Deficit Pushes Senate to End Ethanol Thieving of Taxpayers

The monumental deficit has pushed the Senate to repeal the $5 billion of tax credits and subsidies per year for corn growers, ethanol refiners, and gasoline blenders.  A tariff of $0.54 per gallon on imported ethanol would also be eliminated.  38 Democrats, 2 independents, and 33 Republicans voted to end these pointless subsidies which had wrongly been sold as a path to cleaner skies, energy independence, and a means to reduce CO2 emissions.  I have long pointed at these subsidies, along with the mandate for ethanol production still required by the insane Renewable Fuel Standard law, as a clear sign of Congressional and Presidential perfidy and a determination to rob the taxpayers blind for naked political power.  For more than 30 years, the attitude was clearly let the General Welfare be damned as the votes of special interest groups were bought. 

The repeal bill was sponsored by Senators Tom Coburn of Oklahoma and Dianne Feinstein of California.  14 Republicans and 13 Democrats opposed the 73-27 vote repeal action.  Obama and his Sec. of Agriculture, Tom Vilsack, still oppose the end of these deleterious subsidies, claiming they are needed to reach Obama's imagined plan to reduce oil imports by one-third by 2025. The House has not yet voted on ending these ethanol subsidies and will reject the Senate bill because tax bills are constitutionally required to be initiated in the House of Representatives.  Fortunately, the ethanol subsidies will expire at the end of this year unless the House and Senate renew them.  This Senate vote makes it unlikely that it will renew this special interest travesty.

The ethanol subsidy is a $0.45/gallon of ethanol tax credit given against the excise tax of $0.184 per gallon of gasoline paid by gasoline blenders such as Valero and Marathon Oil.  This allows the blenders to pay more for corn ethanol made by such companies as Archer-Daniels-Midland and to compete for corn used as food or as livestock feed. 

The overall effect of a repeal of the subsidies upon food and feed prices will be minimal, since the mandate for ethanol use in fuel by the Renewable Fuel Standard law passed by the last Democrat Congress requires 12.6 billion gallons of ethanol use in fuel this year and up to 15 billion gallons in 2015.  By 2022, 36 billion gallons of so-called renewable fuel must be blended into gasoline, though only 15 billion gallons of that can be conventional corn-derived ethanol.  The remainder is somehow magically supposed to come from other low-carbon biofuels, such as switchgrass, which as yet produce a negligible 3 to 4 million gallons a year of ethanol or fuel in expensive pilot plants.

This mandate and the subsidies have caused the price of corn to be over $7/bushel all spring, which is twice the price of a year ago.  The subsidy and the high price of oil has caused blenders to use a billion gallons more corn ethanol than they were required to use.  This put still more pressure on corn, corn products, and meat products.  On Friday, buyers bought corn in the Toledo, Ohio grain trading hub at $7.35 per bushel.  A desperate turkey grower even offered $8.37/bushel of corn and got few offers of corn at that price.  Corn supplies are expected to be at a 15-year low in late August.  This may force some makers of corn-derived ethanol to shut down their plants.

The impact of ethanol from corn on the market and on some states can be judged from the graphic below from the 17 June Wall Street Journal:

Note that the food, seed, and industrial use of corn has grown very little since 2000 and the use in feed and residual use has shrunk since 2005 due to the increased cost of corn brought on by the huge increase in ethanol production since about 1998.  Iowa, the first major event for presidential candidates produces 21% of all U.S. ethanol, which is more than twice the production of any other state.  It is no accident that so much of the Iowa corn production is bought for the purpose of ethanol production.  The subsidy takers know how to put the political pressure on.  About 5 billion bushels of corn, or 40% of all corn production, is used to produce ethanol.  The great growth in corn production that has resulted has displaced other food crops and led to price increases severe enough that the World Bank and other international institutions have called for an end to corn ethanol subsidies.

The end effect due to the continuing ethanol in fuel mandate will be continued very high corn prices.  The income tax taxpayer will be relieved of a burden, but that burden will be shifted to the consumer.  It is better that the burden be on the consumer, which is a much broader base of people than the minority who pay federal income taxes.  It would be better yet if we removed the renewable fuel mandate and simply allowed the free market to figure out which fuel resources will be used.  Obama's centrally-planned economy will be a disaster just as all prior central planning has historically led to catastrophe.  The last place a catastrophe will come from will be man-made global warming due to CO2 emissions.