Saturday, July 22, 2000

Ethanol use costs Ohio

Tens of millions in highway funds lost

By James Pilcher
The Cincinnati Enquirer

        Ohio is missing out on tens of millions in federal highway funds, all because drivers are doing something they were told they should — use gas blended with ethanol. And if the funding “glitch” isn't solved, there's no telling how much more the state will lose in coming years.

        “We're still getting the wear and tear on our roads like everyone else, but the way the revenue is calculated, we're not getting compensated like we should,” said Gordon Proctor, director of the Ohio Department of Transportation. “It may be a wrinkle that no one thought of, but we're still missing out.”

        The most recent federal highway funding formula — hailed as an improvement for Ohio when it was enacted in 1998 — actually pulled $15 million in federal highway tax dollars away from the state this year as compared with last. And with ethanol use on the rise, the hit may be even bigger for the 2000-01 fiscal year.

        The reason for the possible shortfall is federal gas excise tax credits created to keep the ethanol industry afloat. Ethanol is a corn-based form of alcohol added to gasoline to reduce car emissions and therefore air pollution. The Federal High way Administration estimates Ohio ranked second in ethanol usage for fiscal year 1999-2000 and was nearly tied with Illinois for the top ranking.

        State officials say no current projects are being jeopardized by the possible short falls, although they gave no definite answer on what the future impact could be.

        Because of its large population, Ohio has traditionally been a “donor” state, meaning it gets less back in federal highway funds than what it collected in federal gasoline excise taxes. On each gallon of gas, consumers pay 18.4 cents in federal excise taxes, the main source of federal highway funds.

        Under the 1998 formula, Ohio receives 90.5 percent of the amount of federal gas taxes it collected, even though the state has the nation's fifth largest highway system.

        Ohio got 75-77 percent of the tax it collected before the new plan.

        States with smaller populations get more than they put in to help keep up the

        national interstate highway system — repairs they would not be able to afford otherwise.

        That's not the problem, however. What created the shortfall is when no one considered the possibility of a donor state using as much ethanol-blended gas as Ohio did last year.

        When the formula was reconfigured, less than 20 percent of gas sold in Ohio included ethanol. But last year, Ohio's ethanol use hit an all-time high — 39.3 percent of all gas sold in the state was some sort of blend. According to the Federal Highway Administration, the state ranked second nationally in ethanol use last year with more than 212,000 gallons consumed, only 40 gallons less than Illinois.

        For every gallon of gasoline blended with at least 10 percent ethanol, the federal government grants an excise tax credit of 5.4 cents to refiners.

        Another 3.1 cents of taxes per gallon on ethanol-blend gas go into the federal general fund, primarily to further promote and encourage ethanol production.

        That means that donor states like Ohio never get credited for that amount when it comes time to redistribute the excise taxes.

        The end result for Ohio last year was about $185 million in taxes that went elsewhere. Normally the state would be eligible to receive 90.5 percent of that money — about $167 million.

        “That's money that would be there if all we sold was straight gasoline and not gasohol,” said ODOT spokeswoman Robin Grant. “We understand that gasohol will always be with us, but being a donor state, we're getting hit hard both ways.”

        This presents a dilemma for state leaders. On the one hand, they support the fuel alternative and the subsidies that go along with it to help keep prices high for Ohio corn farmers and to reduce car emissions.

        Yet they want to keep as many federal dollars flowing into projects such as Cincinnati's $314 million Fort Washington Way reconstruction as possible.

        George Voinovich helped negotiate the new formula while Ohio governor. His spokesman said no one thought of the possibility of a donor state also using a high amount of ethanol at the time, and that Mr. Voinovich, now a Republican U.S. senator, is exploring possible solutions.

        “The problem is that something we support (ethanol) creates an inequity,” said Voinovich spokesman Mike Dawson, who offered no specific proposals. “That's going to be hard to fix without having the entire funding formula fall apart.”

        Ironically, the state does not require the use of reformulated gas (RFG) to clean up the air (RFG made in the Midwest generally uses ethanol as the main additive).

        Ohio opted for emissions checks as a way to curb air pollution, unlike Kentucky, where RFG is required in Northern Kentucky and Louisville.

        The subject came up last month when Ohio Gov. Bob Taft testified before a congressional subcommittee investigating the recent spikes in gas prices.

        He used the opportunity to highlight what he called “a funding anomaly,” and warned that while Ohio may currently be the only one caught by the formula, other Midwestern states may soon follow. And if Ohio's use of ethanol continues to increase, the loss of federal highway funds may increase as well.

        “The problem ... may become more widespread if ethanol consumption increases throughout the Midwest or nationally,” Mr. Taft said on June 29.

        But a spokesman for Mr. Taft was quick to point out that the governor was not criticizing ethanol or even the subsidies, pointing to the fact that the ethanol business means anywhere from a dime to a quarter more for a bushel of corn — even though no corn from Ohio is used to make ethanol.

        Last year, Ohio produced 471 million bushels, and usually ranks 5th or 6th nationally among corn producers. Corn prices are hitting record lows.

        “We've gone out of our way to communicate to corn growers that our beef is not with ethanol,” said Mr. Proctor, whose state-owned car runs exclusively on ethanol. “It's just been an unintended consequence, but it's still a large chunk of money we'd like to have back.”

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