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 your automobile engine.
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 She argues the blenders’ tax credit is outdated, unnecessary and when the credit is dead the import tariff is equally redundant.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, 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.
Coburn tried to force the issue in June by playing procedural games to get his bill voted on without Senate majority leader Harry Reid’s (D-NV) assent; Reid slapped him down and the Coburn bill failed. Feinstein brought her bill to the floor a few days later — identical legislation to Coburn’s — and it sailed to success.
A successful marriage
Sen. Amy Klobuchar (D-MN), and Sen. John Thune (R-SD), two senior senators from ethanol states, helped kill Coburn’s bill by announcing they had an alternative bill, one that would ratchet down the level of ethanol supports for two years, and then tie federal support to the world oil price. They are shooting to rejigger the ethanol game as soon as possible, as Klobuchar pledged to take at least $1 billion of the mid-year savings of about $2.5 billion and dedicate it straight to deficit pay-down. The rest of the savings would be used to install and/or convert blender pumps at gas stations (three-year tax credit), retain the Small Ethanol Producer Tax Credit and fund tax credits for cellulosic (no corn) ethanol. Feinstein embraced the Klobuchar-Thune bill on the floor, saying she hoped, ultimately, her bill and the new legislation would be married and passed by the Senate.
On July 7, Feinstein, Klobuchar and Thune announced they had a deal — Coburn walked away from the talks — and the new ethanol rewrite would end the 45-cent/gallon blenders’ tax credit on July 31 — no talk of ratcheting or world oil prices — and then eliminate the import tariff.
Two-thirds of the savings — or about $1.3 billion goes to deficit reduction — the big carrot for several members. This leaves about $668 million in savings to fund blender pumps, extend an existing alternative fuel station tax credit to include blender pumps through 2014 at 2011 funding levels; modify the credit for ethanol blends between E15 and E85 and clarify that the entire cost of dual-use blender pumps qualifies.
It extends the credit to electric charging stations and natural gas refueling stations. The small ethanol producer tax credit is extended through 2014 and is valued at about 7 cents/gallon, and only producers of less than 60 million gallons a year are eligible. The tax credit for cellulosic biofuels and the depreciation allowance for these fuels is expected through 2015, gain using 2011 funding.
There’s been no final Senate vote on the Feinstein-Klobuchar deal, but Feinstein announced she wants it included in any debt ceiling/spending cut package that comes to the Senate floor, calling it “the best chance to repeal the ethanol subsidy.”
Extending the conversation
The ethanol industry grumbled a bit, said it would work for a “better package,” but behind the scenes was thumping itself on the back for having secured the Holy Grail — federal infrastructure money. The American Coalition for Ethanol (ACE), Growth Energy, the Renewable Fuels Assn. (RFA) and the National Corn Growers Assn. (NCGA) all praised Klobuchar and Thune for saving their bacon, publicly saying the politically correct things about “supporting homegrown energy” while making a “significant contribution to our nation’s deficit.”
And while critics of federal support for corn-based ethanol generally celebrated the deal as the first body blow to the ethanol lobby, the livestock and poultry industries pointed out the compromise still provides over $230 million in new federal support for the corn-based fuel. “We appreciate the work done…to end the VEETC and tariff,” a coalition statement said. “However, the resulting compromise still provides new federal funds for corn-based ethanol, money that would be better spent reducing the deficit or encouraging development of alternative energy sources that do not compete with feed needs.”
If the goal is to wean the ethanol industry off federal largesse, the Feinstein-Klobuchar deal is merely the first step, critics say, or as one analyst carefully put it: “It extends the conversation.”
Meanwhile, the House has not been idle when it comes to pounding nails into the ethanol support coffin. Language prohibiting USDA from spending federal dollars on infrastructure — the department had previously announced its own flexfuel blending pump loan program — was inserted in the House-passed FY2012 agriculture appropriations bill in June, and while this approach was blown off in the Senate, the move is a roadblock to the Feinstein-Klobuchar deal.
Where's domestic demand?
The ethanol industry needs federal infrastructure spending because it needs pipelines and flexfuel pumps that can handle E15 blends and higher, and it needs Detroit to crank out more flexfuel cars and trucks. Put simply, it needs expanded domestic markets. Domestic ethanol demand, set by the RFS, is pretty much full up unless blends above 10% become common. And because domestic demand is met, high U.S. ethanol exports are giving the industry a black eye. It’s expected competition from sugar-based ethanol from Brazil and other countries will also put pressure on the domestic industry.
New challenges
The new challenge is how to get this infrastructure package through Congress. Feinstein says she wants it tacked on to any debt ceiling increase/spending cut package that may be agreed to. That’s likely to happen only if debt negotiators agree to start whacking federal tax loopholes as revenue increasers so they don’t have to mess with individual and corporate tax rates. Meanwhile, Sen. Orrin Hatch (R-UT), ranking member of the tax-writing Senate Finance Committee, said he wants all tax rewrites — and that includes ethanol — as part of a comprehensive tax reform effort, not moved piecemeal on other unrelated legislation.
Further complicating this scenario is a package of other non-ethanol biofuels which receive tax credits for blending, research, small entities, alternative fuel mixtures, etc. The biodiesel/renewable diesel industry, through legislation authored by Sen. Chuck Grassley (R-IA), is pushing to extend its $1/gallon blenders tax credit for three years, but change it from a program for oil companies to one which gives out a producers' tax credit, a benefit to the actual biodiesel producer. Biodiesel made from animal fats and oilseeds argues it’s an industry still too young to be operating on its own without help from Uncle Sam.
The challenge for ethanol interests is to cast federal infrastructure investment, whether loan guarantees, tax credits or what-have-you, as exempt from the no-new-spending mantra being chanted on both sides of Capitol Hill and on both sides of the aisle.
When the dust settles some time this fall, corn-based ethanol will no longer qualify for any blenders’ tax credit and the protective import tariff will also disappear. While the pain for the ethanol industry will be minimal since it didn’t collect those credits in the first place and the RFS remains in place propping up domestic use, the key will be how much money can the ethanol industry convince Congress is a good investment in increasing ethanol demand in U.S. markets.
