By Ryan Cardarella
For WisBusiness.com
Following a U.S. Senate measure that would eliminate a $5 billion annual tax credit for ethanol producers, state industry leaders are calling for a gradual phasing out of the federal subsidy as it moves to a House vote.
Ethanol backers say abrupt repeal could hurt a billion-dollar-a-year state industry that produces 470 million gallons annually at nine Wisconsin plants.
The measure, which passed the Senate by a 73-27 vote June 16, would end the 45-cent-per-gallon Volumetric Ethanol Excise Tax Credit (VEETC) immediately, though the status of the larger federal economic development renewal bill containing the measure is still uncertain.
The measure, categorized as a “warning shot” within the industry, split Wisconsin as Dem Sen. Herb Kohl voted to continue the credit while GOP Sen. Ron Johnson supported the repeal. The credit will expire at the end of the year even without repeal, unless Congress renews the subsidy.
In a statement following the June 16 vote, Johnson cited the danger of relying on federal tax credits and the need to reduce the nation’s debt in voting to repeal the credit.
“It is a very bad idea to base a business model on receiving government subsidies, particularly when we’ve added $4.2 trillion to the nation’s debt over the last three years,” said Johnson. “We need to get government out of the way and unleash the private sector.”
Farmers and producers say they’re open to repeal, but disagree with the abrupt nature of the measure and its singular focus on ethanol.
“We understand the need to tighten the budget and the need to make cuts in these economic times,” said Bob Oleson, executive director of the Wisconsin Corn Growers Association. “We just felt that the credit would be slowly phased out as opposed to an immediate repeal.”
Oleson contends the repeal would slow ethanol production in the state and potentially even lead to a self-imposed furlough on Wisconsin ethanol plants, where production would halt for three months out of the year.
“There is no question it’s a bad prospect for Wisconsin agriculture,” said Oleson.
Citing the lack of movement on repealing or rolling back credits to other energy industries, ethanol leaders feel singled out by the measure.
“It’s important that we have a comprehensive discussion on this issue before we start picking winners and losers in regards to energy policy,” said Joshua Morby, executive director of the Wisconsin Bio Industry Alliance.
Supporters of the repeal argue the tax credit drives up corn prices and is no longer necessary following a federal mandate requiring refiners to blend 36 billion gallons of biofuel by 2022. About one-third of the U.S. corn crop was devoted to ethanol production last year, causing demand and prices to rise substantially. Corn prices have risen to $6.58 a bushel in June, up from $3.41 a bushel in June 2010, according to the U.S. Dept. of Agriculture.
But proponents of extending the credit argue that it gives oil companies a much-needed incentive to work with ethanol producers as they toe the line between customer and competitor.
“The tax credit makes it more lucrative for oil companies to work with us,” said Bob Welch, spokesman for the Wisconsin Ethanol Coalition. “(Eliminating it) puts us in a more tenuous situation and makes us more reliant on the larger oil companies.”
Republican Sen. John Thune of South Dakota and Democratic Sen. Amy Klobuchar of Minnesota have sponsored a more industry-friendly compromise bill that would provide a subsidy to ethanol producers when oil prices drop below $90 a barrel and help pay for the installation of more blending pumps at gas stations.
Johnson’s office didn’t respond to an inquiry on whether the senator would support the alternative bill.
The state currently ranks ninth nationally in ethanol production, with nine operating plants producing 470 million gallons of ethanol annually, according to the Wisconsin State Energy Office.
Ethanol production has nearly quadrupled since the VEETC credit was instituted in 2004, with the Renewable Fuels Association reporting that over 13.2 billion gallons were produced in 2010.
