After Three Decades, Tax Credit for Ethanol Expires

Source: ROBERT PEAR • New York Times  • Posted: Monday, January 2, 2012

Peter Wynn Thompson for The New York Times. A tariff on imported ethanol, which expired Saturday along with a tax credit that cost $6 billion in 2011, aided producers like Marquis Energy, which operates an ethanol plant in Hennepin, Ill.

WASHINGTON — A federal tax credit for ethanol expired on Saturday, ending an era in which the federal government provided more than $20 billion in subsidies for use of the product.

The tax break, created more than 30 years ago, had long seemed untouchable. But in the last year, during which Congress was preoccupied with deficits and debt, it became a symbol of corporate welfare. Fiscal conservatives joined liberal environmentalists to kill it, with help from a diverse coalition of outside groups.

In the United States, most ethanol is produced from corn. The demise of the subsidy is all the more remarkable because it comes at the peak of the political season in Iowa, where corn is king.

“We are in a fairly prosperous period for agriculture,” said Dean C. Taylor, a former president of the Iowa Corn Growers Association. “Agriculture has not been as much of a touchstone for presidential candidates this time around.”

Mr. Taylor, who grows corn and soybeans in Prairie City, Iowa, east of Des Moines, said in an interview that the loss of the tax credit “will reduce the profit margin for a lot of people in the ethanol business.” But, he added, “It won’t be fatal as long as the demand for ethanol and gasoline remains strong.”

Nearly 40 percent of the United States corn crop goes to ethanol and byproducts, including animal feed.

The Government Accountability Office, an investigative arm of Congress, said, “The increasing demand for corn for ethanol production has contributed to higher corn prices.”

The higher prices have “created additional income for corn producers” but also appear to have increased costs to meat and poultry producers, big food companies, grocery shoppers and federal food programs, the Government Accountability Office said.

The tax credit, which cost the government nearly $6 billion in 2011, went to gasoline refiners that mixed ethanol with gasoline. The government has promoted ethanol and other biofuels as a way to reduce dependence on imported oil.

Michal L. Rosenoer, a policy analyst with the environmental group Friends of the Earth, said the end of the tax credit showed that “ethanol is no longer a sacred cow.”

“The end of this giant subsidy is a win for taxpayers, the environment and people struggling to put food on the table,” Ms. Rosenoer said. “Production of ethanol, with its use of pesticides and fertilizer and heavy industrial machinery, causes soil erosion and air and water pollution. And it means that less land is available for growing food, so food prices go up.”

Ethanol proponents eventually accepted expiration of the tax credit without putting up a big fight.

“We may be the only industry in U.S. history that voluntarily let a subsidy expire,” said Matthew A. Hartwig, a spokesman for the Renewable Fuels Association, a trade group for ethanol producers. “The marketplace has evolved. The tax incentive is less necessary now than it was just two years ago. Ethanol is 10 percent of the nation’s gasoline supply.”

In response to a question about how the loss of the subsidy might affect prices and supply, Mr. Hartwig said: “We don’t expect the price of corn to fall or rise just because the tax incentive goes away. We will produce the same amount of ethanol in 2012 as in 2011, or more.”

Representative Jeff Flake, Republican of Arizona, said, “With record deficits and a ballooning national debt, it was ludicrous to expect taxpayers to pay billions to prop up a mature industry that should be able to fend for itself.”

Senator Dianne Feinstein, Democrat of California, said the ethanol industry had enjoyed “a trifecta, a triple crown” of federal support. Federal law requires that certain minimum amounts of renewable fuels like ethanol be blended into gasoline. Refiners received the tax credit for doing so. And the government imposed a tariff on imported ethanol, protecting the domestic industry.

The tariff, like the tax credit, expired Saturday. But the requirement to use increasing amounts of ethanol in gasoline continues.

Senator Charles E. Grassley, Republican of Iowa, a leading advocate for ethanol, said the use of ethanol had reduced retail gasoline prices and America’s reliance on foreign oil.

As Congress begins work on a new farm bill, ethanol companies and gasoline station owners want to expand a federal program that helps pay for pumps and other equipment needed to dispense gas with higher concentrations of ethanol.

Senator John McCain, Republican of Arizona, denounced the idea. “Not content with government support to subsidize ethanol, protect it from competition or require its use, lobbyists now want taxpayers to pay for the construction of pumps and holding tanks at retail gas stations,” he said.

Mr. Hartwig of the Renewable Fuels Association said that such spending was “a wise investment for the government” to help meet the expected demand for higher ethanol blends.

Marlo Lewis Jr., a senior fellow at the Competitive Enterprise Institute, a public policy group that advocates free market principles, was active in the coalition opposed to the tax subsidy.

“Savvy people told me that this was a quixotic endeavor, that we would never see the end of the ethanol tax credit,” Mr. Lewis said. “But we pulled it off. Congress concluded that this was a special-interest giveaway the country could no longer afford.”