Ethanol Subsidies Down But Not Out After Senate Opposes Them

Jun 16, 2011

Demonstrating just how much concern over the nation's fiscal problems has changed the political climate, ethanol has lost its mojo and now appears vulnerable, with the Senate voting Thursday 73-27 to cut tax subsidies to the industry.

Worries about deficits and debt haven't exactly changed everything. Senators from corn and ethanol-producing states still voted against the legislation to would end the tax breaks that keep the Treasury Department from collecting about $5 billion a year more than it would otherwise.

But the vote to end the tax credits and a tariff was being read as a watershed since, until now, the ethanol industry had generally been able to fend off attacks on the subsidies.

As Naftali Bendavid and Stephen Power wrote for The Wall Street Journal:

A bipartisan majority of the Senate voted Thursday to end more than three decades of federal subsidies for ethanol, signaling that other long-sacrosanct programs could be at risk as Democrats and Republicans negotiate a sweeping deficit-reduction deal.

The tax breaks, which now cost about $6 billion a year, had long been considered untouchable politically because of the power of farm-state voters and lawmakers. Iowa's role as the site of the first presidential caucuses has further elevated the political potency of the biofuel.

Presidential hopefuls made a quadrennial ritual of going to Iowa and pledging to support the tax breaks, tariffs and mandates that supported production of ethanol motor fuels from corn. This year, however, some Republican presidential candidates have pointedly refused to endorse ethanol tax breaks.

As the WSJ added, though the vote was a signal moment, it's far from a done deal. The House has to weigh on the matter and the White House isn't exactly on board.

President Obama won Iowa, the nation's largest growing state, in 2008 as well as Minnesota, Indiana, Wisconsin, Michigan and Ohio which are other major producers.

With his 2012 re-election race expected to be challenging because of the disappointing economic recovery, Obama isn't exactly itching to antagonize thousands of people with ethanol-related incomes across the corn belt.

The political risks the White House would rather avoid could be detected in the response from the National Corn Growers Association which was critical of Sen. Dianne Feinstein, a California Democrat, whose amendment the Senate voted on:

The National Corn Growers Association expressed severe disappointment today that the Senate allowed petty politics to trump prudent policy in the fight for the future of the ethanol industry. The passage of Sen. Dianne Feinstein's amendment to immediately repeal the Volumetric Ethanol Excise Tax Credit represents a tax increase on fuel that will kill jobs in rural America and hit all consumers in the pocketbook, NCGA said.

"Today the Senate voted against rural America and domestic, renewable energy, and in favor of more foreign oil," NCGA President Bart Schott, a grower from Kulm, N.D., said. "Sen. Feinstein has unfairly hit at the heart of an important agricultural industry while remaining unified with subsidy-laden Big Oil."

Nonetheless, the vote was a significant congressional step in taking on a politically powerful industry and is worth paying attention to for that reason alone.

The vote was also noteworthy because 33 Republicans joined 38 Democrats and two independents to vote to end the subsidies.

Hanging over Republican heads was the pledge they signed with Grover Norquist's Americans for Tax Reform. The pledge equates ending a tax break with raising taxes, which the senators who signed the pledge vowed not to do unless they took other steps to reduce taxes.

Norquist's organization said it wouldn't hold the tax increases that would come from ending the ethanol subsidies against the Republicans so long as they voted to end the federal mandate requiring the use of ethanol and also voted to end the estate tax.

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