Ethanol: Coburn, ATR, WSJ

by Brian McGraw on April 6, 2011

in Blog, Features

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There is an ongoing ethanol spat between Senator Coburn (R-OK) and Grover Norquist, President of Americans for Tax Reform. The dispute is over conservative support for a bill that would repeal the ethanol tax credit, which has the effect of raising an industry specific tax. Americans for Tax Reform comes down hard on any effort to increase taxes. The Wall Street Journal added their two cents in favor of Senator Coburn:

Our readers know Mr. Norquist as the plucky author of the no-new-taxes pledge, which has helped to make tax increases a red line in Republican politics. In a letter to Mr. Coburn, a deputy of Mr. Norquist writes: “Repealing the ethanol credit is the right thing to do, but other taxes must be reduced in the same legislation by at least this much to prevent a net tax increase.”

We understand the larger principle that Americans for Tax Reform is trying to defend. Axing every credit, exemption and deduction in the tax code, while leaving tax rates high, would result in a higher general tax burden and more money for Washington to spend. A true tax reform would trade such tax loopholes and subsidies for lower rates.

Coburn’s amendment (which would have been attached to a larger bill) is dead, so the fight is in recess and will reappear before the end of the year. It seems that it would be much harder to pass legislation that would kill the VEETC and also lower taxes, rather than solely ending the VEETC. It also raises the question of which other taxes should be lowered. The VEETC goes back to oil refiners, though some of the savings are passed onto consumers.

This issue came up in 2010. Americans for Tax Reform clearly articulated their position here:

In recent days, Americans for Tax Reform’s opinion on extending the Volumetric Ethanol Excise Tax Credit (“VEETC”)has come into question.  Below is our position on the issue:

  1. VEETC is poor energy policy. Encouraging inefficient fuels which accomplishes neither reductions in carbon—its purported impetus— nor monetary gains for American families is bad energy policy.
  2. The VEETC is a tax credit which expires at the end of 2010.  There is no obligation on the part of pro-taxpayer elected officials to vote to extend an expiring tax credit which they believe is bad policy.  In the past, the question has been the elimination of the VEETC while it was still in force.  This affirmative tax hike would have been a violation of the Taxpayer Protection Pledge, but that issue is not applicable to this debate.
  3. Therefore, Americans for Tax Reform neither supports nor opposes extending the Volumetric Ethanol Excise Tax Credit.
First and foremost, they admit the obvious: the VEETC is no good. They would not require candidates to support its extension but would oppose candidates that sought to directly end it. This distinction might seem frivolous to many, but one must tip their hat to the larger role ATR plays in keeping tax rates from increasing. The only problem is there will assuredly be a push from the ethanol industry later this year to continue milking the taxpayer, and Coburn’s amendment may preemptively shut them down, whereas the industry could prevent an expiration of the tax credit.
The Renewable Fuels Association, naturally, weighed in on the debate. Defending ethanol these days is hard work. They provide the standard boilerplate of insisting that they’re unfairly under attack, everyone gets subsidies, etc. This is true, and we’d like to end them all (including what subsidies are actual oil industry subsidies — much of the popular demonized oil industry subsidies are general tax deductions that apply to everyone). We don’t always have the opportunity to end them all, but that doesn’t mean we should want to keep them all.
I also want to point out one flaw in their logic. The RFA points out that the ethanol tax credit keeps gas prices lower. Sure, but where does the money come from? If taxes/government spending is necessarily higher because of the money sent to refiners through the VEETC, the consumer doesn’t actually save any money, its just hidden and spread around. And individuals who don’t drive (or drive very little) are subsidizing those who drive all the time — bad policy. By Hartwig’s logic, the oil industry subsidies should also be applauded because they keep gasoline prices lower relative to what they would be, but I don’t see the RFA cheering for oil industry subsidies.
Finally, lets remember the VEETC is small potatoes. A strong stance in support of freer energy markets would involve the introduction of a bill to amend the 2007 Energy Independence and Security Act and strike out the Renewable Fuel Standard.

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