Thursday, June 16, 2011

Senate Votes to End Ethanol Tax Credit

CNBC reports. Developing...


Koch brothers win.

The Senate has voted 73-27 to kill a major tax break for ethanol producers. The vote was on a Diane Feinstein amendment to an economic development bill that will end the credit of 45 cents for each gallon of ethanol that fuel blenders mix into gasoline.

Although the tax credit was only on for a very narrow specific sector of the economy, tax credits in general should not be opposed. The key to a growing economy is to expand tax credits, not remove credits already in existence.

Update 2:

The measure will now be added to a bill renewing a federal economic development program. The prospects for the overall bill are uncertain.


  1. I'm surprised you take a pro-tax-credit stance. Isn't it effectively a subsidy?

    Sure you can argue that it offsets higher taxes in areas that shouldn't be taxed, but in reality it can drive massive capital investment into sectors that would ordinarily not be economically viable. Tax credits promote inefficient uses of resources that could otherwise be used for producing something at a true comparative advantage.

  2. I'm having trouble following your logic here Robert. Ethanol comes largely from corn, corn that historically has been consumed by people- not cars. Corn prices are at record highs because the demand for corn is artificially propped up due to the generous subsidies given to corn growers so that a substantial portion of their crop is sold for conversion to fuel in lieu of more efficient and plentiful oil. This makes no sense from a market standpoint. Less efficient, lower profitability producers will be weeded out over time in favor of better, faster and more profitable companies-- unless the government steps in and essentially bails out the runts of the litter. That is what is going on with ethanol production. The taxpayers subsidize their poor quality product so that money can be made by those in government and those willing to play ball. This is not a tax credit for a farmer who is making a good product whose price is determined by market forces, this is a tax credit for a farmer who knows this product doesn't need to be bought by a consumer when the government with our tax money covers their losses.

  3. @Anonymous 3:04

    So you want the tax money collected from the repealed tax credit to go exactly where?

    The focus should be on cutting taxes on all other produced products. I agree that the ethanol tax credit provides an edge to corn farmers, but the solution is not to raise their taxes, but to give everyone else an equal tax credit.

  4. Wenzel:

    I hear your argument: The less tax money going to Leviathan the better. However, from a relative standpoint this "limited tax credit" acts just like a subsidy and is a product of rent seekers. The result would be the same if the tax were not credited but actually received by the Fed Gov. and then subsequently sent back to the "taxpayer" as a subsidy. Yours is a distinction without a difference.

    More importantly, it has caused severe market distortions which have disrupted fuel, food and land prices (i.e. it has messed with the all important price signals for those commodities as well as other that are "unseen"). It has also had the effect of steering capital from what might have been a more efficient use to the creation of ethanol, which as I understand it results in a net energy loss (i.e. more btu's are required to produce each gallon than are actually contained in each gallon). Don't forget, along with this "tax credit" are also mandates that pump gasoline contain a certain amount of this subsidized, net-energy-loss liquid.

    You usually hit the nail on the head every time, but you're wrong on this one.

    We still love you though!

  5. I'm gonna take issue, Bob. Suppose congress gave Boeing huge tax credits to develop arms. Or Xe to send personnel overseas. Or even GM to keep jobs here.

    The effect is the same, a distorted market.

  6. I was going to post something similar to Anon 3:04, but I got sidetracked.

    I think this is another example of where everyone is right -- in a way.

    It just goes to show how evil the tax system really is.

  7. Should prices reflect opportunity costs? If so, the ethanol subsidy should go and the price of ethanol should rise. Unfortunately, the darn stuff is mandated to be blended into gasoline, which means the price rise is passed right along to drivers.

    The good side might be that the cost of the ethanol mandate might become just a little more transparent to drivers, and just maybe we might get rid of it. If we could do that wonderful thing, the world would pay less to eat and we would pay less to get around.

  8. The ethonal content in any particular blend is mandated by the government. Removing a tax subsidy should have little impact on the use of ethonal in gas. It is simply a tax hike that we consumers may end up paying for at the pump. We certainly won't have the option to choose between different priced blends.

  9. I completely agree with anonymous @3:51

    Tax breaks cause market distortions, just look at the housing bubble. We can all agree that less money paid in taxes the better, but tax breaks are the wrong way to do it, tax cuts are.

    Some of us may disagree with you on this Robert, but EPJ is still one of the best blogs on the net.

  10. I am not against tax credits but I am against ethanol. As a boater I know the destruction that it causes to engines first hand. Fuel that contains ethanol spoils very quickly and breaks down in the tank and acts as a solvent on rubber fuel lines. It literally dissolves them! There is nothing quite like have a bilge full of gasoline from a fuel leak. Because of this issue and the danger it presents to boaters, I have to pay almost $1 per gallon to buy marine grade fuel that is the same as service station fuel but without the ethanol.

    If people knew how bad this stuff is to their engines and actually had a choice not to put this crap in their tanks, the ethanol refiners would fold tomorrow. I am very happy about this! Next step is to get this crap out of our fuel or at least have a choice!

  11. Anon @2:48, thank you for succinctly summarizing everyone's comments before they were written. I could not agree more.

    No matter what sector is involved, a tax credit or debit will cause a market disruption and a misallocation of resources.

  12. If the tax break causes market distortions... then repeal other taxes, not the actual tax breaks. All taxes are distortive from the outset anyway.

  13. Why didn't you mention that it also eliminated a 54-cent-a-gallon tariff? Seems like a net win.

  14. @Inquisitor, I think the phrase "credit or debit" covers repealing taxes as well as tax breaks ... that's the whole point ... when you do anything to alter the market price of something, it is going to have an undesired effect.