The political war over $5 billion to $6 billion in federal tax supports for corn-based ethanol is about to take a dramatic turn. Biofuel now takes center stage for the elimination of one-off tax supports for industries deemed “mature” enough to operate without Uncle Sam’s help, thus contributing to trying to fill the deep chasm that is the federal deficit.

In broad macroeconomic terms, using food/feed grade corn to fill citizens’ gas tanks and not their stomachs is blamed by livestock and poultry production for the dramatic runup in feed costs and supermarket prices for meat, poultry and dairy. It’s routine these days to hear pro-ethanol politicians, while denying corn-based ethanol’s role in rising food inflation, to counsel the marketplace to “get used” to $6 to $8/bushel corn; it’s “the new normal,” they say.

Tax credits: repeal or reinvent?

The Volumetric Ethanol Excise Tax Credit (VEETC) is a package of federal supports for corn-based ethanol paying 45 cents/gallon to oil companies as an “incentive” to blend ethanol with gasoline. That’s right; the ethanol refiner doesn’t get the tax credit — the oil company does. Critics argue it makes no sense to provide any “incentive” to the oil companies when the federal Renewable Fuel Standard (RFS) mandates the petroleum giants must use specific amounts of “advanced biofuels” to meet their energy self-sufficiency orders.

The tax credit expires at the end of 2011. The easy way out for Congress would be to simply let the ethanol supports expire, but the ethanol industry can’t afford to let that happen. It now appears the goal is to get Congress to reinvent its current spending on ethanol from tax credits as an “infrastructure” investment. It’s federal infrastructure spending that excites the ethanol industry.

If you move out of the Midwest, politicians in the Northeast, Southeast and the West don’t see why, after 30-plus years, the federal government continues to pay anything to support ethanol. These regions argue it’s costly to move ethanol to their gas stations, the fuel can’t be pumped through existing pipelines, there are no savings to be had, and some auto manufacturers argue E15 and higher blends rot car engines.

Sen. Dianne Feinstein (D-CA) is no fan of federal ethanol subsidies or of the import tariff slapped on imports, primarily South American sugar-based ethanol. She argues the blenders’ tax credit is outdated, unnecessary and when the credit is dead the import tariff is equally redundant. So sure is she in her thinking, she joined with political opposite Sen. Tom Coburn (R-OK) earlier this year to introduce legislation that flat out kills the ethanol package. Feinstein and Coburn capitalized on last year’s 180-degree shift in the political winds on ethanol, as local, state and national politicians walked away from supporting taxpayer-funded support for the fuel.

Ethanol’s death notice

So strong was the political wind blowing in late 2010 as the nation struggled out of its recession that the ethanol industry itself put out feelers to USDA, the Department of Energy (DOE) and its champions on Capitol Hill, letting them know it fully expected the death notice for ethanol subsidies to be writ large when the 112th Congress and its budget cutting zeal convened in January 2011. The industry sought assistance from these government gurus on how to walk away from the tax credits, but still maintain the industry’s share of the federal alternative fuel funding pie. In November 2010, the first murmurings from the industry signaled it would surrender its blenders’ tax credit and import tariff, if “infrastructure spending” on pumps, pipelines and flexfuel cars was forthcoming.

Feinstein and Coburn had a clear Senate field when they reintroduced their bill to kill off the VEETC ethanol program. By the time these two were ready for primetime, no fewer than 14 separate bills had been introduced to pare back, redirect or eliminate corn-based ethanol subsidies, and most dropped in the House. This rush to be the first to kill the ethanol program was in large part the result of a dogged campaign by livestock and poultry producer groups and their meat processing industry allies.