Monday, January 2, 2012

The Unthinkable in Iowa

On the eve of the Republican caucuses in Iowa, the unthinkable happened.  No, a rational political process for electing a president did not suddenly emerge.  But another sacred cow bit the dust:  the 30 year old federal tax credit for ethanol was not renewed by Congress in 2011 and it expired with the beginning of the new year.  What makes this particularly unthinkable is that it happened in the midst of the Quadrennial Feast of Iowa (a.k.a. the Iowa caucuses), during which politicians normally kneel at the altar of all things corn.

The difference this year is that corn is having a pretty good run and government subsidies are suddenly very unpopular.  The ethanol subsidy made especially little sense.  For 30 years, the federal government has offered a tax credit to turn food into fuel.  It cost us $6 billion in 2011.  But the feds also charge a tariff on foreign ethanol and mandate the use of ethanol in vehicle fuel.  The tax credit was the cherry on top of a pretty sweet deal.

The ethanol industry didn't fight too hard to keep the tax credits, which means that they have their eyes on a bigger prize, namely funding for fuel retailers to upgrade infrastructure to handle higher levels of ethanol, thus having the federal government subsidize the consumption of more ethanol.  The corn industry doesn't think corn or ethanol production will be harmed by the loss of the subsidy, which makes me wish it had been taken off the table long ago.  As long as mandates continue to exist, they are probably right.

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