With Congress in the early stages of drafting the 2012 farm bill and the nation at a fiscal crossroads, there will be calls for reductions in disbursements to the agriculture sector – as well as a healthy debate in Main Street cafes and grain elevators across the country about the structure of a proper safety-net for American agriculture.

Ethanol tax credits provide a case in point. Conventional wisdom has traditionally held that when Presidential candidates court voters in the early caucus state of Iowa and throughout the Farm Belt, they must exude unequivocal and unbridled support for the ethanol. However, opposition to the tax credits might not be the death knell in the 2012 Republican presidential primary as it might have been in previous election cycles. The political sands have shifted beneath the feet of politicians, and the question has become one of addressing fiscal pressures and philosophical opposition to ethanol vis-à-vis the need for a pragmatic approach to program reforms. In essence, should ethanol be debated in relation to the overall fiscal and budgetary issues facing the United States, or should the dialogue be within the context of a comprehensive energy strategy?

For far too long, fiscal conservatives have blindly attacked ethanol tax credits as an unwarranted intrusion by the federal government in the private sector that distorts market dynamics without fully understanding the ethanol sector. Conversely, supporters continue to highlight ethanol’s economic impact on rural communities and have held fast and true to the belief that it must be afforded the opportunity to succeed on a level playing field with oil and other sources of energy because it is a key component in ensuring the nation’s energy security.

Recently the United States Senate voted to eliminate the current 45-cent-per-gallon volumetric ethanol excise tax credit (VEETC) – otherwise known as the blender’s credit – as well as the 54-cent-per-gallon import tariff on ethanol. Although the vote is seen by many as largely symbolic, it demonstrates that the years of political clout built on Iowa’s presidential politics, powerful Members of Congress and industry support have taken a hit. Although part of a larger bill that is unlikely to be enacted, the vote signals a shift toward fiscal austerity, and approval of the tax credits is not ensured when they come up for renewal at the end of the year.

Given the political and budgetary realities, the wisest course of action may be a phase-out of ethanol tax credits. As the sector continues to feel pressure from policymakers amidst a renewed push to eliminate ethanol tax credits and other provisions immediately, there is increased acceptance to reduce the tax credits over time. Supporters of corn-based ethanol will have to adjust their tactics in light of the new political reality, and a phase-out, rather than immediate termination, would buy time for supporters to place subsidies on what is viewed as a sustainable glide path toward their eventual elimination. It would also allow for policy discussions based upon an overall energy strategy rather than one born out of purely fiscal necessity and would allow for a reallocation of resources toward other renewable fuels priorities, such as a move toward supporting increased consumer access to ethanol products.

Reprinted with permission

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