Subsidies and incentives

Dec. 6, 2010
Supporters of generous federal subsidies for fuel ethanol must be desperate.

Supporters of generous federal subsidies for fuel ethanol must be desperate. What else explains their hollow attempt to liken ethanol subsidies to tax breaks available to oil and gas companies?

Ethanol supporters are worried because the 45¢/gal blender's tax credit expires Dec. 31. They want Congress to renew it for 5 years. After the voters' revolt in federal elections Nov. 2, though, the congressional mood has become miserly. Farm-state politicians, therefore, have resorted to comparisons with supposed oil and gas subsidies, claiming only to want equitable treatment.

"A lot of the opposition [to ethanol subsidies] comes from big oil and natural gas people and senators from those states," said Sen. Charles Grassley (R-Iowa) late last month. "I can't believe they would have the chutzpah to talk about doing away with the tax incentives for ethanol at the same time they expect us to keep in place tax incentives for oil and natural gas."


Beyond subsidization

Grassley's comparison is preposterous. Oil and gas receive no tax credit to help them compete on price with other fuels. They receive no special 54¢/gal tariff as protection against foreign competition. They certainly enjoy no statutory requirement that specific volumes of their products be sold every year.

Federal support for ethanol comes in all such forms. Many states help ethanol, too. And when conditions sour for the industry, more aid always materializes.

Most recently, the Environmental Protection Agency in October—just before elections—raised the blending limit for ethanol in gasoline for new vehicles to 15% from 10% in a move resisted by engine manufacturers. Why? Without relaxation of the blending limit, ethanol soon won't be able to enter the saturated gasoline market at required levels.

This goes beyond subsidization. This is a government using taxpayer funds and market-skewing mandates to promote otherwise uneconomic levels of production and use of politically favored fuel.

The motive is to curry favor with important political constituencies in agricultural areas. And it's happening as public support for fuel ethanol fades. Beyond the cost—which the Congressional Budget Office estimates at $1.78/gal for displacement of an energy-equivalent volume of gasoline—environmental benefits have fallen subject to strong doubt.

This explains the desperation of ethanol supporters. It explains their wild attempt to equate oil and gas tax incentives with the country's lavish subsidization of ethanol.

Farm-state politicians receive help with this ludicrous comparison from the Obama administration, which in budget proposals has sought to end oil and gas tax breaks worth an estimated $36.5 billion over 10 years.

The Treasury Department even hints that the targeted production incentives somehow equate to consumption subsidies now under righteous global scrutiny. It further suggests that resulting oil and gas supply contradicts national interests. Confusion at this level provides intellectual cover for claims to equivalent treatment for ethanol.

Accounting preferences

In fact, oil and gas incentives demand of American taxpayers nowhere near the generosity extracted by federal ethanol subsidies, estimated at more than $7 billion/year. Nearly half the "savings" projected in budget documents would come from denying oil and gas companies the use of a tax deduction available to all US manufacturers. The deduction is not a tax break for oil and gas. Most real oil and gas incentives are accounting preferences, many relating to the timing of taxation, that help independent producers recover and raise drilling capital. They stimulate work, generate wealth, and enhance oil supply while costing taxpayers very little over time.

The decision whether to extend or phase out the ethanol tax credit should have nothing to do with oil and gas tax incentives. Economically, tax treatment of oil and gas is not the same as ethanol subsidies and consumption mandates.

Politically, no question of fairness validly applies. The question is whether taxpayers derive enough value from their support for ethanol to justify the cost.

Maybe it's fear of the answer that makes ethanol supporters want to steer public attention in other directions.

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