Congress Tackles ‘Splash-and-Dash’ Loophole Giving Tax Credit for Exported Biodiesel

By Eric Miller, Staff Reporter

This story appears in the June 9 print edition of Transport Topics. Click here to subscribe today.

Two bills circulating in Congress would eliminate a loophole that permits foreign producers of biodiesel to get a tax credit if they “splash” their product with petroleum-based diesel in the United States and then sell it overseas.

One provision to tighten the “splash-and-dash” loophole has passed the House as part of the Energy and Tax Extenders Act of 2008. The other was introduced last month by Rep. John Shadegg (R-Ariz.) and referred to the House Ways and Means Committee.

Shadegg estimated the tax loophole cost the American taxpayers $300 million in lost revenue last year — and could jump to $900 million this year.

Here’s how the splash-and-dash tax credit loophole works: Upon arrival in a U.S. port, a foreign biodiesel shipment is “splashed” with a minimal amount of conventional diesel fuel, making it eligible for a tax credit as much as $1 per gallon.

After the conventional diesel is added, the ship then “dashes” to Europe, where the fuel can be sold at a cheaper price and even be eligible for additional subsidies.

The House bill passed May 21 would not allow a tax credit for any foreign-produced biodiesel or biodiesel not sold in the United States.

The Shadegg bill would allow foreign-produced biodiesel still to be eligible for the tax credit, but only if the “splashed” biodiesel is sold in the United States.

The fact that more than 50% of cars in Europe now burn diesel has increased demand for diesel and biodiesel there.

American Trucking Associations opposes the tax credit for biodiesel sold outside the United States.

“It doesn’t make sense for the taxpayers to subsidize biodiesel that’s produced offshore and ultimately used offshore,” said Rich Moskowitz, vice president and regulatory affairs counsel for American Trucking Associations.

The biodiesel tax credit is intended to encourage the use of biodiesel by making the cost of biodiesel roughly equivalent to the cost of petroleum-based diesel, Moskowitz said.

Shadegg said he fears the House bill already passed would not be World Trade Organization-compliant because it would create trade barriers.

“My concern about the language is that, were it to be enacted, there would be an imminent challenge from other WTO nations, and it would be stricken down,” Shadegg told Transport Topics.

“My legislation would be WTO-compliant, due to the fact that it does not create an inequity between domestic producers and foreign producers,” he said.

Shadegg said he doesn’t believe the Senate will adopt the House version in the energy bill.

Manning Feraci, vice president of federal affairs for the National Biodiesel Board, said the nonprofit is “vehemently opposed” to splash-and-dash by foreign producers who ship biodiesel out of the country.

“There is no energy or tax policy justification for this practice, and the NBB has been working with Congress and various federal entities to stop these transactions,” Feraci said. “Towards this end, the U.S. House has on four occasions — with NBB’s support — passed tax legislation that would deny the biodiesel tax incentive on splash-and-dash transactions.”

This time around, Feraci is more optimistic about eliminating the loophole.

“The U.S. biodiesel industry wants to end splash-and-dash transactions, and the fact that the U.S. House has again reaffirmed its desire to close the loophole is a positive development,” he said.

Charles “Shorty” Whittington, vice chairman of American Trucking Associations and president of tank-truck carrier Grammer Industries Inc., Grammer, Ind., called the splash-and-dash tax credit “a very bad deal.”

“It’s a situation where really shrewd people took advantage of some government programs and got a reinterpretation of the law, which shouldn’t have ever happened,” Whittington said. “What they do is, they bring diesel fuel into a port, like in Houston or something, and they add two gallons of B100 to every 98 gallons of diesel and pick up a $1 per gallon credit. That’s wrong.”

“The other bad thing, and the National Biodiesel Board disagrees with ATA on this, is about 50% of the biodiesel produced in the U.S. was exported and the producers got a $1 per gallon credit for that,” Whittington said.

Senior Reporter Sean McNally contributed to this story.