Ethanol Subsidy Running on Empty

One program that has epitomized the destructive and nonsensical nature of subsidies is ethanol, and on Thursday June 16, 2011, the United States Senate voted to kill the 45-cent-per-gallon tax credit for blending ethanol in gasoline that expires at the end of 2011.  Not only was it a shock for taxpayers to have a win in the Senate, there was actually bi-partisan support for the repeal.  According to Politico, “’I think the days of large subsidies like this are really over, and this is kind of the first vote on it,’ said Sen. Dianne Feinstein (D-Calif.), who sponsored the subsidies amendment with Sen. Tom Coburn (R-Okla.). ‘I think you’re going to see all kinds of subsidies go, because we’ve got so many problems.’”  How many times do you see Sens. Feinstein and Coburn working together?

Even though the focus of the legislation was to repeal the 45-cent per gallon tax credit given to companies that blend ethanol into gasoline, there are two other components, the Renewable Fuel Standard, and the import tariff that make ethanol a losing proposition for taxpayers and distort the market and ultimately make gas and food more expensive.

Let’s start with the good news. The first order of business was to eliminate the 45-cent per gallon tax credit.  A March 2011 Government Accountability Office (GAO) report noted that “The ethanol tax credit was recently extended at 45 cents per gallon through December 31, 2011. The tax credit will cost $5.7 billion in forgone revenues in 2011.”  A 2010 GAO report noted that “although the credit is provided to blenders, most of it ultimately flows to producers of ethanol and to the farmers who grow the corn—in the form of higher prices received for their products.”

In 2007, the Renewable Fuel Standards mandated the use of 36 billion gallons of renewable fuel annually by 2022.  This creates an artificial market for ethanol and gives more incentive to sell corn for ethanol rather than food.

The 54-cent tariff on imported bio-fuels limits the amount of ethanol that is imported thus making it less financially viable to import.  According to Sen. Dianne Feinstein (D-Calif.), “By lowering the import tariff to match the non-corn ethanol credit, we allow refiners to purchase cheaper, environmentally friendly ethanol from foreign sources while at the same time preventing foreign producers from benefitting from US subsidies.”

More bad news for ethanol is former Vice President Al Gore’s pronouncement in a November 27, 2010 Wall Street Journal article that his love of ethanol may have been less intellectual and more political when he noted that, “One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for President.”

The ethanol subsidy distorts the free market and costs taxpayers billions of dollars.  If Congress is serious about cutting government waste, there is no better place to start than the ethanol subsidy.  The Senate has taken the first step; it is now time to put the dagger in the heart of the rest of the subsidy.