Supports of subsidies for developing industries argue that those subsidies are need so that the industry can develop to the point that it can compete with existing companies. Even if that argument is accepted at some point the subsidies have to be removed to force the industry to compete and be efficient. If the subsides are left in place permanently or for too long of a period the industry will began to live off of the subsidy. This year the Federal Tax credit on biodiesel expired but for Illinois tax payers the state biodiesel tax credit put into effect in 2003 will continue. Should the Illinois tax credit continue and is need for the biodiesel industry to continue to grow? The first thing to take into account is that even with the end of the Federal Government tax credit, support for biodiesel at the Federal level has not completely ended. Federal rules require the fuel industry to blend at least a billion gallons of biodiesel into their product. Along with that a growing number of states have passed laws requiring that a certain percentage of biodiesel be used in fuel sold in those states. All these are government supports that guarantee the existence of a market for biodiesel. As it stands right now domestic production of biodiesel is lower than the minimum market set by law. The market for biodiesel has continued to grow each year, in 2011 it increased by 27%. Increasingly strict government fuel economy standards are likely to push demand up even more. Along with that, increasing oil price over time will add to the demand for biodiesel. So it is likely that over time the market for this product will continue to grow. The second question is without the tax credit will biodiesel producers be profitable? The answer is most likely yes. Data from Iowa state university indicates that even without Federal or state tax credits companies would still turn a profit on biodiesel. The profit level does vary over time because of volatility in the price of biodiesel and its inputs. That can be effectively managed through the use of futures contracts. So even without tax credits biodiesel can be profitable. In light of all this it has to be asked with Illinois facing the worse fiscal crisis in its history, does it make sense to continue give special tax breaks to the biodiesel industry.
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