As was widely reported, the Senate voted last week on a bill that would terminate the ethanol tax credit and corresponding tariff. While many were excited by the prospect of finally moving towards better energy policy, it seems likely that things will still get worse before they get better. The ethanol industry does not seem worried.

Consider the following: John McCain (R-AZ) offered additional legislation, while the Senate was voting down the tax credit, that would have ended federal subsidies for ethanol fuel pumps at gas stations. This was voted down 41-59:

“It lost because of the influence of the ethanol lobby,” McCain said on Fox News Thursday, alleging ethanol “is probably the greatest rip-off that I’ve seen since P.T. Barnum.

“It is one of the most outrageous examples of the influence of special interests,” McCain said.

He said that the rejection of his amendment thwarts the will of voters who handed Republicans major gains in last year’s midterm elections.

McCain said:

“The American people as of last November expected us to act. If we don’t, I think they will try to find somebody else that will. This example, the failure to address ethanol, at last to phase out these incredible subsidies to ethanol is really, I’m sorry to say, a signal to the American people we are not serious. And the special interests still govern here in Washington.”

He is right — though some Democrat’s have turned against ethanol, most haven’t, including the Obama Administration. And it seems, as some predicted all along, that though the tax credit might sunset, it will be replaced by some form of corporate welfare. The ethanol industry has suggested a number of different types:

• Require that all automobiles sold in the U.S. be flex-fuel vehicles — as many as 120 million — at no additional cost to the taxpayer.
• Eliminate artificial barriers to the transportation fuel market by building out the distribution infrastructure for ethanol, including 200,000 blender pumps and federal loan guarantees for ethanol pipelines. This infrastructure will provide consumers the access to choose ethanol in an open and free market.

Ignoring their abuse of language (free markets don’t involve federal subsidies and mandates), these subsidies will be much worse than the tax credit, as they will stick around forever and potentially be much more expensive. As more infrastructure and capital is invested into projects that cannot survive without federal support, the more money and fear mongering will be employed by the industry every time their federal support begins to dry up. Perhaps the relatively inexpensive $6 billion per year was a blessing in disguise compared to what they might get stuffed into a larger energy bill.

Between the time this is written and the time you read it, gas prices will have undoubtedly risen again.  They have been on an upward spiral for months and not likely to drop long term without some bold, decisive action as was taken on July 14, 2008. Instead of encouraging the development of our own natural resources, politicians of both parties  are once again betting that we will not notice if they play the antibusiness card—but 2011 is not a year for politics as usual and the rules have changed. This is no longer a back-room game. It is the poker channel. People are watching.

With their cards close to the vest, Max Baucus (D-Mont.) and Harry Reid (D-Nev.) are bluffing. They want America’s citizens to believe their hand is filled with spending cuts—cut subsidies from big oil companies. Somehow we are supposed to think this will lower gas prices?

Part of their bluff is to use the term “subsidy”—which in the house-of-cards economy/debt crisis they’ve built translates to spending. Concerned Americans do not want more spending, they want cuts. We’ve anted up all we can. Politicians are betting we’ll fall for the deception.

But for those of us who are watching, the tell is there. The so-called “big oil companies” don’t get subsidies. They do get the same type of tax deductions on their expenses and some of their up-front costs that every industry gets. Their dramatic wins are in the headlines now. Loses are huge too—though usually not front page news. Last month, it was announced that Shell Oil had to scrap their Alaska drilling plans (which would have provided more domestic energy) due to an EPA decision to withhold permits. Shell had spent five years and $4 billion on plans to explore. Will the EPA reimburse them for their loss? No. But they will receive some tax benefits, the loss is held against their wins—just like every other business. They know they win some, they lose some. It is all factored into the game plan.

But who is the real loser? The American citizen who wants lower gas prices. If the cost of doing business is lower, and the resource development is encouraged, the savings is passed on at the pump. When costs continue to escalate and business is forced to fold their hand—even when it could be a full house, we lose.

The way the energy game is being played now is that the house always wins—with the house being government, not business. A company can, as Shell did, make big investments based on their hand as they see it (geology and seismic data indicates the gamble is worth it) and then the dealer calls the shots. Sorry.

Because we are playing dealer’s choice, other more expensive, less competent players get the advantage. Renewables do get subsidies—like $6 billion for the corn ethanol industry. Electric cars are subsidized to the tune of $7,500 for each vehicle sold—and this is just on the retail end. American taxpayers are forced to buy in even though we know we are drawing dead.

Next week, Harry Reid is dealing once again. He is expected to hold a vote on the Baucus plan which they claim will “end billions of dollars in wasteful tax breaks for large, multinational oil and gas companies while investing in cleaner and cheaper domestic energy sources.” The dealers are picking the winners and losers. If the above quote from Baucus’ website was honest, it would say that they are singling out one industry because it is currently making money (who will be next?) and giving money to more expensive energy sources.

If the game was fair, and we eliminated tax deductions and subsidies altogether—great! Then everyone would need to stand on their own merits in every industry. But that is not going to happen with this hand. We’ll need a different dealer.

But we, the American taxpayers, do not have to sit idly by and watch. We can let them know we are watching. We can participate. We can force politicians to play for us. It is our money they are playing with.

Call their bluff. The hand they are holding will increase the cost of doing business for America’s domestic energy providers and that will result in higher gas prices not lower. Who do they think they are fooling?

Politicians, like poker players, are known to have a few cards up their sleeve.

Known as the voice for energy, Marita Noon is the Executive Director at Energy Makes America Great Inc. the advocacy arm of the Citizens’ Alliance for Responsible Energy—working to educate the public and influence policy makers regarding energy, its role in freedom and the American way of life. She is a popular speaker, a frequent guest on television and radio, her commentaries have been published in newspapers, blogs and websites nationwide, and she has just completed her twentieth book: Take Away Energy, Take Away Freedom. Find out more at www.EnergyMakesAmericaGreat.org.

In response to my criticism of conservative Members of Congress for supporting H. R. 1380, which I have nicknamed the T. Boone Pickens Earmark Bill, some conservatives (in which broad category I include libertarians and advocates of free markets) have defended tax credits, even those that benefit only narrow interests.  They do, after all, reduce some people’s taxes, and reducing taxes is a good thing.  Some even go further and define ending tax credits as raising taxes.  Some anti-tax groups thus demand that elimination of any tax credits be matched with tax cuts somewhere else.

The conservatives who make these arguments do so because they have unknowingly accepted the world view of the left.  They have forgotten that the Constitution was designed to maintain a nation of citizens rather than to create a government with subjects.  They ignore the essential role that the equal protection of the laws fulfils in maintaining the rights of citizens against the encroachments of government.

Tax credits (also known as “tax expenditures”) for buying or producing certain goods and services rather than other goods and services are a species of wealth re-distribution.  Tax credits are a particularly obnoxious type of wealth re-distribution because the re-distribution generally flows from the politically less powerful to the politically more powerful.

Many tax credits are special interest payoffs masquerading as tax cuts.  Low taxes encourage independence and self sufficiency, while tax credits encourage dependency on government.  Corporate welfare dependency does more to undermine limits on government than the welfare dependency of the poor because it gives money to special interests that is then used to lobby for more payoffs.

Tax credits are one of the Nanny State’s most insidious ways of substituting government’s judgment about what is best for people for people’s own judgment about what is best for themselves.  This substitution is almost always sold as promoting some greater goal, the achievement of which will be for the common good.

Thus tax credits for natural gas vehicles (and also for hybrid vehicles) are purportedly for the purpose of reducing imports of foreign oil or of reducing greenhouse gas emissions (goals which it is alleged advance the common good of Americans), when in fact their purpose is transferring wealth from some industries and individuals to the producers of natural gas and manufacturers of natural gas vehicles and to individuals and businesses that drive natural gas vehicles.

It is often implied that no one is harmed by tax credits that benefit some particular special interest.  Inasmuch as government can’t print money indefinitely and must raise revenue to pay for government spending, this claim is absurd.  If someone gets a $7,500 tax credit for purchasing a natural gas or a hybrid vehicle, then the rest of us are going to have to pay higher taxes to fund the government.  Moreover, many of the tax credits that benefit narrow special interests are refundable, which means that they are paid whether the beneficiary owes any taxes or not.  Thus the government must take money from those not receiving the tax credit in order to pay those who are receiving it.

Conservatives who profess to believe in maintaining limits on government should be wary of anything that blurs the distinction between activities that are the proper role of government and those that should remain a matter for individuals to pursue without government interference.  They should be especially wary of the softer, more seemingly benign forms of government encroachment beyond its proper sphere.  Tax credits to encourage some kinds of behavior often seem like a quite harmless way to accomplish some worthwhile goal.  But once the principle is conceded, there is simply no end to the social engineering that will be attempted by the left, whose goal is to replace citizens with government subjects.

(I recognize that these observations and arguments will not be accepted by the sorts of libertarians who define all taxes as theft.  For them, anything that allows people to keep more of their own money results in the morally preferable outcome.  This position no doubt has its charms for some, but it is utterly irrelevant to our constitutional regime of ordered liberty.  Taxes are burdensome, and high taxes threaten our freedom as well as our prosperity, but taxes are not illegitimate.  No conservative who supports the Constitution can argue that all taxation is theft.)