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Wall Street Journal, Senator Tom Coburn Expose Blind Spot in Anti-Ethanol Arguments

April 5, 2011

           

The arguments made by the Wall Street Journal and Senator Tom Coburn against American farmers and ethanol producers come with huge blind spots. In its most recent tirade (subscription required) against its perceived “threat” posed by American farmers and ethanol producers, the Journal states that “Senator Tom Coburn of Oklahoma has a fighting chance to begin reforming Washington’s bonehead ethanol policy,” and that this program “ladles out roughly $5 billion a year in benefits to petroleum refiners that blend ethanol into gasoline.” As usual, the Journal fails to tell its readers some very important points.  For example, most of the companies eligible for the tax incentive are small businesses like independent gasoline marketers that actually sell gasoline, not the world’s largest oil companies.  Nor does the Journal mention that the tax incentive alone actually lowers the price of gasoline for American drivers by a nickel for each gallon of 10 percent ethanol blends they buy. Senator Coburn also fails to grasp this concept.  He routinely proffers the notion that ethanol is driving up the price of gasoline, along with erroneously suggesting ethanol is the driver behind food price increases.  In private, my guess is Senator Coburn blames ethanol for the disappearance of Amelia Earhart too, but that is pure speculation. Aside from the near pious nature of their crusade against American farmers and ethanol, both Senator Coburn and the Journal are exposing an enormous blind spot they share when it comes to claims seeking an end to wasteful tax policy. By the calculations of one reporter, the oil industry is in receipt of nearly $18 billion in direct annual support from taxpayers.  That doesn’t include the price we pay to protect the free flow of oil from hostile regions of the world or the billions it takes to clean up the environment as a result of our reliance on fossil fuels.  Some of these programs—such as the provision enacted in 1916 allowing expensing of “intangible drilling costs” (whatever those are)—have existed for nearly 100 years! Many of these oil subsidies and tax shelters are buried so far down in the tax code that even a deepwater drilling rig couldn’t find them. By comparison, the ethanol tax incentive is a molehill.  Remember, this incentive goes to many small businesses that create the gasoline we use.  This tax incentive reduces the cost of producing a gallon of gasoline making ethanol-blended fuels less expensive.  All things being equal, a blend of 10 percent ethanol (E10) will be 4.5 cents cheaper than conventional gasoline.  As noted above, today’s spread in gasoline and ethanol prices together with the tax incentive is saving drivers a dime at the pump.  Economists from the likes of the Department of Energy, Iowa State University, and Merrill Lynch have examined the impact of increased ethanol blending on consumer gas prices and concluded that ethanol has generally reduced the price of gasoline by 15-50 cents per gallon. For the average American driver, that’s an annual savings of $120 to $400 dollars.  These savings result not only from the fact that ethanol has been $0.50-$1.00 per gallon cheaper than gasoline at the wholesale level for the last several years, but also from the fact that replacing 13 billion gallons of gasoline reduces aggregate oil demand and, thus, exerts downward pressure on gasoline prices across the entire fuel supply. (This analysis says gasoline prices should be $10-$15 if all costs were truly calculated). The blind spot on tax policy isn’t limited to oil.  As the New York Times reported recently, some of the nation’s largest and most profitable corporations are paying little, if any, federal income tax.  The Times story singled out General Electric, the nation’s largest corporation, for having no tax liability in 2010 despite more than $14 billion in profits.  But, this tax avoidance phenomenon isn’t confined to GE.  Known as the active financing exception, this taxpayer giveaway allows huge corporations to avoid paying some U.S. taxes while shipping jobs, investments, and revenues overseas.  Presumably, this loophole could be readily exploited by the oil industry as well.  (Perhaps that is why Senator Coburn fails to mention it when opining on the dangers of wasting taxpayers dollars.) The Treasury estimates this loophole will cost $5 billion this year.  Sound familiar?  That is roughly equal to the investment in domestic ethanol production represented by the tax credit for ethanol blending that the Journal so passionately abhors. No one is blaming these companies for taking advantage of tax loopholes that Congress readily allows into the tax code.  As individuals, we all look for every tax advantage we can find.  Corporations are no different.  But, when lawmakers like Senator Coburn and news outlets like the Wall Street Journal fail to discuss these job-exporting, tax-evading practices while lamenting the investment in a domestic renewable fuel industry that is reducing the price at the pump for all Americans, that is hypocrisy. Lest we be accused of hypocrisy, let’s be clear:  Ethanol is not the singular silver bullet to all America’s energy challenges.  Rather, ethanol is an important part of the solution to reducing our demand for imported oil, creating jobs and opportunity that can’t be outsourced, and helping shield American consumers from some of the price volatility that defines energy markets today. Since the beginning of the year, the Journal’s editorial page has written no fewer than SEVEN anti-ethanol diatribes, not including the disparaging submissions from outside sources.  Senator Coburn, for his part, has made countless speeches and given a plethora of interviews castigating American ethanol production.  Neither have bothered to discuss the billions still provided to oil companies or the tax loopholes that allow highly profitable companies to avoid paying taxes. Tackling energy challenges and addressing shortcomings in the American energy tax policy require honest and comprehensive discussions.  American ethanol producers are ready to have such discussions.  The ethanol industry is actively engaged in good faith discussions with lawmakers and other stakeholders to transition and transform current ethanol policies to address budget concerns.  Ideas that address market economics, such as a variable tax credit, investment in vehicles and infrastructure, and accelerate the commercialization of advanced ethanol technologies must be part of the discussion.  When the Wall Street Journal and Senator Coburn are ready to talk seriously about energy tax reform, our door is open.