Ethanol subsidies and the highway trust fund

The Highway Trust Fund in the US was established to maintain and expand the national system of highways. The fund has long been financed through excise taxes on motor fuel. In 1978 the Federal Government began subsidising ethanol use through motor fuel tax relief. By subsidising ethanol markets in thin way, the Federal Government has linked these two separate programmes. This paper analyses data from 1980-1996 to estimate the extent to which the ethanol promotion subsidies have had unintended feedback effects upon the appropriations from the highway trust fund. A general model of the fund disbursement process is estimated, and the results are used to simulate disbursements under an alternative regime where ethanol subsidies are not taken from the fund. The results suggest that there have been significant and differential transfers of wealth across states because of this choice of policy instrument. The results also suggest that significant free-riding is occurring because states lose funds regardless of whether they use ethanol. Most importantly, linking the trust fund to the federal desire to subsidise the ethanol market has redistributed significant amounts of trust fund money independent of any changes in state highway need. The results highlight how overlaying an environmental subsidy onto an existing earmarked tax programme c ! an have detrimental feedback effects on the operation of the trust fund.