Tax Expert Opines on the Ethanol Production Credit

Note: The following commentary is written by Christopher Bergin, the President and Publisher of Tax Analysts. He is the former editor of Tax Notes and has written extensively on tax policy and administration issues for almost 30 years. He has degrees from Boston College, Pace University School of Law and the Columbia Business School's Senior Executive Program. Let us know what you think on our blog.......

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Pop Corn

- by Christopher Bergin, http://tax.com/taxcom/taxblog.nsf/Permalink/UBEN-7WLMU6?OpenDocument

A tax credit reduces tax liability dollar for dollar. A tax deduction reduces the amount to which a tax is applied. Of the two, the tax credit is better. But that is not why I don’t like tax credits. I don’t like tax credits because they encourage selected behaviors over others. And who gets to select the behaviors? Lawmakers (I mean after all, they, or their lobbyists, know best).

I’m a purist on this credit thing; I don’t even like the child credit. I have children, but I don’t think it’s the government’s role to decide that people who have children should be treated differently under the tax law than people who don’t. (This isn’t China; is it?)

One of my least favorite tax credits is the ethanol production credit. It’s supposed to encourage alternative fuels. I don’t believe that’s the whole reason for the credit. Since most ethanol is made from corn starch, I think the ethanol credit awards the behavior of growing CORN; ethanol is just the by product.

In addition to taking care of the farmers and ethanol producers, the credit drives up the price of feed, which drives up the price of pigs, which drives up the price of bacon. And I like bacon more than I like ethanol (personal preference).

Now what figures in all this is that a huge champion of the corn giveaway is a powerful member of the Senate Finance Committee. His name is Chuck (he doesn’t like Charles) Grassley. And guess what? He’s from Iowa. Oh, what a surprise! And even though it seems like he’s been in Washington forever, he still brags that he’s a family farmer. Yes, and he probably has some real rich family farmer friends, like corn cooperatives.

So, a man who comes from a state with more pigs than people gets to use the tax code to promote an activity that he thinks the rest of us should pay for: corn; I mean alternative fuel? Yep.

Recently, the Government Accountability Office released a big report on Biofuels. And one of the things the report says is that it might be time to reconsider the ethanol tax credit because the ethanol producers don't need the special treatment. (The report also notes that “about 98 percent of domestic ethanol is made from corn grown in the Midwest.”)

Well, that’s all it took. As quickly as he could, Grassley sent a memo to “Reporters and Editors” around the country. “Home-grown ethanol is the shining star in our efforts to reduce our dependence on dirty, imported fossil fuel,” he pontificates. Defending the credit he says, “Ethanol remains relatively new, especially when you compare it to the oil industry, which has been around for 100 years and still receives extensive government support.” Ah, the classic Senatorial argument that two wrongs make, well, two wrongs.

Come on. The ethanol tax credit is a shining example of how Congress operates. It uses the tax code to pick winners and losers. And unless you own a Senator or two – and I certainly don’t – that would make you a loser. And me, too.