March 29, 2024

Ethanol Subsidies Besieged

But this year, cutting the budget deficit holds more allure than courting corn farmers, making a turning point in ethanol politics.

In Washington, there is growing consensus that the ethanol industry has reached financial stability, making much government assistance unnecessary. A strong majority of the Senate recently voted to end most of the subsidies.

The pressure prompted three influential senators to announce a compromise on Thursday that would drastically cut the financial support and end a tariff on foreign ethanol entirely by the end of July. The White House, which has supported a reduction of the subsidies, said it was encouraged by the latest proposal.

Three Republican presidential candidates — Tim Pawlenty, Ron Paul and Rick Santorum — are also seeking to eliminate or phase out subsidies for the industry even if that hurts them in Iowa. Jon Huntsman has decided he will not even participate in the caucuses, in large part because of his antisubsidy record.

No one is seeking to end the most important government support for ethanol — a federal mandate that gasoline blenders mix increasing amounts of ethanol into gasoline. But at a time when many tax breaks are under scrutiny, there seems to be little political will to continue giving $6 billion a year in federal tax credits to fuel blenders that must buy the ethanol anyway.

Further undermining support for ethanol are food makers and livestock farmers, who say the industry’s huge demand for corn is driving up their own costs, and the oil industry, which has never been fond of a fuel that displaces some of the gasoline in cars and trucks.

Recognizing reality, ethanol makers say they are willing to give up most of the money, although they and their allies in Congress want to spend some of the savings on new subsidies instead.

“They always say, ‘It’s just a few more years,’ and now the few more years has added up to decades,” said Jay Hakes, a former director of the federal Energy Information Agency and now director of the Jimmy Carter Library. Noting that the early subsidies provided by the Carter administration were originally intended to be temporary, he added, “The time for heavy subsidies for corn-based ethanol has passed.”

Corn ethanol production has hit record levels this year, beating government goals and creating a surplus for export. With oil prices close to $100 a barrel, fuel blenders have not needed tax credits to make ethanol economically attractive, since wholesale ethanol is cheaper than gasoline in many markets. And the mandate, known as the renewable fuels standard, has increased the required amounts of ethanol that fuel blenders must use to 7.5 billion gallons by 2012 from four billion gallons in 2006.

Many top ethanol producers, like Valero Energy, Archer Daniels Midland and POET, are stable and profitable — a contrast to the heavily indebted companies of five years ago, some of which were forced into bankruptcy.

Corn prices, meanwhile, have more than tripled since Congress first created an ethanol mandate in 2005, as the portion of the American corn crop devoted to ethanol has grown to nearly 40 percent. Food manufacturers and cattle and chicken farmers say the government’s support for ethanol is, in effect, pushing up food prices.

“Over the last two years, the oil industry has been joined by food producers, environmentalists, as well as the poultry producers who use grain as a feed, to create a powerful coalition against ethanol subsidies,” said Divya Reddy, an energy analyst for the Eurasia Group, a consulting firm.

Reflecting the new landscape, the Senate voted 73-27 in June to end the tariff on foreign ethanol and cut annual tax credits for blenders of ethanol. The vote was largely symbolic since the amendment was attached to a bill that failed. But many analysts view it as a sign that neither benefit is likely to survive this summer’s negotiations between the Obama administration and Congress to deal with the national debt.

Senator Jeff Bingaman, a New Mexico Democrat and the chairman of the Energy and Natural Resources Committee, is among those who have shifted views on ethanol. Although he remains a strong supporter of the renewable fuels standard, he says the tax credit is no longer necessary.

“It doesn’t make sense to provide people with a tax subsidy to encourage people to do what they would otherwise do at any rate,” Mr. Bingaman said. “The fact that we have budget problems is making the need to phase out or eliminate the tax credit that much more urgent.”

Many economists say an end to the blender’s tax subsidy would have minimal impact.

Article source: http://feeds.nytimes.com/click.phdo?i=b48dacacfbaaec70951e7fc7103779d3

Economix: What Your Taxes Do (and Don’t) Buy for You

Today's Economist

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served
on the staffs of Representatives Jack Kemp and Ron Paul.

Last week I showed that total taxes at the federal level — individual and corporate income taxes, payroll taxes and so on — are at a 60-year low as a share of the broadest measure of income, the gross domestic product.

Some readers took issue with my failure to include state and local taxes in the calculation. I have now done that, using data from the Organization for Economic Cooperation and Development, which represents the major developed countries. Among its most important responsibilities is the collection of internationally comparable data on a wide variety of topics, including taxes and health care spending.

The table below shows total taxes, including state and local government taxes, as a share of G.D.P. in 2008, the latest year for which there is complete data. The table makes clear that the United States has very low taxes by international standards.

Organization for Economic Cooperation and Development

When Americans see these data they are usually incredulous that Europeans submit to such seemingly oppressive tax levels. Conservatives, in particular, tend to view freedom as a fixed sum: the bigger government is as a share of G.D.P., the less freedom there is for the people (if government consumes, say, 40 percent of G.D.P., then people are only 60 percent free).

The late Milton Friedman popularized this idea, but even he thought that freedom would not be seriously threatened in Western democracies until government spending reached 60 percent of G.D.P. We are far away from that “tipping point,” as he called it; in 2010, total federal, state and local government spending amounted to 36 percent of G.D.P.

American conservatives tend to ignore the composition of spending; to them, just about all spending is equally bad. Europeans don’t have this attitude because their governments provide them with benefits from which all residents gain.

First is cash allowances that almost all families with children receive. We have something similar, the earned-income tax credit. Because it is part of the tax code, it reduces the tax burden; in Europe such programs are part of the budget and thus raise spending. Moreover, the earned-income tax credit benefits only low-income workers; in Europe, family allowances benefit virtually all families with children.

The impact on the tax burden can be dramatic if one views family allowances as negative taxes. For example, in Luxembourg, an average married worker with two children pays a nominal income tax rate of 16.5 percent (including state and local income taxes), while an American in the same situation would pay 5.2 percent. But once family allowances are subtracted from the Luxembourg worker’s income-tax payment, the effective tax rate falls to just nine-tenths of 1 percent.

More importantly, almost every other country has some form of national health insurance that covers, on average, 72 percent of all health costs. The comparable figure in the United States is 46.5 percent, and almost all of that is accounted for by Medicare and Medicaid, which largely benefit the elderly and the poor.

Average American workers must pay for health care out of their pockets, or through their employers in the form of lower wages. Europeans prefer to pay higher taxes and get government health care for every resident in return.

Conservatives universally believe that whenever the government provides a service it will be vastly more costly than if the private sector does so. This is why they support the plan offered by Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, to essentially privatize Medicare. Conservatives believe competition will drive down health costs for the elderly.

But O.E.C.D. data show that Americans pay vastly more for health care than the residents of any other major country. In 2008, we paid 16 percent of G.D.P. in total health care costs, public and private combined. The people with the next heaviest health care burden were the French, who paid 11.2 percent of G.D.P. Indeed, at 7.4 percent of G.D.P., the governmental share of health spending in the United States is about the same as total health care costs in many other countries, including (as a percentage of G.D.P.) Luxembourg (6.8 percent), Israel (7.8 percent), Japan (8.1 percent), Britain (8.4 percent) and Norway (8.5 percent).

In other words, if we had a health care system like those in most developed countries, we could, in effect, give every American an increase in their disposable income of 8 percent of G.D.P. – about what they pay in federal income taxes – and have health care no worse than they have in Britain or Japan. It would be like abolishing the federal income tax in terms of allowing people to spend more of their income on something other than health care.

Because most people have little more choice about medical spending than they do about the taxes they pay, one can think of the two as being similar in nature. In the table below, I have added private health care spending as a share of G.D.P. to the tax data in the table above. This puts the United States and other countries on the same footing, by accounting for the fact that they get health care mostly through government while Americans mostly pay for it themselves.

Organization for Economic Cooperation and Development

As one can see, the burden of taxes plus private health care spending substantially equalizes the loss of disposable income in the United States and other countries, because we pay 8.6 percent of G.D.P. for health care over and above what the government pays, whereas those in other major countries pay an average of just 2.3 percent of G.D.P. out of their pockets.

Looking at taxes alone, the burden in the United States is 25 percent below the O.E.C.D. average, but including the additional health costs Americans pay, the United States is just 4.7 percent below average.

In short, a substantial portion of the higher tax burden that Europeans pay is really illusory. They are really just paying their health insurance premiums through their taxes rather than through lower wages, as we do.

Middle-class Europeans also get cash benefits from government that offset much of the tax burden in a way that the United States offers only for the poor. There may be reasons why it is better not to subsidize every family with children and not provide government health insurance for every citizen. But the idea that Europeans are enslaved by high taxes, as most American conservatives believe, is just nonsense.

Article source: http://feeds.nytimes.com/click.phdo?i=71c3135b1cf8649ef94e1699d0f3da5f