Senate Sidetracks Move to Repeal Ethanol Credit

The Senate refused to kill a $5 billion annual subsidy for ethanol on Tuesday, backing continued government aid for a Farm Belt-based industry instead of deficit reduction in an era of record red ink.


The 40-59 vote, far short of the 60 needed to advance the measure, reflected regional as well as partisan differences, a split among Republicans — and anything but the final word on the issue.

"We continue to spend money that we don't have on things that we don't need," said Sen. Tom Coburn (R-OK), a prominent deficit hawk who led the effort to eliminate the subsidy immediately.

Supporters of continued federal spending for ethanol argued it is a leading source of alternative fuel and is needed to reduce U.S. dependence on foreign oil.

"With conflicts in the Middle East and crude oil priced at more than $100 a barrel, we should be on the same side," said Sen. Chuck Grassley (R-IA) on Monday, when the measure was debated at length. "Why would anyone prefer less domestic energy production?"

Grassley's state leads the nation both in harvesting corn and blending it into alternative fuel. Other leading ethanol-producing states are Nebraska, Illinois, Minnesota, South Dakota and Indiana, and all senators from them opposed an end to the subsidy, regardless of political party.

Ethanol is blended with gasoline and subsidized at 45 cents a gallon, with an additional 10 cents for small producers. These tax breaks have long been supported as a way to reduce oil imports by politicians in both parties, emphatically so for many who campaign across Iowa every four years in the state's kickoff presidential caucuses.

Energy and You - A CNBC Special Report
Energy and You - A CNBC Special Report

But a new emphasis on deficit reduction, particularly among Republicans aligned with tea party activists, has contributed to a shift in the political landscape.

As a result, with the current subsidy scheduled to expire at the end of the year, Grassley and other farm state lawmakers support alternative legislation to reduce the tax break without eliminating it for several more years.

Unlike Coburn's measure, the alternatives put only a fraction of the savings to deficit reduction. Instead, the rest would go for renewal of different tax breaks, including one for firms that purchase pumps to blend ethanol with gasoline. Given the pressure to cut spending, it was evident even before the vote that the roll call would not be the final word this year in Congress on ethanol.

House deficit hawks are likely to seek to cut or eliminate the subsidy, and the issue also might come up in deficit reduction talks led by Vice President Joe Biden.

Additionally, shortly after Coburn's legislation was blocked, Senate Majority Leader Harry Reid (D-NV), announced he would schedule additional votes on the fate of the subsidy at the end of next week.

Coburn's pre-emptive move forced a quick choice.

White House spokesman Clark Stevens said President Barack Obama opposed the elimination of the subsidy but was "open to new approaches that meet today's challenges and save taxpayers money."

For Republicans, the choice was complicated by opposition from Grover Norquist, the head of Americans for Tax Reform and an inflexible opponent of tax increases.

A tax increase?

Because the subsidy isn't scheduled to expire until the end of 2011, he said Coburn's legislation to end it immediately amounted to a tax increase.

The Oklahoman disagreed, as did other deficit hawks who said the vote marked a chance to go on record for spending cuts.

"It seems to me to be a pretty easy one" to cut, said Sen. Jeff Sessions (R-AL), who said he had supported the subsidy in the past but had switched his position because of the growing national debt.

Sen. Pat Toomey (R-PA), elected to his first term last fall, said the current program was "extremely inefficient. It is a waste of taxpayer money."

But Sen. John Thune (R-SD), said ethanol takes the place of 445 million barrels of oil annually.

"That is the equivalent of $34 billion that we don't send overseas," he said.

Other critics noted that Coburn's state of Oklahoma is part of the nation's oil patch and said the oil industry has benefited from government largesse for roughly a century.

"Already, the ethanol community is ahead of every other energy sector in stepping up with an alternative plan," Grassley said in a statement issued after the vote.

Thune and Sen. Amy Klobuchar (D-MN), like Grassley, are sponsors of an alternative measure.

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