the structure of the federal excise taxes on these fuels by type of fuel and by its use.

Alternative Fuels

Historically, the taxes on gasoline, diesel, and other highway transportation motor fuels have applied to liquids rather than gaseous, fuels -- fuels that are a liquid at the time they are actually delivered into the supply tank of a vehicle or motorboat. And this is still the general rule. What the tax code terms "special motor fuels" that are liquid -- naphtha, benzene, benzol, casinghead gasoline, and natural gasoline (also known as gasoline substitutes) -- are taxed at 18.3 cents if the fuel is used in a highway vehicle for purposes that are not specifically tax-exempt (Section 4041(a)(2)).

TABLE 1. Federal Transportation Motor Fuels Taxes: Traditional Fuels |TABLE NOT INCLUDED|

Included in this "special motor fuels" category is liquefied petroleum gas (LPG, or propane) (See Endnote 5.), and liquified natural gas (LNG) which are in the category of "alternative motor fuels," but also taxed at 18.3 cents per gallon because they are liquid when delivered into the supply tank of the consuming vehicle. (See Endnote 6.)

In addition to propane, LNG and other "special motor fuels" alcohol fuels and other types of alternative transportation fuels, particularly alcohol fuel mixtures, are provided with tax exemptions (effectively reducing their tax rates) at varying rates depending upon the fraction of alcohol that is in the mixture and the type of alcohol. Gasohol -- blends of gasoline and ethanol consisting of 10% ethanol from biomass and 90% gasoline -- is taxed at 12.9 cents per gallon (the exemption is 5.4 cents from the 18.3 cent gasoline tax). (See Endnote 7.)

Blends that are 7.7% or 5.7% alcohol (either ethanol or methanol) receive an exemption prorated from either the 5.4 cent exemption for ethanol blends or the 6.0 cent exemption for methanol blends. Thus, 7.7% ethanol blends qualify for a 4.158 cent exemption (they are taxed at 14.142 cents per gallon); mixtures that are 5.7% ethanol qualify for a 3.078 cents per gallon exemption (they are taxed at 15.222 cents per gallon). In all these cases, the exemption equates to 54 cents per gallon of ethanol used.

The exemption for gasohol blends also applies to blends of diesel and biomass-derived alcohol and blends of a special motor fuel and biomass-derived alcohol, whether ethanol or methanol. Alcohol blended with diesel -- sometimes called "dieselhol" -- is taxed at the rate of 18.9 cents (the exemption is 5.4 cents, the same as for gasoline) if the alcohol is ethanol and 18.3 cents per gallon is the alcohol is methanol.

Blends of special motor fuels and either ethanol or methanol from biomass are taxed at 12.9 cents or 12.3 cents, respectively (the exemption is either 5.9 cents or 6.0 cents, respectively). However, in these cases the blended mixture must be at least 85% alcohol (IRC Section 4041(b)(2)). Straight ethanol (E100) and methanol (M100) would also qualify for these exemptions; they are taxed at 12.9 cents and 12.3 cents, respectively.

It should be noted that in all these cases of alcohol blends, the alcohol must be at least 190 proof (95% pure alcohol) and the alcohol cannot be derived from petroleum, natural gas, or coal (including peat). (The latter limitation means that exempt alcohol is currently derived from biomass.) Thus, while both methanol and ethanol qualify for the exemption, methanol is in effect disqualified because it currently is mostly produced from natural gas. (See Endnote 8.)

In the case of special motor fuels that are at least 85% alcohol (ethanol or methanol) derived from natural gas, there is a separate exemption of 7.0 cents per gallon (the tax rate is 11.3 cents per gallon (Section 4041(m)).

Finally, it is important to underscore the tax treatment of electricity and fuels that are gaseous at the time they are delivered into the vehicle, such as compressed natural gas (CNG). Such fuels were historically not taxed because the motor fuels excise taxes applied to liquid fuels only. This is still true of electricity, but it is no longer true of CNG, which as a result of the Omnibus Budget Reconciliation Act of 1993 (P.L. 93-66) is now taxed at 48.54 cents MCF (thousand cubic feet), the Btu equivalent of 5.4 cents per gallon of gasoline (IRC Section 4041(a)(3)). (See Endnote 9.)

The current tax code thus contains a wide variety of tax rates that vary by type of fuel. A summary of the statutory tax rates on the various alternative highway motor fuels is shown in row 1 of table 2. This row of numbers presents the statutory tax rates on a per gallon basis -- on an MCF basis in the case of CNG -- following the discussion in the text. Gasoline is shown first because it is treated as the benchmark fuel in this report. As these data clearly show, statutory tax rates on alternative transportation motor fuels display wide variation among fuels. Excluding CNG these range from 11.3 cents per gallon for neat methanol fuels to 24.3 cents per gallon for diesel. As explained elsewhere in this report, these differences are a result of many independent legislative actions, with varying policy objectives, taken over many years.

Effective Tax Rates

The remaining numbers in table 2 shows the variation in "effective" tax rates -- that is, statutory tax rates adjusted for energy content (on a Btu basis). The statutory tax rates specified under the tax laws are adjusted for differences in energy content among fuels. All of the alternatives have less energy per gallon (Btu's) than gasoline or diesel fuel. (See Endnote 10.) That is to say, one gallon of that fuel, or its equivalent, has a lower energy content (fewer Btu's) than gasoline. Therefore, more of that fuel has to be consumed in order to do the same work -- drive the same distance -- as a gallon of gasoline, resulting in more tax paid per gallon of gasoline equivalent than per gallon of the fuel. Economically, this is a much more rational basis of comparison and analysis. The effects on supply and demand, and therefore market price and quantity of fuel used, and interfuel substitution possibilities, depend on the tax corrected for energy content.

The second row of numbers in table 2 shows the energy content per gallon of each of the fuels in British thermal units (Btu). (See Endnote 11.)

The third row of numbers shows the tax rates adjusted for the energy content of a particular fuel compared to that of a gallon of gasoline. This row translates the statutory tax rates in row 1 to the tax rates on 115,400 Btu's of a particular fuel. Since every alternative fuel has fewer Btu's per gallon equivalent than gasoline, more of that fuel would have to be consumed to achieve a given quantity of work (to drive a specific distance) as compared to gasoline. And more taxes per gallon would be paid on that alternative fuel as compared with gasoline. Given the relative differences in Btu's among the fuels there is another source of variation in the effective tax rates. For example, since gasoline contains 38% more Btu's per gallon than propane (115,400 versus 83,500), 38% more propane would be required to deliver the same quantity of energy as a gallon of gasoline. Thus, the "effective" excise tax rate for propane is 25.3 cents per gallon, 38% more than the 18.3 cents per gallon tax.

CNG is a special case. It is taxed at 48.54 cents per one thousand cubic feet (MCF), which is equivalent to 1,031,000 Btu's. Therefore, based on the quantity of CNG equivalent to one gallon of gasoline, the tax rate is approximately 5.4 cents per gallon. (See Endnote 12.)

The fourth row of numbers shows what the per gallon tax rates on the various fuels would be if they were set to achieve parity with gasoline on a Btu basis. Thus, again using propane as an example, since it contains 35% fewer Btu's than gasoline, a tax rate that is 35% less than gasoline -- 13.5 cents instead of the current rate of 18.3 cents -- would achieve parity with gasoline on a Btu basis. Here electricity is a special case. Currently, electric cars are not taxed, although their drivers benefit from the use the highway system and roads. It takes approximately 11 kilowatt hours of electricity on the input side to equal roughly the same Btu's as a gallon of gasoline. Thus, to achieve parity with gasoline, electric cars would be taxed at about $1.66 per kilowatt hour. (See Endnote 13.)

Another way of viewing the tax rates in row 4 is that they are the gallon equivalent of a Btu tax at the rate of about 15.8 cents per 100,000 Btu's. If the various fuels were taxed at the same rate of 15.8 cents per 100,000 Btu's, then the tax rates per gallon of gasoline equivalent would be the estimates in row 4.

Conclusions

The current structure of excise taxes on alternative transportation motor fuels has evolved into a complex, almost labyrinthine system of taxation, with tax rates varying by type of fuel both on a statutory basis and adjusted for the differences in energy content among the fuels. In particular, three fuels -- electricity compressed natural gas (CNG) and gasohol blended with 10% ethanol from biomass -- are favored: electricity by not being viewed as a highway fuel and thus not carrying a highway tax burden at either the ffederal or state level, CNG by virtue of being taxed at the federal level only at the newly imposed additional deficit reduction rate, and ethanol gasohol because of its 5.4 cent per gallon exemption.

In some cases, however, alternative fuels bear a higher tax than gasoline. In particular, three fuels -- propane (LPG), liquefied natural gas (LNG), and pure methanol -- have effective tax rates, adjusted for energy content, about 7 cents per gallon higher than gasoline. These fuels are significantly disadvantaged because the level of tax specified by law is too high given the energy density of the alternative fuel relative to gasoline (and the energy-equated CNG). Propane is disadvantaged the most of any alternative fuel. The higher tax burden on these alternative fuels raises questions about the consistency of federal energy tax policy, which seeks to encourage alternative fuels development.

EVOLUTION OF FEDERAL HIGHWAY TAXES ON TRANSPORTATION FUELS

The present structure of federal excise taxes on motor fuels evolved from three public policy concerns: (1) revenue generation for budget deficit reduction; (2) revenue generation for highway infrastructure financing; and (3) energy policy considerations.

Deficit Reduction

The federal excise tax on gasoline was first enacted as part of the Revenue Act of 1932 (P.L. 154), although the first known federal proposal to tax gasoline goes back to the Wilson Administration. (See Endnote 14.) The tax, which was initially 1 cent per gallon, was enacted as part of a program of tax increases designed to generate additional revenue to reduce budget deficits, which were looming due to the deepest and longest economic recession in U.S. history. Revenues from the tax were allocated to the general fund for deficit reduction.

Revenue generation for deficit reduction was also the underlying rationale for the gasoline tax rate increases of 1940, 1941, 1951, and 1954. The increases of 1951, which were part of the Revenue Act of 1951, raised the gasoline tax from 1.5 cents to 2 cents per gallon and introduced the tax on diesel fuel, also at the rate of 2 cents per gallon. Revenue generation to help finance the Korean War was an additional reason for these tax rate increases. Revenue generation for deficit reduction was part of the rationale for the tax rate increases of 1990. The Omnibus Budget and Reconciliation Act of 1990 (P.L. 101-508) raised the gasoline and diesel fuel taxes, which had increased to 9.1 cents and 15.1 cents per gallon respectively during the 1980s, by another 5 cents per gallon and authorized that revenues from 2.5 cents of the 5.0 cent increase would go toward deficit reduction rather than the highway trust fund. The 1990 law also allowed diesel fuel used in trains to be taxed at 2.6 cents per gallon, with 2.5 cents for deficit reduction and 0.1 cents for the LUST fund. Prior to the 1990 law, diesel used in trains was tax-exempt because it was a non-highway use.

The Omnibus Budget Reconciliation Act of 1993, in addition to imposing a new tax on CNG, raised the tax rate on motor fuels used in highway transportation by 4.3 cents per gallon, and allocated all of the increase to the general fund. This increase was also undertaken largely for purposes of deficit reduction.

Highway Finance

In 1956, the Highway Trust Fund was created under the Federal-Aid Highway Act of 1956 (P.L. 84-627). This marked a fundamental change in federal highway financing -- from general revenues to motor fuels taxes. Under the Act, all gasoline tax revenues and most other highway user revenues went into that fund for highway construction finance. The purpose of the trust fund was to finance the cost of the interstate highway system. Thus, financing highway infrastructure rather than deficit reduction became the primary rationale underlying most of the increases in tax rates and expansion of the tax bases since then. From 1956 to 1982, there were two increases in tax rates, several extensions of expiration dates, and repeals of scheduled declines in tax rates. Each of these amendments was made to generate more money for the Highway Trust Fund programs.

Beginning in late 1982, another objective was added to the list. Rather than fiscal deficits or energy security, attention began to focus on the large portion of the roads and highways in this country that had fallen into disrepair and on the unemployment rate, which had risen steeply as a result of the 1981-82 economic recession. Between 1982 and 1990 there were four increases in the motor fuels excise taxes. Title I of the Surface Transportation Assistance Act of 1982 (P.L. 97-424) boosted the motor fuel excise taxes by 5 cents per gallon (to 9 cents). The 1982 law also provided that 1 cent of the 5 cents increase would be allocated to a special mass transit account. The Tax Reform Act of 1984 (P.L. 98-369) increased the diesel fuel tax another 6 cents per gallon in return for a repeal of a scheduled boost in truck taxes based on vehicle weights. This made the tax on diesel fuel 15 cents per gallon. A 0.1 cent per gallon tax was added by the Superfund Amendments and Reauthorization Act of 1986 (P.L. 99-499) to pay for the cleaning up of leaking underground storage tanks. This tax expired at the end of 1995.

Energy Policy Considerations

Beginning in the 1970s, energy policy considerations began to influence both the level of motor fuel taxation and, more importantly, the structure of tax rates. Reducing petroleum consumption and importation made it easier to support motor fuels excise tax increase proposals, and was the rationale for reducing the tax rates on alternative fuels, particularly alcohol fuels. Proposals to increase the federal excise tax on gasoline became common during and after the 1973/1974 Arab oil embargo and subsequent rises in crude oil prices. Coming in the aftermath of the 1973-74 oil shock, such proposals were intended largely to reduce consumption of motor fuels (by raising their prices), and thereby reduce oil imports. Perhaps the most ambitious of these proposals was that of Senator Henry Jackson, proposing to increase the tax by $1.00 per gallon.

The concept of taxing alternative fuels at lower rates, which began in the middle-70s in response to the first oil shock, was actually realized in 1978 with the enactment of the Energy Tax Act (P.L. 95-618). (See Endnote 15.) Prior to this law, there were no special exemptions for highway use of alternative motor fuels.

The federal exemption for alcohol fuels under the 1978 law was for the full amount of the gasoline tax: 4 cents per gallon. The Crude Oil Windfall Profits Tax (P.L. 96-223) extended the 4 cent exemption from October 1, 1984, to December 31, 1992. The Surface Transportation Assistance Act of 1982 (P.L. 97-424) raised the gasoline tax from 4 cents to 9 cents per gallon and also changed the exemption for gasohol from the complete 4 cent exemption to a partial 5 cent exemption (gasohol would be taxed at 4 cents per gallon instead of 9 cents per gallon). The Deficit Reduction Act of 1984 (P.L. 98-369) raised the diesel fuel tax from 9 cents to 15 cents per gallon as part of a compromise that also lowered the highway use taxes on trucks. The 1984 tax law also raised the gasohol exemption from 5 cents to 6 cents (i.e., it reduced the tax rate for gasohol from 4 cents to 3 cents), and retained the 9 cent exemption for "neat" alcohol fuels, and provided that alcohol produced from natural gas would also qualify for the exemption. The Tax Reform Act of 1986 (P.L. 99-514) reduced the excise tax exemption for 85% alcohol from 9 cents to 6 cents per gallon (for sales made beginning in 1987). The Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647) made minor liberalizations to the excise tax rules. Finally, the OBRA of 1990 reduced the alcohol fuels exemption to 5.4 cents per gallon. (See Endnote 16.)

The Energy Policy Act of 1992 (P.L. 102-486) extended the gasohol excise tax exemption to gasohol that contains less than 10% alcohol. Two categories of gasohol mixtures were prescribed: mixtures containing 7.7% alcohol; and mixtures containing 5.7% alcohol.

ENDNOTES

(1) This report reviews the current federal tax treatment of different types of alternative motor fuels in comparison with the traditional petroleum highway motor fuels. Given that there may be a significant discussion of energy taxation in the 105th Congress, the purpose of this report is to describe the status of federal highway fuel taxation at the outset of the 105th Congress. This report is not intended to track particular bills or resolutions through the legislative process. For continuously updated information on major tax legislation see CRS Issue Brief 96040: Major Tax Issues in the 105th Congress. You may also wish the Bill Summary and Status File of the Legislative Information System (http://www.congress.gov).

(2) States tax motor fuels through a combination of excise taxes and other fees and taxes. Many states also have tax policies for ethanol, propane, and other alternative motor fuels.

(3) Many non-highway uses of motor fuels, such as farm uses or commercial uses in stationary motors and some highway uses of motor fuels such as uses by school districts or state and local governments are tax-exempt.

(4) The LUST trust fund is a federal program that finances the cost of cleaning up spills from underground fuel tanks. The 0.1 cent per gallon tax on motor fuels that financed the trust fund expired at the end of 1995.

(5) LPG is made up primarily of propane, with varying amounts of propenes, butane, and some minor constituents. In this report, propane and LPG are used interchangeably.

(6) Where LPG is sold by weight, the equivalent of a gallon for purposes of computing the motor fuels tax is 4.25 pounds per gallon (see Rev. Rul. 71-464, 1971-2 CB 357).

(7) If the alcohol is methanol from biomass, the resulting gasohol blend would be taxed at only 12.3 cents per gallon (exemption is 6.0 cents per gallon of mixture). However, although under the IRC blends of gasoline with biomass-derived methanol would also qualify, such blends are disqualified under the Clean Air Act because of the associated increase of emissions of ozone-forming pollutants. The Clean Air Act, as amended, requires that all gasoline sold in the 40 carbon monoxide (CO) non-attainment areas contain 2.7% oxygenate; and that all reformulated gasoline sold in 9 ozone non-attainment areas (6 of which are also CO non-attainment areas) contain 2 percent oxygenate. An oxygenate is a gasoline additive that adds oxygen to gasoline and makes the fuel burn more completely and more cleanly. Tailpipe emissions -- nitrogen oxides, carbon monoxide, particulate matter, and other hydrocarbons -- are a result of incomplete fuel combustion. Complete combustion of gasoline in pure oxygen would yield only carbon dioxide and water. Methanol blends are limited to less than 0.3% methanol, in effect ruling out 10% gasohol made from methanol.

(8) In the case of the blended fuels, methanol produced from coal or natural gas did not originally qualify for the tax exemptions. This is because when the ethanol exemption was first introduced in the 1977 version of the Energy Tax Act of 1978, the Congress believed that the cost of producing methanol from coal and natural gas was low enough without a Federal tax subsidy; whereas, the cost of producing methanol from wood and ethanol from grain was costly and did warrant a subsidy. According to a committee report: "The technology for the production of ethanol from agricultural products and for the production of methanol from forestry products seems to require greater subsidies than for the production of methanol from coal or from urban waste." See: U.S. Congress. Senate. Finance Committee. Energy Production and Conservation Tax Incentive Act. S.Rept. 95-529 on H.R. 5263, 95th Cong., 1st Sess. Washington, U.S. Govt. Print. Off, 1977. p. 45.

(9) It should also be mentioned that for each of the various alternative fuels the total tax rate consists of a highway trust fund rate and a general fund rate. In general, the general fund component is 4.3 cents for each fuel and the highway trust fund component is the difference between the total tax rate and the 4.3 cents. Thus, generally, it is the highway trust fund component that differs among the various fuels. However, for CNG, and alcohol fuels made from natural gas this does not hold. For CNG, the entire tax is allocated to the general fund; for alcohol fuels made from natural gas 5.55 cents per gallon of the total tax is allocated to the general fund for deficit reduction.

(10) The higher energy density of gasoline and diesel fuel is one of their advantages compared to the alternatives, in that a given storage capacity for fuel leads to a longer driving range per tankful.

(11) The heat content of a fuel is the quantity of energy released when it is completely combusted under a certain set of conditions. One Btu, for example, is the amount of heat required to heat one pound of water one Fahrenheit degree a specific set of conditions. Another cause of differences in heat values used in various sources is that all of these fuels are mixtures whose compositions vary from place to place and time to time. For consistency, this paper uses the net heat values used by the Energy Information Administration and by some authors. See Oak Ridge National Laboratories. Transportation Energy Data Book: Edition 15. Prepared for the U.S. Department of Energy. May 1995. p. B-2. See also: Klass, Donald L. Alcohol Fuels. In Kirk-Othmer Concise Encyclopedia of Chemical Technology. Edited by Martin Grayson and David Eckroth. New York, John Wiley and Sons, 1985. pp. 50-52.

(12) The intent is to equate the energy content of a "gallon" of CNG to the energy content of a gallon of gasoline. But, there has not been a standard definition of Btu equivalency between CNG and gasoline. The exact amount depends upon gas composition, the temperature and pressure, which will vary depending on the fuel fill rate and the ambient temperature and the gasoline to which it is compared. Industry practice is to measure the amount of gas fed into the fuel tank, to calculate its energy content, and to divide the energy content by a factor to convert the energy to billable quantity (e.g., therms). The number of therms equivalent to the energy content of a gallon of gasoline is defined by each state. The National Conference on Weights and Measures had recommended a standard Btu equivalency to gasoline for CNG of 1.14 therms (100 cubic feet at standard conditions, which are defined by the American Gas Association as 60oF and 14.73 lbs/sq.in.). The energy content of a therm averages about 100,000 Btu. This recommendation was recently changed, after a review of the issues, to a standard weight of 4.6601 lbs. of gas as the equivalent of one gallon of gasoline. The recommendation has not yet been adopted. In table 2, we follow that intent.

(13) It is assumed that electricity on the input side is generated equally by nuclear power and fossil fuel; the average Btu input from nuclear power (10,678/kwh) and fossil fuels (10,280/kwh) is used to generate one kwh of power for the electric car. While this calculation considers any efficiency losses in the input side, it does not consider any efficiency losses on the output side (as the electricity is being used by the vehicle).

(14) Some of this historical information is taken from: U.S. Library of Congress. Congressional Research Service. Federal Excise Tax on Gasoline and the Highway Trust Fund: A Short History. CRS Report 89-174 E, by Louis Alan Talley.

(15) The Energy Tax Act (ETA) also provided for the gas-guzzler tax, incentives for van pooling, and miscellaneous energy tax provisions. The underlying rationale for the ETA was the perceived failures in the energy markets in allocating resources efficiently and fairly, in coping with the 1973 oil embargo, and in adjusting to the sharp increases in energy prices, the shortages, and the associated adverse economic and social problems.

(16) The 1990 OBRA also introduced a new tax credit for small ethanol producers (less than 15 million gallons per year).