Ethanol subsidies that are set to expire at the end of this year continue to lose support among the public and in Congress. King Corn, understandably not too happy about this change in public attitude, has launched an extensive lobbying campaign targeting Capitol Hill and beyond.
The Corn Farmers Coalition has launched a visible ad campaign in Washington, in addition to revamping its lobbying efforts on Capitol Hill. Featuring the faces of happy corn-growing families carrying messages of the industry’s progress on billboards all throughout the D.C. metro system, the ads silently neglect mentioning that the share of farmers owning ethanol plants has dwindled from 40 percent in the early 2000s to merely 16 percent today, while corn production for ethanol has increased to 35 percent. Understandably, featuring the logos of its biggest corporate backers benefiting from U.S. ethanol fuel blend support wouldn’t sell as well.
It is policies like ethanol subsidies that prevent America from reaching its full economic potential by diverting taxpayer money to selecting economic winners among favored industries. Ethanol subsidies are part of the bad policies included in the annual tax extenders package, which, according to Heritage expert Curtis Dubay, presents
a yearly occasion for Congress to raise taxes under the guise of faux fiscal discipline. [Instead,] Congress should make all the provisions in the tax extenders that are good policy permanent and allow the ones that are not to expire. It should then cut other taxes to make sure the reforms are revenue-neutral. If it takes these steps, Congress will have one less way to raise taxes and sneak through this kind of irresponsible spending increase in the future.
Unlike the recent attack on supposed oil subsidies, which was an attempt to subject the oil industry to targeted tax hikes, the ethanol subsidy is a true subsidy because it’s a specific handout to ethanol blenders. Fortunately, the previously favorable environment for ethanol fuel blend support seems to be changing.
Tim Pawlenty announced his 2012 presidential run by boldly arguing against ethanol and other industry subsidies in Des Moines Iowa, stating, “We need to phase out subsidies across all sources of energy and all industries, including ethanol.”
As recently as November 2010, even Al Gore stated that he had withdrawn his affection for the taxpayer-backed ethanol support despite his “certain fondness for the farmers in the state of Iowa” during his run for President. And yet Pawlenty appears far from committing the political suicide that his position on ethanol may have meant at any other time. The Des Moines Register reports that even some key industry ethanol groups are in support of a gradual phase-out.
That’s not good news, though. For the ethanol industry to voluntarily submit to a gradual phase-out signals that danger lurks. If Congress takes no further action, the direct ethanol subsidy of 45 cents to the gallon is scheduled to expire at the end of this year. The subsidy was scheduled to expire last year, but President Obama and Congress extended it for another year in the 2010 tax bill.
A gradual phase-out would mean that policymakers negotiate an extension of ethanol subsidies, even if at a lower rate. The danger lies in the phase-out period continuing indefinitely, as ethanol industry groups return to Congress year after year, in the same way as they do now, to argue that it’s merely too early this time to wean the industry off of taxpayer support.
The other maneuver the corn lobby is pushing is to direct the subsidy away from fuel blending to supporting infrastructure. Proponents of ethanol subsidies want to redirect the tax credit to blender pump and pipeline installation. If Congress funds infrastructure subsidies, it will be even more difficult to get rid of ethanol subsidies in the future no matter how uneconomical ethanol is, because Congress cannot ignore sunk costs and will continue to sink money into a bad investment for years to come.
Congress should not fall for any cry of the corn sirens who may argue that a slow phase-out of ethanol subsidies is necessary, especially given high gas prices. Ethanol would still benefit from equally onerous support in the form of consumption mandates and import tariffs, even absent the direct taxpayer subsidy.
Ethanol made in America is shielded from foreign competition by a 54 cent per gallon tariff, and the government also mandates that Americans consume an increasing share of ethanol as fuel, this mandate rising to 36 billion gallons of ethanol by 2022. Demand for ethanol, however artificially created, is strong, even without the $6 billion in handouts the industry is set to receive yet again this year.
Congress should bury the ethanol subsidy once and for all by letting it expire as scheduled on December 31. Furthermore, Congress should revisit the issue of ethanol mandates and protective tariffs and repeal both. As Nick Loris and Alison Acosta Fraser write:
If biofuels are to succeed as a competitive fuel source, congressional legislation should not be necessary to mandate its production. Moreover, Congress should not force specific technologies on Americans, especially if they are unproven technologies. Instead, Congress should unleash the power of free enterprise, letting researchers and the markets discover the best new viable alternatives. Federal mandates limit choices and hinder free enterprise from finding the most efficient, cost-effective solution.
