Senate votes to repeal ethanol tax credits

Ethanol producers lost a battle in the U.S. Senate Thursday when senators voted to end a 45-cent per gallon tax credit on the corn-based fuel.

The vote comes as Congress eyes cuts to many parts of the federal budget. The Senate has been debating the $6 billion a year subsidy for ethanol all week.

After one attempt to kill it failed earlier this week, the measure sponsored by Sen. Tom Coburn, R-Okla., and Sen. Dianne Feinstein, D-Calif., passed with 73 votes in favor and 27 against.

Both of Minnesota's senators voted to keep the tax credit in place.

Sen. Amy Klobuchar, D-Minn., has proposed a compromise bill that would create what she calls a "glide path" to gradually end the subsidies while continuing government support for advanced biofuels. Negotiations continue on that bill.

Minnesota is among the nation's top ethanol-producing states. In 2009, 21 plants produced a total of 1.1 billion gallons of ethanol, according to the Minnesota Department of Agriculture.

"We wouldn't like it," Chippewa Valley Ethanol Co. General Manager Mike Jerke said. "It would be felt. It wouldn't be insignificant."

The company, based in Benson, Minn., receives the credits directly for making E85, a blend of 85 percent ethanol and 15 percent gasoline. The company produces 45 million gallons of ethanol a year, including E85 and other blends. The company produced about 300,000 gallons of E85 in May.

However, the credits don't just benefit the companies that receive them, Jerke said. They make U.S.-produced ethanol cheaper and more attractive to consumers. He said eliminating the credits would hurt the demand for ethanol, but he's not panicking, yet.

"Without a crystal ball one can't say," Jerke said. "But folks (in Congress) are looking for a compromise."

Ultimately, he expects the credits to be reduced, not eliminated.

The Senate measure will now be added to a bill renewing a federal economic development program. The prospects for the overall bill are uncertain, but Thursday's vote clearly endangers the ethanol tax credit, which would expire at the end of the year anyway, unless Congress renews it.

The measure passed Thursday would end the tax credit immediately. It would also repeal a 54-cent-a-gallon tariff on imported ethanol, which restricts imports, mainly from Brazil.

"The best way for ethanol to survive is to stand on its own two feet, without spending something we don't have to get something we're going to have anyway," said Sen. Tom Coburn, R-Okla.

In a sign that some ethanol subsidies are likely to endure, the Senate also voted 59-41 to reject a measure that would have eliminated a government program that supports the distribution of ethanol. The House had passed a similar measure earlier in the day, by a vote of 283-128, adding it to an agriculture spending bill.

The debate played out as the White House and congressional leaders continued to negotiate spending cuts to help reign in government red ink. Thursday's vote will almost certainly make repealing the ethanol tax credit part of those discussions.

The federal government, which borrows about 40 cents of every dollar it spends, has already hit the legal borrowing limit of $14.3 trillion. Treasury Secretary Timothy Geithner has warned Congress that the U.S. risks an unprecedented default on Treasury bonds if the borrowing limit isn't increased by Aug. 2. However, a growing number of lawmakers say they won't vote to increase the borrowing limit without substantial deficit reduction.

Many Republicans have ruled out tax increases, though some have said they would support ending narrowly-tailored tax breaks like the ethanol tax credit. The ethanol tax credit is part of a package of dozens of business and individual tax breaks that Congress usually renews each year. Thursday's vote could spell trouble for some of the others.

Thirty-three Republicans joined 40 Democrats in voting to eliminate the ethanol tax credit.

The Obama administration opposed both ethanol measures.

"The administration supports efforts currently under way in the Senate to reform and modernize tax incentives and other programs that support biofuels," Agriculture Secretary Tom Vilsack said in a statement. "However, today's amendments are not reforms and are ill advised. They could lead to job loss and pull the rug out from under industry, which will lead to less choice for consumers and greater dependence on foreign oil."

The Senate had rejected an identical amendment on Tuesday, 59-40, though some senators opposed it on procedural grounds that were later addressed.

Critics say ethanol subsidies are no longer needed for an industry that is already supported by a mandate from Congress that requires refiners to blend 36 billion gallons of biofuels into auto fuel by 2022. They say it drives up corn prices, mainly for animal feed.

"A tax break from ethanol is a gift to the oil companies and grain producers, a gift that actually harms American consumers and our environment," said Sen. Ben Cardin, D-Md.

Supporters of continued federal spending for ethanol argue it is a leading source of alternative fuel that helps reduce U.S. dependence on foreign oil. Sen. Tom Harkin, D-Iowa, said there should be a transition period rather than an abrupt elimination of the tax credit.

"This is truly a homegrown industry, built on the investment and labor of many thousands of Americans, providing a product that helps us with one of our most pressing national issues: our dependency on imported oil," Harkin said. "Yet here we are debating amendments that I think clearly tell the industry, `you aren't important, you don't matter, and you don't have the support of the American people.' Well, I think that is the wrong, misguided message to be sending."

Sen. Chuck Grassley, R-Iowa, asked: "Why is the Senate taking a full week and voting twice on the same amendment that will increase prices at the pump, increase dependence on foreign oil, and lead to job losses? We should be having this debate in the context of a comprehensive energy plan."

(MPR reporter Brett Neely and The Associated Press contributed to this report.)

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