Congress considering eliminating ethanol subsidy

CHARLES CITY, Iowa --- The gas-price talk on Capitol Hill these days is branching out into twin discussions.

One is whether to yank tax breaks from oil companies --- an effort that fell apart last week when opponents failed to muster the 60 votes necessary to bring their bill to the floor.

The other conversation --- still ongoing --- takes aim at ethanol subsidies.

Iowa corn growers are listening carefully, and some appear resigned to losing the prop at some point. The question is when will the money go away.

"You know, the ethanol subsidy has been a contentious issue for quite a while. It seems they've been debating it for years," said Mark Recker.

He grows 900 acres of corn near Arlington, about 400 devoted to corn for ethanol.

Two Senate bills focus on the volumetric ethanol excise tax credit --- a de facto subsidy that directs 45 cents to refiners for every gallon of ethanol they blend with gasoline.

On May 11, U.S. sens. Tom Coburn, R-Okla., and Dianne Feinstein, D-Calif., introduced the Ethanol Subsidy and Tariff Repeal Act, which will eliminate the tax credit July 1 and repeal an import tariff on foreign ethanol. The bill has other Republican and Democrat supporters.

Cold turkey

A sudden cutoff of the subsidy would be a traumatic blow to Iowa's corn industry, according to farmers.

"I think it could be a significant problem just going cold turkey," said Dean Taylor, president of the Iowa Corn Growers Association and a farmer in Jasper County.

"They were set up to build infrastructure and get the market out there. We have companies and investors around Iowa, and they're getting their infrastructure slowly paid off," Taylor said. "Cutting these credits off could put them in a financial bind."

Tim Burrack, a corn grower in Arlington, agreed the biggest concern would be suddenness.

"The tax credit ending abruptly will create turmoil," he said. "How much, nobody seems to know."

Sens. Charles Grassley, R-Iowa, and Kent Conrad, D-N.D., recently introduced an alternative, the Domestic Energy Promotion Act of 2011. Their version would, through 2016, ratchet down the tax credit and extend the alternative fuel refueling property credit; the cellulosic producers' tax credit; and the special depreciation allowance for cellulosic biofuel plant property.

The bill would reduce the subsidy to 20 cents next year and to 15 cents in 2013. After that, there would be a variable subsidy to protect the industry against a collapse in oil prices. As the price of crude falls, ethanol loses its competitive edge.

"The ethanol subsidy and tariff is bad economic policy, bad energy policy and bad environmental policy," Coburn said at the time his bill was introduced. "As our nation faces a crushing debt burden, rising gas prices and the prospect of serious inflation, continuing our parochial ethanol policy that increases the cost of energy and food is irresponsible."

The idea was filed as an amendment to a small business bill pending in the Senate.

"Ethanol is the only industry that benefits from a triple crown of government intervention: its use is mandated by law, it is protected by tariffs and companies are paid by the federal government to use it," Feinstein said. "Ethanol subsidies and tariffs sap our budget, they're bad for the environment and they increase our dependence on foreign oil."

Feinstein's version would reportedly save taxpayers about $3 billion this year, according to advocates, who claim to have support from nearly 40 organizations on both the left and right and from refiners that benefit from the subsidy.

"That probably makes a lot of sense going forward. We're not going to be able to create an ethanol policy in a vacuum," said Monte Shaw, executive director of Iowa Renewable Fuels Association. "We are trying to see if we can't create a broader discussion about energy policy. At the same time, the oil industry is saying get rid of this ethanol thing but saying 'our incentives are necessary.'"

Valero, a refiner based in San Antonio, Texas, operates an ethanol plant in Charles City. The company has not taken an official position on the so-called "blender's credit," said Bill Day, a spokesman.

"It's probably good for the industry in general but not Valero," he said of the subsidy. "Our plants are large and low-cost, but they can be profitable without the credit. It's probably more important to some of the smaller producers."

Iowa has 41 ethanol refineries and is the top ethanol producer in the U.S., making 3.6 billion gallons in 2010, according to the Iowa Renewable Fuels Association.

Jobs

The tariff on imported ethanol is 54 cents per gallon. Coburn and Feinstein say the duty makes the U.S. more dependent on foreign oil by increasing the price of imported ethanol.

Coburn and Feinstein also call into question the job-creation role ethanol plays. They cite a report from the Center for Agricultural and Rural Development at Iowa State University that recently estimated a one-year extension of the subsidy and tariff would lead to only 427 additional domestic jobs. That translates into a cost of nearly $6 billion, or roughly $14 million of taxpayer money per job.

Bruce Babcock, the center's director, didn't back off from those numbers.

"I looked at how many jobs in a 100 million-gallon ethanol plant, and maybe there's 60 jobs per plant," Babcock said.

Iowa's Department of Agriculture counters the state's ethanol industry supported more than 80,000 jobs, contributed about $12 billion to the economy and provided almost $600 million in state and local tax revenues.

Babcock is a skeptic.

"The industry relies on very big multiplier effect (in counting jobs)," he said. "You take these direct jobs and multiply by a thousand or something and you get the indirect effect."

Eliminating the ethanol subsidy might cut ethanol production by 500 million gallons, Babcock added.

"Almost all would be running without it," he said. "That 500 million-gallon reduction would have to come from somewhere, so it's likely the plants would keep running but at a reduced capacity."

Grassley and Conrad said in a prepared statement many existing tax policies helped "successfully develop ethanol, the only source of alternative energy that is substantially reducing America's dependence on foreign oil and generating economic activity in the United States."

Democrat Tom Harkin, Iowa's other senator, sponsored legislation that would require all auto manufacturers to equip vehicles to run on ethanol.

"I'm always concerned about what they're going to do with ethanol because I have believed that the (tax credit) could be phased out," Harkin said earlier this month. "I have proposed that we replace that with market access (for ethanol)."

But, he said, that's only part of the necessary equation, and that's where addressing tax credits to oil companies could have played a role.

"To continue the oil and gas tax incentives but to take away the ethanol tax incentives would be the wrong thing to do," Harkin said.

Opposition

The Corn Growers Association's Taylor said he prefers the Grassley-Conrad plan.

"We have a lot of opposition to ethanol, and a lot is overblown," he said. "But when I hear from a senator in Oklahoma or California saying we need to do away with ethanol, it's politics from an oil state."

A gradual lowering of the subsidy is a realistic compromise, according to Iowa Agriculture Secretary Bill Northey.

"I think most folks are comfortable with that and understand," he said. "Most people recognize the industry has gotten more efficient. The credits were there to get the industry started, so it makes sense for them to go down, especially in these budget times."

Burrack said a sudden cutoff of the subsidy could cut corn prices from 10 and 50 cents a bushel.

"To phase it out is different than just killing it," he said. "That's where Sen. Grassley has come in and done such a great job with his initiative and index it to the value of crude oil and phase it out over time. That's a more common-sense approach."

The Advanced Ethanol Council threw its support behind the Grassley-Conrad plan.

"The proposal strikes the right balance between providing savings to the taxpayer, developing the infrastructure necessary to incorporate growing volumes of ethanol from all feedstocks, and extending the incentives that are critical to the development of next generation ethanol fuels," Executive director Brooke Coleman said in a prepared statement.

Northey said it also makes sense to tie a reduced subsidy to any cut in the tariff on imported ethanol.

"Over the long term, it seems like that duty should be tied to the tax credit," he said. "It makes sure you have a level playing field between imports and domestic production."

It also makes sense, as part of a comprehensive energy strategy, for Congress to address oil company tax breaks, Northey said.

"Certainly, as we see the profits out there in the oil industry, it makes sense to look at it the same way as the ethanol credits," he said.

According to estimates, about half of the nation's fuel supply contains some ethanol. Northey said that has done much to extend fuel inventories --- and blunt gas-price increases.

"Having that ethanol supply out here has an impact on the price of gasoline," he said. "You see that at the pump, that having that additional 13 to 14 billion gallons domestic supply has an impact on the gasoline pump prices."

SOURCE: wcfcourier