Cutting $5 Billion+ in Federal Spending, Nearly Consequence-free
The federal government has an opportunity to cut spending by over $5 billion next year with nearly no impact, and all it has to do is…nothing.
The federal tax credit for blending ethanol, currently at 45 cents/gallon, is set to expire at the end of the year. If Congress does not renew it, it will disappear. The EPA recently finalized its 2011 Renewable Fuel Standards, calling for the equivalent of 13.95 billion gallons of renewable fuel, over 90% of which is traditional ethanol.
Some simple math shows that not subsidizing that ethanol will save over $5 billion next year.
Eliminating the subsidy should have little effect on the amount produced or where it comes from. Because the EPA has a standard, a minimum amount of ethanol must be produced regardless of whether it is subsidized. To ensure that the standard is met, the EPA mandates that each relevant party meet its renewable volume obligations or face civil penalties under the Clean Air Act. Additionally, if the tariff on imported renewable fuels stays in place, the relative value of domestic and imported ethanol will stay the same.
Only the “blenders and marketers” of ethanol who receive the unnecessary subsidy are guaranteed to feel a negative effect from its expiration. The largest blender of ethanol is Valero – of California Proposition 32 fame – which owns ethanol plants capable of producing 1.1 billion gallons/year and has claimed the subsidy does not affect its blending decisions.
The argument on the Hill is heating up between coastal senators and ultra-conservatives on one side, and farm-state senators on the other hand. As long as the EPA can do its job and the tariff remains in place, farmers wouldn’t actually be disadvantaged from eliminating the subsidy, but some against the subsidy are also fighting the import tariff, leading to U.S. regional political differences. Senator Max Baucus (D-MT) offered a compromise to lower the subsidy to 36 cents/gallon for the next year, a step in the right direction but still $3.8 billion too expensive.
This subsidy serves no purpose. If its intent is to help farmers, Congress should consider a farm bill, but subsidizing firms like Valero is a waste of taxpayer money. In the future, it would be useful to have a discussion of the questionable merits of the ethanol mandate as well. But in the next month, at a time of large deficits, it is hard to find an easier $5 billion+ to cut. |
