Farm-State Senators Agree to End Ethanol Tax Breaks in July

Senator Dianne Feinstein, a California Democrat, said she has reached an agreement with two farm-state lawmakers to end ethanol subsidies July 31.

Feinstein’s agreement with Senators Amy Klobuchar, a Minnesota Democrat, and John Thune, a South Dakota Republican, would end a 45-cent-a-gallon ethanol blender tax credit and a 54-cent-a-gallon tariff on ethanol imports that are scheduled to expire Dec. 31. The lawmakers said the proposal, announced today, would reduce the federal budget deficit by $1.33 billion.

Feinstein said she hopes the agreement will be included in a deficit reduction package the Obama administration is negotiating with congressional leaders. In a letter to Senate Majority Leader Harry Reid of Nevada and Minority Leader Mitch McConnell of Kentucky, the lawmakers said the agreement would fall apart if it doesn’t come up for a vote soon.

“If Congress fails to enact this proposal before it adjourns for August recess, the substantial levels of deficit reduction and investment achieved by this compromise will no longer be possible and we cannot commit our support after that point,” the three senators wrote in the letter dated today.

The Senate voted last month to curb ethanol subsidies. The measure was attached to underlying legislation that didn’t clear the chamber. Klobuchar and Thune opposed that measure, and Feinstein won their support by agreeing to use $668 million that would be saved by ending the ethanol subsidy to support other technologies.

Details of Proposal

Under the agreement, $308 million would be spent to extend for three years a $1.01-a-gallon tax credit for cellulosic biofuel production. That credit is set to expire at the end of 2012. The lawmakers said extending the credit would support the development of non-corn biofuels.

Cellulosic biofuel can be produced from items other than corn, including grasses and farm waste. Poet LLC, the largest U.S. biofuels producer, along with Verenium Corp. (VRNM) and BP PLC (BP/) are investing in commercially viable cellulosic fuel.

The lawmakers also propose spending $253 million on a three-year extension of an alternative fuel infrastructure tax credit. This benefit currently expires at the end of 2011 and the credit would be reduced to 20 percent from 30 percent.

The agreement includes $107 million for a one-year extension of a small-producer tax credit. The credit currently expires at the end of 2012 and would be reduced to 7 cents a gallon from 10 cents a gallon.

Lost Support

The effort to win the votes of Klobuchar and Thune might cost the support of other lawmakers who have also targeted ethanol subsidies.

Senator Tom Coburn, an Oklahoma Republican who worked with Feinstein in June on an ethanol deal, said he was unlikely to support the new agreement. Coburn has said savings from ending the ethanol subsidies should be applied to lowering the budget deficit and he has opposed using the funds to support cellulosic ethanol production.

“Private industry’s already spending billions on algae- based cellulosic ethanol, and we’re going to give them $600 million more?” he said. “It’s nuts.”

Representative Jeff Flake, an Arizona Republican, echoed those concerns. He shepherded a measure through the House in June that would have prohibited federal funding for certain ethanol pumps or storage facilities.

‘Still Too Generous’

“Frankly, the compromise bill is still too generous to the ethanol industry,” he said in an emailed statement. “I think there’s enough support in the House to end all ethanol subsidies.”

A similar amendment was defeated in the Senate on June 16.

Senator Charles Grassley, an Iowa Republican who is one of the Senate’s staunchest ethanol supporters, said the agreement should have included a “more robust investment in alternative fuel infrastructure and cellulosic ethanol.”

“The fact that this happened in a vacuum, rather than in an even-handed debate over all energy tax incentives, will always be a raw deal, especially for taxpayers and renewable fuel producers,” he said.

To contact the reporter 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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