Senate Ethanol Vote Signals Ill Wind for Other Energy Subsidies

The U.S. Senate’s vote to eliminate a tax credit and a tariff that subsidize ethanol production has lawmakers wondering which subsidies may be the next ones targeted.

The ethanol tax credit and tariff won’t end immediately, because the vote yesterday attached the repeal proposal to legislation that isn’t likely to become law. The ethanol tax credit is expected to cost $4.9 billion this year in forgone revenue, according to the congressional Joint Committee on Taxation.

Still, lawmakers said the 73-27 vote to end the aid to ethanol sent a message that no tax benefit will be spared from an intense search for revenue.

Senator Charles Grassley, an Iowa Republican and a staunch defender of ethanol and wind tax benefits, said the vote would encourage lawmakers to zero in on other energy tax breaks.

“Before the year’s out, you’re probably going to have people attack wind and solar and biomass and biodiesel,” he said in an interview.

Financial markets paid close attention to the vote. Corn futures for December delivery slid 2 percent to $6.53 a bushel in Chicago, after touching $6.50, the lowest for the most-active contract since March 17. The market closed before the Senate vote concluded.

Market Reaction

The price decline occurred on misguided speculation that the Senate action would reduce demand for the grain to make the fuel, said Glenn Hollander, a partner at Chicago-based Hollander & Feurehaken, a cash grain merchandiser and broker.

Cash corn prices have fallen 11 percent in Chicago from a record $7.88 on June 10, government data show.

After the vote, shares of meat companies rose while shares of agricultural processers, farm equipment manufacturers, ethanol producers and fertilizer makers fell.

Tyson Foods Inc. (TSN), the largest U.S. poultry producer, rose 2.8 percent to $18.08 as of 4 p.m. in New York yesterday. Smithfield Foods Inc. (SFD), the world’s largest pork processor, jumped 6.4 percent to $21.70. Its biggest one-day increase since 2010 came as Smithfield reported its first annual profit in three years.

Senator Dianne Feinstein, a California Democrat who offered yesterday’s ethanol amendment, cautioned against reading too much into yesterday’s vote.

“This is a fairly unique situation,” she told reporters after the vote. “Corn ethanol now has occupied so much of the market -- 39 percent of the market -- that it’s really impacting feed costs and that’s what was driving some of the vote for our amendment.”

Reviewing Tax Breaks

Other Democrats are pressing for a review of energy tax breaks as part of deficit reduction discussions. Democratic Senator Robert Menendez of New Jersey and Representative Chris Van Hollen, a Maryland Democrat, said they hope lawmakers will revisit tax breaks for oil and gas companies.

Michael Ettlinger, the vice president for economic policy at the Center for American Progress, a Washington policy group often aligned with Democrats, called the vote “encouraging.”

“It’s a sign of adult behavior,” he said. “It broke a philosophical barrier and now we can look at these things.”

Procedural Dispute

Yesterday’s action followed the Senate’s 59-40 vote on June 14 against advancing a similar proposal from Senator Tom Coburn, an Oklahoma Republican. Democratic leaders, who wanted to assert their control of the chamber’s proceedings, urged their members to oppose that proposal in protest of the way Coburn forced a vote. Yesterday’s vote was free of such procedural issues and marked a truer test of senators’ position on the ethanol issue.

Coburn and Feinstein harnessed a coalition that includes anti-hunger groups worried about food prices, taxpayer advocates who call the ethanol program wasteful and animal agricultural processors that compete with ethanol producers for feed.

The vote also has broader consequences for tax policy. Grover Norquist of Americans for Tax Reform, who has persuaded 40 of 47 Republican senators to sign his no-tax-increase pledge, regards the elimination of a tax break as a tax increase.

Coburn, who drew the support of 32 other Republicans in yesterday’s vote, has been challenging that view. He contends that some tax breaks look more like spending programs and should be eliminated without being paired with a tax cut.

Norquist’s group said that it wouldn’t consider a vote for the ethanol proposal a violation of the pledge provided that lawmakers also support a proposal by Senator Jim DeMint, a South Carolina Republican, that would eliminate the ethanol usage mandate and the estate tax.

The group reiterated its position after yesterday’s vote.

“As long as taxpayer protection pledge signers that voted for the Feinstein/Coburn amendment also vote for the DeMint amendment, they will be in keeping with the pledge they made to their constituents,” the group’s statement said.

To contact the reporters on this story: Steven Sloan in Washington at ssloan7@bloomberg.net Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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