Congressional Energy Bills Pump Ethanol, Billions in Tax Breaks

Published August 1, 2005

U.S. motorists will be required by the federal government to sharply increase their use of the corn-based gasoline additive ethanol in the coming years. The only question now is, by how much?

The boost for ethanol is one of many objections critics of the new federal energy legislation now in conference committee cite. The Senate bill would cost the federal budget $56 billion in subsidies and tax breaks over 10 years. The House version would cost nearly $90 billion.

The nation would be mandated to consume, by 2012, either 78 percent more ethanol, under the House-approved bill, or 208 percent more, under the Senate-approved bill. These and other differences will be worked out in conference committee, perhaps this fall. If agreement can be reached, the legislation is expected to be signed by President George W. Bush.

The Senate version of the energy legislation includes $18.4 billion in tax breaks for favored industries. The House version has $8 billion in tax incentives.

Midwest States Push Ethanol

The politics of the debate has followed geographic, rather than partisan, lines. Senators from Midwest corn-producing states strongly favored the creation of a government-mandated market for their corn growers and ethanol producers, while senators from coastal states opposed the legislation because they said it would force an increase in gasoline prices.

The legislation’s backers included ethanol producers and large campaign contributors, such as Decatur, Illinois-based Archer Daniels Midland, the nation’s largest ethanol producer.

One opposition leader was Sen. Charles Schumer (D-NY), who asked on the Senate floor, “Where are my friends from the free market when we need them? Is this a free market?”

Hastert Applauds Senators

House Speaker Dennis Hastert (R-Illinois) has been a strong proponent of the need for energy legislation.

After the Senate’s approval of the energy bill, Hastert issued a statement in which he said the legislation “will go a long way towards giving our nation the sound, comprehensive energy policy that our citizens need and deserve. It reduces our dependence on foreign oil by expanding domestic supplies and allowing oil and gas exploration right here in the United States.

“And, the legislation significantly expands the use of renewable fuels like ethanol and biodiesel–environmentally safe alternatives that can be found in the corn and soybean fields across the United States. Finally, the bill creates nearly a half million jobs in the manufacturing, construction, agriculture, and technology sectors.”

Subsidies Criticized

Jerry Taylor, director of natural resource studies at the Cato Institute, said the energy bill “represents more of the same, with a lot more subsidies. It’s a ‘pick ’em’ as far as which are the most annoying or obnoxious.”

Taylor said the tax breaks “are particularly bad” because, with energy prices at record levels, there is no need to provide incentives for additional energy research or conservation. The price is the incentive.

“They’re subsidizing more bad investments,” Taylor said. “Ethanol, clean-coal technology, nuclear power … they all have political merit but little economic merit. If a fuel or technology has merit, it doesn’t need a public subsidy. If it doesn’t have merit, no amount of subsidy is going to bestow it.

“These tax breaks and subsidies represent government interference in the market, favoring some sectors over others,” Taylor said. “This is the approach we took in the 1970s. It was a complete boondoggle then, and it is now.”

‘More of a Pork-Barrel Bill’

Ben Lieberman, senior policy analyst at The Heritage Foundation, is likewise skeptical of the subsidies.

“Ethanol already receives a 52-cents per gallon tax credit,” he said. “Now, not only are we giving ethanol a big subsidy, we’re mandating its use. If we need to use the tax code to encourage its use, that means it’s not worthwhile.

“This is less of an energy bill and more of a pork-barrel bill,” Lieberman said. “From wind or solar to generate electricity to diesel fuel made from soybeans or lard, just about every conceivable alternative that hasn’t been able to compete on its own is getting favorable tax treatment.”

Lieberman said the legislation does have “a few things that can be defended,” such as a 15-year rather than 20-year depreciation period for electric transmission lines, and some streamlining of regulations.

Subsidizes Profitable Industries

On the whole, though, the legislation gives away far too much at taxpayer expense, Lieberman said.

“A lot of people are asking why taxpayers should be subsidizing profitable industries,” Lieberman noted, pointing out that the four largest oil companies last year earned nearly $100 billion. “It’s a legitimate question. Why have taxpayer subsidies of research and development when the market already provides the incentive to do it?”

Dennis Byrne ([email protected]) is a Chicago writer and consultant.