Ethanol Subsidy Ended by Congress, Signaling Political Shift

In allowing the demise of a formerly sacrosanct ethanol subsidy, Congress underscored both its drive to cut costs and the ethanol industry's diminished need for economic support.

The Energy Tax Act of 1978 sought to stimulate the ethanol industry by providing federal tax credits to gasoline refiners who purchased ethanol, a biofuel that in the United States is mostly produced from corn, to blend with gasoline. Corn farmers embraced the subsidy, which drove up the price of corn by increasing demand for ethanol, and it became common practice for presidential candidates to enthusiastically voice their support for the policy while campaigning in Iowa, a leading corn producer.

But at a time when scaling back spending has come to dominate Washington, the political calculus has shifted. The subsidy was increasingly denounced by members of both parties as wasteful -- it cost the government about $6 billion in tax revenue in 2011, and the Government Accountability Office projected in a recent report that its annual cost would continue to rise. A separate report suggested that those rising costs were in turn driving up the price of livestock feed and food.

I think the days of large subsidies like this are really over, and this is kind of the first vote on it, Sen. Dianne Feinstein (D-CA) said in June after the Senate passed a largely symbolic amendment to end the subsidy, which Feinstein sponsored with Sen. Tom Coburn (R-OK). I think you're going to see all kinds of subsidies go, because we've got so many problems.

The fact that lawmakers allowed the tax credit to expire on the eve of Iowa's first in the nation caucuses punctuated the changing dynamics. Republican presidential candidates have not uniformly backed the tax credit either: Jon Hunstman cited his opposition to a subsidies that needlessly prop up soy and corn when he declined to visit Iowa, and Mitt Romney qualified his previously stated support for ethanol subsidies by saying they should not continue indefinitely and noting that he was not making promises of handing out money.

Ethanol: No Longer An Embryonic Industry

The decision to eliminate the subsidy also reflects the fact that at a time of surging corn and gasoline prices, ethanol producers no longer need the government to nurture their industry. The Government Accountability Report noted that strong demand and a well established infrastucture for producing ethanol ensured that a market for domestic ethanol production exists in the absence of the ethanol tax credit, and the soaring price of crude oil bolsters the appeal of alternative fuels like ethanol as a less costly alternative.

We are in a fairly prosperous period for agriculture, said Dean C. Taylor, a former president of the Iowa Corn Growers Association, told the New York Times. It won't be fatal as long as the demand for ethanol and gasoline remains strong, Taylor added in reference to the tax credit expiring.

A protectionist tariff on imported ethanol is expiring along with the tax credit, similarly signaling the American ethanol industries competitiveness. The tariff was designed in large part to shield American farmers from Brazil's thriving ethanol industry, but exploding demand for ethanol in Brazil has rendered that tariff unnecessary, Bruce Babcock, the Cargill endowed chair of energy economics at Iowa State University, told National Public Radio.

I think the industry matured, Babcock said. They say they could compete with sugarcane ethanol from Brazil and with gasoline, and Congress wanted to cut spending, so those two things together is the reason why we don't have the subsidy anymore.