Tax Law

Few or None Mourn Ethanol Tax Credit's Demise

Back in August, when the debt ceiling legislation was finally passed after considerable debate, one tax provision that had been considered as part of that legislation, and seemed to have bipartisan support, was left out.  (In fact, no tax provisions were actually included in that legislation.) Thus, the ethanol tax credit, which had been the subject of a great deal of debate throughout the year, was allowed to remain until the end of the year.  The fact that the ethanol tax credit escaped the chopping block in August, however, did not guarantee its continued existence.

At the time the debt bill was being debated, Senator Dianne Feinstein (D-CA), a prime sponsor of the provision that would have repealed the credit, noted that early elimination of the credit would have saved approximately $2 billion for taxpayers; but alas, at that point in time, and throughout the rest of the year, Congress was unable to agree on much of anything--and so the credit was granted a brief reprieve.  

When the credit was originally enacted three decades ago, it provided a means to encourage individuals to purchase a more costly, but less powerful, form of gasoline; however, the intervening years saw the imposition of federal mandates regarding fuels and fuel alternatives, which made the need for the credit unnecessary-and even somewhat wasteful. Over the years, the credit has resulted in a more than $20 billion tax benefit for those who qualified for the credit-an incredible cost to U.S. taxpayers, for little, if any, benefit.

According to some, the existence of the ethanol credit was one of the most wasteful give-aways in the tax code.  While producing a major benefit for agri-giants, such as Archer Daniels Midland (ADM), it operated to the detriment of almost everyone else. The credit was used to support the production of a costly fuel, at the expense of the environment (with the heavy use of chemical pesticides and fertilizer) and food production (with some estimating that 40% of the corn grown in recent years was used to produce ethanol, thus reducing the amount of land available for food).  In addition, the industry that the credit benefited was one that was already realizing significant profits, separate and apart from the credit. With oil prices remaining high, according to a report in the Washington Post, U.S. exports of ethanol hit a record high in 2011, with approximately 1 billion gallons shipped out of the country.

In the end, the credit was a target of varied and disparate groups, many of whom disagreed on virtually everything else, and even some of those who benefited from the credit saw the handwriting on the wall when it came to the inadvisability of continuing the credit. Farmers, particularly those in the Midwest corn-producing states, seemed to realize that the continued credit would not work to their advantage.  Republican candidates for the 2012 presidential nomination took aim at the credit, and even the Tea Party took a special interest in eliminating the ethanol credit, an example of what it considered a government "handout." 

On the opposite end of the political spectrum, the elimination of the credit had the support of staunch environmentalists.  In a recent New York Times article, Michal L. Rosenoer, a policy analyst with an environmental group, Friends of the Earth, was quoted as characterizing the end of the ethanol credit as a victory for taxpayers, the environment, and those people struggling to put food on the table.

Admittedly, the credit died as a result of Congressional neglect, rather than conscious and considered action, but the result is the same. And so, as a new year begins, we bid farewell to a not-so-dearly departed credit-one that managed to survive long beyond its useful life.

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