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As Ethanol’s Ravages Grow, Phony ‘Reform’ Emerges

Amid all the talk of budgets, tax laws, and debt last week, one telling nugget of government data went unnoticed: The Agriculture Department last week estimated that this year, for the first time ever, America will use more corn for ethanol than for any other purpose.

Congressmen of both parties are putting on a show of rolling back federal subsidies for this alcohol fuel, but these proposals have the backing of the ethanol industry because they would actually increase taxpayer support for ethanol.

Last week, the USDA published its regular report “World Agricultural Supply and Demand Estimates,” which calculates that in the current corn “marketing year” (September 2010, through the end of August 2011), 11.43 billion bushels of corn will be consumed in the United States. As usual, a small fraction will be used for food or seed: 1.4 billion bushels, or 12.1 percent of the total. Also, as usual, a sizable chunk will be fed to farm animals: 5 billion bushels, or 43.7 percent. But for the first time, the largest chunk will be turned into ethanol: 5.1 billion bushels, or 44.2 percent.

So, the single biggest use of corn in the United States is now highway driving.

Increasingly, Americans see ethanol as a heavily subsidized corporate welfare boondoggle. That realization creates pressure on Congress to reform the ethanol subsidies. A bipartisan coalition has produced a plan that pretends to scale back those subsidies.

Last month, South Dakota Sen. John Thune, R., and Minnesota Sen. Amy Klobuchar, D., proposed the Ethanol Reform and Deficit Reduction Act. The bill ends the most famous ethanol subsidy, a handout to ethanol blenders called the “Volumetric Ethanol Excise Tax Incentive.” While the government accounting books treat the VEETC as if it were a tax credit against the fuel excise tax, it is really just a transfer payment from the Internal Revenue Service to anyone who blends ethanol with regular gasoline. Blenders simply fill out a form stating how much ethanol they mixed with gasoline last month, send it to the IRS, and then wait for a check amounting to 45 cents per gallon. You can get this credit even if you pay zero excise tax.

Historically, this blender’s subsidy boosted ethanol demand by bringing down the effective price of a gallon of ethanol. But the 2005 energy bill created an ethanol mandate, requiring refiners to use a certain amount of ethanol every year. The 2007 energy bill expanded the mandate, and in 2011, refiners are required to use 13 billion gallons of ethanol. This mandate now sets demand, with the tax credit having little or no effect. The Congressional Budget Office recently wrote: “In the future, the scheduled rise in mandated volumes would require the production of biofuels in amounts that are probably beyond what the market would produce even if the effects of the tax credits were included.”

So if the ethanol blender subsidy doesn’t increase ethanol demand, what does it do? It simply lowers the blenders’ costs, resulting in a subsidy for blenders, gas stations, and even consumers. Ironically, because the subsidy lowers the price of a gallon of blended gasoline without boosting ethanol demand, it ends up spurring more driving, and thus subsidizing petroleum.

Unintended consequences — in this case, accomplishing the opposite of what subsidy proponents promised — are the whole story of ethanol subsidies. Government support for ethanol has wreaked environmental damage (massive water use, dangerous fertilizer runoff), economic damage (higher gasoline prices, at times), and hurt some farmers (those who use grain as feed). That’s why ethanol backers in Congress and industry felt compelled to “reform” the boondoggle.

But Thune and Klobuchar’s bill takes the tax revenue gained from ending the VEETC (which, again, doesn’t help ethanol producers), and dedicates most of the money to other ethanol subsidies, such as tax credits for small ethanol producers and for ethanol blender pumps to be installed at gas stations. The bill, of course, leaves in place the mandate, which is by far the biggest ethanol subsidy.

Lobbyists for the American Coalition for Ethanol and the Renewable Fuels Association applaud the bill — which tells you just about all you need to know.

These sort of phony “cuts” and “reforms” are standard fare in Washington, but they are also the sort of thing against which Barack Obama ran in 2008, and which the Tea Party was supposed to assault. Now that ethanol is the No. 1 use of corn in the United States, maybe the boondoggle will get the scrutiny it deserves.

The Washington Examiner, 17 July 2011