The price of a gallon of ethanol is higher than the price of a gallon of gasoline. If you replace 1/10% os a gallon of gas with ethanol, you are adding a higher-priced product, which raises the price of the gasoline.
E85 gas is actually cheaper than regular unleaded gasoline right not, but that is due to a government subsidy which I understand is about $.50/gallon.
A tax exemption is not a subsidy.