Congressional Budget Office
Director's Blog

In March, CBO estimated that the total cost of the Troubled Asset Relief Program (TARP) would be $109 billion over the life of the program.  That estimate (which represented the present value, adjusted for market risk, of the program’s activities) was based on market values in February, actions that had occurred up to that time, and an assumption that additional amounts would be allocated to programs that were not yet specified.  In the baseline budget projections that CBO released yesterday, the lifetime cost of the program has been reduced to $66 billion.  Three factors account for the reduction: further repurchases of preferred stock and sales of warrants from banks, a lower estimated cost for assistance to the automobile industry, and the elimination (due to the passage of time and provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203) of the opportunity to create new programs.  Additional information about CBO’s current projections of the cost of the TARP can be found on page 9 of yesterday’s Budget and Economic Outlook: An Update.  CBO will release its next report on the activities and cost of the TARP in the fall.
 

CBO estimates, in its annual summer update of the budget and economic outlook, that the federal budget deficit for 2010 will exceed $1.3 trillion—$71 billion below last year’s total and $27 billion lower than the amount that CBO projected in March 2010 when it issued its previous estimate. Relative to the size of the economy, this year’s deficit is expected to be the second largest shortfall in the past 65 years: At 9.1 percent of gross domestic product (GDP), it is exceeded only by last year’s deficit of 9.9 percent of GDP. As was the case last year, this year’s deficit is attributable in large part to a combination of weak revenues and elevated spending associated with the economic downturn and the policies implemented in response to it.

This report presents CBO’s updated budget and economic projections spanning the 2010–2020 period. Those projections reflect the assumption that current laws affecting the budget will remain unchanged—and thus the projections serve as a neutral benchmark that lawmakers can use to assess the potential effects of policy decisions. As such, CBO assumes that tax reductions enacted earlier in this decade that are currently set to expire at the end of this year do so as scheduled; it also assumes that no new legislation aimed at keeping the alternative minimum tax (AMT) from affecting many more taxpayers is enacted. In addition, CBO assumes that the measures enacted in the past two years to provide fiscal stimulus to the weakened economy will expire as currently scheduled and that future annual appropriations will be kept constant in real (inflation-adjusted) terms. Under those assumptions, the federal budget deficit would decline substantially over the next two years—to 4.2 percent of GDP in 2012—and, consequently, the budget would provide much less support to the economy than has been the case for the past two years.

According to CBO’s projections, the recovery from the economic downturn will continue at a modest pace during the next few years. Growth in the nation’s output since the middle of calendar year 2009 has been anemic in comparison with that of previous recoveries following deep recessions, and the unemployment rate has remained quite high, averaging 9.7 percent in the first half of this year. Such weak growth is typical in the aftermath of a financial crisis. The considerable number of vacant houses and underused factories and offices will be a continuing drag on residential construction and business investment, and slow income growth as well as lost wealth will restrain consumer spending.

All of those forces, along with the waning of federal fiscal support, will tend to restrain spending by individuals and businesses—and, therefore, economic growth—during the recovery. CBO projects that the economy will grow by only 2.0 percent from the fourth quarter of 2010 to the fourth quarter of 2011; even with faster growth in subsequent years, the unemployment rate will not fall to around 5 percent until 2014.

In CBO’s current-law projections, once the economy has recovered, the federal budget deficit amounts to between 2.5 percent and 3.0 percent of GDP from 2014 to 2020. Projected deficits total $6.2 trillion for the 10 years starting in 2011, raising federal debt held by the public to more than 69 percent by 2020, almost double the 36 percent of GDP observed at the end of 2007.

Those projections, which are similar in many respects to the ones that CBO prepared in March, reflect assumptions about spending and revenues that may significantly underestimate actual deficits. Because the projections presume no changes in current tax laws, they result in estimates of revenues that, as a percentage of GDP, would be quite high by historical standards. Because of the assumption that future annual appropriations are held constant in real terms, the projections yield estimates of discretionary spending relative to GDP that would be low by historical standards. Of course, many other outcomes are possible. If, for example, the tax reductions enacted earlier in the decade were continued, the AMT was indexed for inflation, and future annual appropriations remained the share of GDP that they are this year, the deficit in 2020 would equal about 8 percent of GDP, and debt held by the public would total nearly 100 percent of GDP.

A different fiscal policy would also yield different economic outcomes. For example, CBO estimates that under an alternative fiscal path similar to the one mentioned above, real growth of GDP in 2011 would be 0.6 to 1.7 percentage points higher than it is in the baseline forecast, and the unemployment rate at the end of 2011 would be 0.3 to 0.8 percentage points lower. However, later in the coming decade, real GDP would fall below the level in CBO’s baseline because the larger budget deficits would reduce investment in productive capital.

Beyond the 10-year budget window, the nation will face daunting long-term fiscal challenges posed by rising costs for health care and the aging of the population. Continued large deficits and the resulting increases in federal debt over time would reduce long-term economic growth. Putting the nation on a sustainable fiscal course will require policymakers to restrain the growth of spending substantially, raise revenues significantly above their average percentage of GDP of the past 40 years, or adopt some combination of those approaches.
 

The federal budget deficit was about $1.2 trillion in the first ten months of fiscal year 2010, CBO estimates in its latest Monthly Budget Review—about $90 billion less than the roughly $1.3 trillion deficit incurred through July 2009.

By CBO’s estimate, spending during the first 10 months of the fiscal year was about $81 billion (or 2.7 percent) less than outlays at the same point in 2009. That decline includes a net reduction of close to $370 billion in major components of spending related to the recent financial crisis: the Troubled Asset Relief Program (down $277 billion), federal deposit insurance (down $50 billion), and Treasury payments to Fannie Mae and Freddie Mac (down $42 billion).

Adjusted for calendar-related shifts in the timing of certain payments, spending through July for all other federal activities was about $284 billion, or 10 percent, higher than it was in 2009. Spending resulting from enactment of the American Recovery and Reinvestment Act (ARRA) accounted for about one-third of that increase. In addition, payments for Social Security and Medicare grew by $32 billion (or 6 percent) and $13 billion (or 4 percent), respectively. Excluding spending resulting from ARRA, expenditures for unemployment benefits were $33 billion higher and federal spending for Medicaid was $10 billion higher than a year earlier. Outlays for net interest on the public debt were $29 billion (or 18 percent) higher than during the same period last year, reflecting adjustments to the value of inflation-indexed securities.

Receipts for the first ten months of fiscal year 2010 were slightly greater—about $13 billion (or 0.7 percent) more—than the amounts collected during the same period last year. Increases in net corporate income taxes and receipts from the Federal Reserve were partially offset by declines in individual income and payroll taxes. Corporate income taxes rose by about $35 billion (or 33 percent), primarily because of higher taxable profits stemming from improved economic conditions and lower depreciation charges. Receipts from the Federal Reserve were more than double the amount received in the comparable period in 2009—an increase of $37 billion. The Federal Reserve’s higher remittances stem from a much larger portfolio and a shift to riskier and thus higher-yielding investments. 

In contrast, combined receipts from individual income and payroll taxes were about $58 billion (or 4 percent) lower than collections in the same 10-month period last year. Withheld income and payroll tax receipts fell by about $29 billion (or 2 percent), and nonwithheld receipts fell by about $37 billion (or 12 percent). In both instances, the declines occurred earlier in this fiscal year and are largely attributable to lower collections of tax liabilities incurred in 2009. Collections during the past three months were higher than those during the same months last year.

The Monthly Budget Review was prepared by Elizabeth Cove Delisle and Daniel Hoople of CBO's Budget Analysis Division, and by Barbara Edwards and Joshua Shakin of our Tax Analysis Division.
 

In responding to questions raised by Congressional staff and outside analysts, we have found some errors in one section of our report The Long-Term Budget Outlook, which was released on June 30, 2010 and discussed in a previous blog entry. To correct those errors, we issued a revised version of the report today along with a letter explaining the changes.

The errors did not affect CBO’s primary findings—the long-term budget projections under the extended-baseline scenario and the alternative fiscal scenario—as discussed in the summary of the report, nor did they affect numbers presented in any of the tables. Rather, the errors were limited to the analysis of how the projected growth of debt would reduce, or crowd out, private investment and thereby lower gross domestic product (GDP) in the United States. The corrected estimates of the effects of crowding out on GDP are smaller than those shown in the original report. Also, the effects of crowding out on gross national product (which equals GDP plus income received from other countries minus income sent abroad) are now shown; those effects were discussed in last year’s Long-Term Budget Outlook (released in June 2009) but were not included in the original publication this year.

A discussion of the original and revised projections of the crowding-out effects is included in the letter. The changes affect Figures 1-5 and 1-6 and related text, and appear on pages 19 through 22 of the revised report.

In fiscal crises in a number of countries around the world, investors have lost confidence in governments’ abilities to manage their budgets, and those governments have lost their ability to borrow at affordable rates. With U.S. government debt already at a level that is high by historical standards, and the prospect that, under current policies, federal debt would continue to grow, it is possible that interest rates might rise gradually as investors’ confidence in the U.S. government’s finances declined, giving legislators sufficient time to make policy choices that could avert a crisis. It is also possible, however, that investors would lose confidence abruptly and interest rates on government debt would rise sharply, as evidenced by the experiences of other countries.

Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States. In a brief ("Federal Debt and the Risk of a Fiscal Crisis") released today, CBO notes that there is no identifiable “tipping point” of debt relative to the nation’s output (gross domestic product, or GDP) that would indicate that such a crisis is likely or imminent. However, in the United States, the ratio of federal debt to GDP is climbing into unfamiliar territory—and all else being equal, the higher the debt, the greater the risk of such a crisis.
 
Over the past few years, U.S. government debt held by the public has grown rapidly. According to CBO’s projections, federal debt held by the public will stand at 62 percent of GDP at the end of fiscal year 2010, having risen from 36 percent at the end of fiscal year 2007, just before the recession began. In only one other period in U.S. history—during and shortly after World War II—has that figure exceeded 50 percent.

Further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades. Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels, as shown in the figure below. (For more details, see CBO’s recent report The Long-Term Budget Outlook.)

Note: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections through 2020 (with adjustments for the recently enacted health care legislation) and then extending the baseline concept for the rest of the long-term projection period. The alternative fiscal scenario incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.

Although deficits during or shortly after a recession generally hasten economic recovery, persistent deficits and continually mounting debt would have several negative economic consequences for the United States. Some of those consequences would arise gradually—but a high level of federal debt, combined with an unfavorable long-term budget outlook, would also increase the probability of a sudden fiscal crisis prompted by investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation. The resulting abrupt rise in interest rates would create serious challenges for the U.S. government. For example, a 4-percentage-point across-the-board increase in interest rates would raise federal interest payments next year by about $100 billion; if those higher rates persisted, net interest costs in 2015 would be nearly double the roughly $460 billion that CBO currently projects for that year. Such an increase in rates could also precipitate a broader financial crisis because it would reduce the market value of outstanding government bonds, inflicting losses on mutual funds, pension funds, insurance companies, banks, and other holders of federal debt.

Options for responding to a fiscal crisis would be limited and unattractive. The government would need to undertake some combination of three actions. One action could be changing the terms of its existing debt. This would make it difficult and costly to borrow in the future. A second action could be adopting an inflationary monetary policy by increasing the supply of money. However, this approach would have negative consequences for both the economy and future budget deficits. A third action could be implementing an austerity program of spending cuts and tax increases. Such budgetary adjustments, in the face of a fiscal crisis, would be more drastic and painful than those that would have been necessary had the adjustments come sooner.

This brief was prepared by Jonathan Huntley of CBO’s Macroeconomic Analysis Division.
 

People born in other countries are a growing presence in the U.S. labor force. In 2009, more than 1 in 7 people in the U.S. labor force were born elsewhere; 15 years earlier, only 1 in 10 was foreign born. About 40 percent of the foreign-born labor force in 2009 was from Mexico and Central America, and more than 25 percent was from Asia.

Today CBO released an update to its November 2005 report on the role of immigrants in the U.S. labor market. That earlier report included data through 2004; this update, the first of several on various aspects of immigration, incorporates data through 2009 from the Census Bureau’s Current Population Surveys. The update includes various tables showing statistics on the number of foreign-born workers, the countries from which they have come, their educational attainment, the types of jobs they hold, and their earnings.

Some highlights include:

• People born in other countries represent a substantial and growing segment of the U.S. labor force—that is, people with a job or looking for one. In 2009, 24 million members of the labor force were foreign born, up from 21 million in 2004. However, the growth of the foreign-born labor force was much slower between 2004 and 2009 than between 1994 and 2004.
• In 2009, over half of the foreign-born workers from Mexico and Central America did not have a high school diploma or GED credential, as compared with just 6 percent of native-born workers. Yet nearly half of the foreign-born workers from places other than Mexico and Central America had at least a bachelor’s degree, as compared with 35 percent of native-born workers.
• Over time, participants in the U.S. labor force from Mexico and Central America have become more educated. In 2009, they had completed an average of 9.8 years of schooling—up from 9.5 years in 2004; 55 percent lacked a high school diploma or GED credential—down from 59 percent in 2004; and among 16- to 24-year-olds, 50 percent were not in school and were not high school graduates—down from 60 percent in 2004. Nevertheless, those born in Mexico and Central America constitute an increasingly large share of the least educated portions of the labor force.
• To a considerable extent, educational attainment determines the role of foreign-born workers in the labor market. In 2009, 70 percent of workers born in Mexico and Central America were employed in occupations that have minimal educational requirements, such as construction laborer and dishwasher; only 23 percent of native-born workers held such jobs.
• Foreign-born workers who came to the United States from places other than Mexico and Central America were employed in a much broader range of occupations. Nevertheless, they were more than twice as likely as native-born workers to be in fields such as computer and mathematical sciences, which generally require at least a college education. Their average weekly earnings were similar to those of native-born men and women.
• On average, the weekly earnings of men from Mexico and Central America who worked full time were just over half those of native-born men; women from Mexico and Central America earned about three-fifths of the average weekly earnings of native-born women.

This report was prepared by Nabeel Alsalam of CBO’s Health and Human Resources Division.

This morning CBO released a brief about the Social Security Disability Insurance (DI) program. The DI program pays cash benefits to nonelderly adults (those younger than age 66) who are judged to be unable to perform “substantial” work because of a disability but who have worked in the past; the program also pays benefits to some of those adults’ dependents.

Between 1970 and 2009, the number of people receiving DI benefits more than tripled, from 2.7 million to 9.7 million. At the same time, the average inflation-adjusted cost per person receiving DI benefits rose from about $6,900 to about $12,800 (in 2010 dollars). As a result, inflation-adjusted expenditures for the DI program, including administrative costs, increased nearly sevenfold between 1970 and 2009, climbing from $18 billion to $124 billion (in 2010 dollars). Most DI beneficiaries, after a two-year waiting period, are also eligible for Medicare; the cost of those benefits in fiscal year 2009 totaled about $70 billion.

The jump in participation, which significantly outpaced the increase in the working-age population during that period, is attributable to several changes—in characteristics of that population, in eligibility criteria, and in opportunities for employment. For example, the aging of the workforce and an increase in the number of women working have boosted the number of people receiving DI benefits. Older workers are more likely to suffer from debilitating conditions and are more likely to qualify for DI—and between 1970 and 2009, the share of working-age women who had worked enough to qualify to apply for disability insurance rose from 41 percent to 72 percent.

Developments in federal policy have also contributed to the growing number of DI beneficiaries. Legislation enacted in 1984 eased the medical eligibility requirements, and limited funding has caused backlogs in reviewing cases to determine whether beneficiaries are still eligible for DI benefits. Participation also grows when economic conditions are weak and employment opportunities are scarce, as occurred during and immediately following the recessions in the early 1990s, in 2001, and over the past few years.

Under current law, the DI program is not financially sustainable. The program’s expenditures are drawn from the Disability Insurance Trust Fund, which is financed primarily through a payroll tax of 1.8 percent; the fund had a balance of $204 billion at the end of 2009. CBO projects that by 2015, the number of people receiving DI benefits will increase to 11.4 million and total expenditures will climb to $147 billion (in 2010 dollars). However, tax receipts credited to the DI trust fund will be about 20 percent less than those expenditures, and three years later, in 2018, the trust fund will be exhausted, according to CBO’s estimates. Without legislative action to reduce the DI program’s outlays, increase its dedicated federal revenues, or transfer other federal funds to it, the Social Security Administration will not have the legal authority to pay full DI benefits beyond 2018.

A number of changes could be implemented to address the trust fund’s projected exhaustion. Some would increase revenues dedicated to the program; others would reduce outlays. One approach to reducing expenditures on DI benefits would be to establish policies that would make work a more viable option for people with disabilities. However, little evidence is available on the effectiveness of such policies, and their costs might more than offset any savings from reductions in DI benefits.

This brief was prepared by Molly Dahl and Noah Meyerson of CBO’s Health and Human Resources Division.

This morning CBO released a letter to Chairman Fortney Pete Stark analyzing a proposal to add a “public plan” to the options available through the health insurance exchanges that will be established under the recently enacted health care legislation—the Patient Protection and Affordable Care Act, or PPACA (Public Law 111-148).
 
Under the proposal, the Department of Health and Human Services would establish and administer a public health insurance plan and would charge premiums to fully cover its costs for benefit payments and administrative expenses. The plan’s payment rates for physicians and other practitioners would be based on Medicare’s current rates but would not be subject to the future reductions required by Medicare’s sustainable growth rate formula; instead, those rates would initially increase by 5 percent and then would rise annually to reflect estimated increases in physicians’ costs. The plan would pay hospitals and other providers the same amounts that would be paid under Medicare, on average, and would establish payment rates for prescription drugs through negotiation. Health care providers would not be required to participate in the public plan in order to participate in Medicare.

CBO estimates that the public plan’s premiums would be 5 percent to 7 percent lower, on average, than the premiums of private plans offered in the exchanges. The differences between the premiums of the public plan and the average premiums of private plans would vary across the country because of geographic differences in the plans’ relative costs. Those differences in premiums would reflect the net impact of differences in the factors that affect all health insurance premiums, including the rates paid to providers, administrative costs, the degree of benefit management applied to control spending, and the characteristics of the enrollees.

CBO estimates that roughly one-third of the people obtaining coverage through the insurance exchanges would enroll in the public plan. We anticipate that, under the proposal, about 25 million people would purchase coverage individually through the exchanges on average during the 2017–19 period; in addition, about 13 million people would obtain employment-based coverage through the exchanges—so total enrollment in exchange plans would be about 38 million. Total enrollment in the public plan would thus be roughly 13 million. Given all of the factors at work, however, those estimates are subject to an unusually high degree of uncertainty. 
 
CBO and the staff of the Joint Committee on Taxation (JCT) estimate that the proposal would reduce federal budget deficits through 2019 by about $53 billion. That estimate includes a $37 billion reduction in exchange subsidies and a $27 billion increase in tax revenues that would result because a greater share of employees’ compensation would take the form of taxable wages and salaries (rather than nontaxable health benefits). Those changes would be partly offset by an $11 billion increase in costs for providing tax credits to small employers. (The proposal would have minimal effects on other outlays and revenues related to the insurance coverage provisions of PPACA.)

The bulk of those budgetary effects would occur in the second half of the decade; the savings estimated for 2019 are about $14 billion. Although CBO and JCT have not yet extended to 2020 the models they use to estimate insurance coverage, the proposal would probably reduce the federal budget deficit by about $15 billion in that year, bringing the total budgetary savings through 2020 to about $68 billion. As discussed in CBO’s letter, those estimates are smaller than figures that have been previously reported regarding the savings from establishing a similar public plan because those previous estimates were related to legislation that differed in a number of ways from what was enacted.

The Congress created the Arsenal Support Program Initiative (ASPI) in 2001 to help maintain the functional capabilities of the Army’s three manufacturing arsenals, which are located in Rock Island, Ill., Watervliet, N.Y., and Pine Bluff, Ark. A primary goal of the program is to enable commercial firms to lease vacant space at the arsenals once it has been renovated, thereby encouraging collaboration between the Army and commercial firms as well as reducing the costs the government incurs to operate and maintain the arsenal facilities. Since the ASPI’s inception, a number of commercial tenants have leased unused property at the arsenals; however, the financial benefits generated by the program have proved to be small relative to the program’s funding.

To determine whether the ASPI is meeting certain of its objectives, the Congress directed CBO to conduct a “business case” analysis of the program. In response to that directive, today CBO released a study examining the costs, return on investment, and economic impact of the program.

The ASPI has received more than $87 million in funding from its inception in 2001 through 2010. As of the end of 2009, a total of  $54 million had been disbursed. Most of the funds have been used to renovate and improve arsenal properties and infrastructure. Funding for the ASPI is not used to pay employees who work for the office that manages the program; those costs are paid out of the Army’s operation and maintenance account

The principal outcome of the ASPI to date is that commercial tenants have begun to lease unused property at the arsenals, typically vacant buildings or portions of buildings that the Army has renovated specifically for that purpose. Tenants compensate the arsenals mostly in the form of negotiated rental payments or services in lieu of rent. As of 2009, a total of 46 tenants were leasing more than 200,000 square feet of space at the arsenals under the ASPI; payments and services provided to the government totaled $1.3 million in that year.

CBO’s analysis shows that the total stream of financial benefits that the ASPI has generated for the government so far and can be expected to generate in the future will fall short of the up-front investment required to ready the arsenal properties for tenants. In making this determination, CBO first estimated the revenues and other financial benefits that the program has generated for the government so far and those that might be generated in the future. CBO then compared the present value of those revenues and benefits to the outlays required to make space available to tenants. That calculation measures the economic value, in 2010, of projected future cash flows and noncash benefits using a discount rate that attaches a market price to the risk associated with those flows.

Under the assumptions that the ASPI receives no additional appropriations for renovations after 2010 and that the government continues to pay for marketing and administering the program, CBO estimates that, measured in 2010 dollars, the economic value of outlays for the program would total $99 million through 2075 and the economic value of the financial benefits that the program will generate for the government would total $47 million. The resulting net present value is negative $52 million, effectively translating into a government subsidy of about 50 cents for every dollar spent on the program.

In terms of the program’s broader economic impact, the ASPI positively affects the local economies in two ways: government spending for the program probably leads to additional jobs for civilians and income for area businesses; and commercial tenants who relocate to the arsenal regions because of the program buttress economic activity in the area. On a national basis, the ASPI has had little if any net economic impact, in CBO’s judgment, because the program primarily causes a shift in resources from one region of the country to another.
 
This study was prepared by Daniel Frisk of CBO’s National Security Division.

The federal government supports the use of biofuels—transportation fuel produced usually from renewable plant matter, such as corn—in the pursuit of national energy, environmental, and agricultural policy goals. Tax credits encourage the production and sale of biofuels in the United States, while federal mandates specify minimum amounts and types of biofuel usage each year through 2022. Tax credits effectively lower the private costs of producing biofuels relative to the costs of producing their substitutes, gasoline and diesel fuel. Together, the credits and mandates increase domestic supplies of energy and reduce U.S. emissions of greenhouse gases, albeit at a cost to taxpayers and consumers. For example, in fiscal year 2009, the biofuel tax credits reduced federal excise tax collections by about $6 billion below what they would have been if the credits had not been in effect.

Roughly 11 billion gallons of biofuels were produced and sold in the United States in 2009, and ethanol produced from corn accounted for nearly all of that total. Blenders of transportation fuels receive a tax credit of 45 cents for each gallon of ethanol that is combined with gasoline and sold. Although the credit is provided to blenders, most of it ultimately flows to producers of ethanol and to corn farmers—in the form of higher prices received for their products.

Most of the rest of the biofuel sold in the United States consists of biodiesel, which is made largely from soybean oil but is also produced from animal fats and recycled plant oils. Until recently, the producers of such biodiesel received a tax credit of $1 per gallon. Although that credit expired in December 2009, CBO included it in the analysis to provide information about the value of the credit should policymakers decide to reinstate it. In the future, cellulosic ethanol—made from plant wastes such as corn stalks—could account for a significant share of domestic production of biofuels. Its producers are eligible for a tax credit of $1.01 per gallon if it is produced and blended with gasoline; even with that credit, however, cellulosic ethanol is not commercially viable today and is produced in very limited quantities.

In a study prepared at the request of the Chairman of the Subcommittee on Energy, Natural Resources, and Infrastructure of the Senate Committee on Finance, CBO assesses the incentives provided by the biofuel tax credits for producing different types of biofuels and analyzes whether they favor one type of biofuel over others. In addition, we estimate the cost to U.S. taxpayers of reducing the use of petroleum fuels and emissions of greenhouse gases through those tax credits; we also analyze the interaction of the credits and the biofuel mandates. CBO’s main conclusions are the following:

• The incentives that the tax credits provide to producers of biofuels differ among the fuels. After adjustments for the different energy contents of the various biofuels and the petroleum fuel used to produce them, producers of ethanol made from corn or other similar feedstocks receive 73 cents to provide an amount of biofuel with the energy equivalent to that in one gallon of gasoline. On a similar basis, producers of cellulosic ethanol receive $1.62, and producers of biodiesel would receive $1.08 (if that credit were extended).
• The costs to taxpayers of reducing consumption of petroleum fuels differ by biofuel. Such costs depend on the size of the tax credit for each fuel, the changes in federal revenues that result from the difference in the excise taxes collected on sales of gasoline and sales of biofuels, and the amount of biofuels that would have been produced if the credits had not been available. The costs to taxpayers of using a biofuel to reduce gasoline consumption by one gallon are $1.78 for ethanol and $3.00 for cellulosic ethanol. The cost of reducing an equivalent amount of diesel fuel (that is, a quantity having the same amount of energy as a gallon of gasoline) using biodiesel is $2.55, based on the tax policy in place through last year.
• Similarly, the costs to taxpayers of reducing greenhouse gas emissions through the biofuel tax credits vary by fuel: about $750 per metric ton of CO₂e (that is, per metric ton of greenhouse gases measured in terms of an equivalent amount of carbon dioxide) for ethanol, about $275 per metric ton of CO₂e for cellulosic ethanol, and about $300 per metric ton of CO₂e for biodiesel. Those estimates do not reflect any emissions of carbon dioxide that occur when production of biofuels causes forests or grasslands to be converted to farmland for growing the fuels’ feedstocks (the raw material for making the fuel). If those emissions were taken into account, such changes in land use would raise the cost of reducing emissions and change the relative costs of reducing emissions through the use of different biofuels—in some cases, by a substantial amount.

Federal biofuel mandates require vendors of motor fuels to produce or blend specified minimum volumes of the different fuels with gasoline and diesel fuel; the annual targets are scheduled to rise through 2022. In the past, those requirements have not directly increased the quantity of biofuels sold in the United States because the combination of underlying economic conditions and the biofuel tax credits has caused the use of biofuels to exceed the mandated quantities. In the future, the scheduled rise in mandated volumes would require the production of biofuels in amounts that are probably beyond what the market would produce even if the effects of the tax credits were included.

The report was written by Ron Gecan of CBO’s Microeconomic Studies Division and Rob Johansson, formerly of CBO.