Ethanol vote: First step toward extinction for federal tax subsidies?

Maverick Sen. Tom Coburn (R) of Oklahoma lost his first assault on the ethanol tax credit by a lopsided procedural vote, 59 to 40. But Tuesday’s vote is only the beginning of a siege on perceived pork in the tax code by the lawmaker who led the charge to outlaw pork spending.

The vote also opened a rare rift in GOP ranks on the question of what constitutes a tax increase – a breach that could give bipartisan negotiators more scope to resolve a debt crisis set to hit as early as Aug. 2. Of the 40 votes to oppose a $6 billion annual tax subsidy for ethanol blenders, 34 were Republican.

“While I’m disappointed my amendment did not pass, taxpayers should remember that when I offered an amendment to defund the Bridge to Nowhere in Alaska in 2005, we lost that vote 82 to 15,” said Senator Coburn in a statement after the vote.

“Over time, however, the will of the people prevailed, and Congress was forced to scale back this wasteful and corrupting practice,” he added. “Today, the earmark favor factory is mainly closed. Only the tax division remains open.”

There is the sense that the issue of trimming tax breaks could get far more Democratic support than the six votes it garnered Tuesday. Many Democrats voted against the amendment for partisan and procedural reasons – Coburn bypassed Senate majority leader Harry Reid in getting his measure to the floor. For example, Dianne Feinstein (D) of California, an original cosponsor of the Coburn amendment, voted against it Tuesday. She will offer similar amendment later this month.

Before Tuesday’s vote, however, all eyes were on the GOP. Republicans in both the House and Senate had rallied around the principle that tax increases were off the table, period. Most had signed a pledge by Americans for Tax Reform (ATR) that committed lawmakers to opposing increases in tax rates as well as cuts to tax credits, unless offset by other new tax cuts.

The Congressional Research Service estimates that the US spends some $1 trillion annually in such tax breaks, or “tax expenditures.” The ATR’s taxpayer pledge is against cutting such tax expenditures because it does not trust the government to apply the extra revenues to deficit or debt reduction. The ATR's goal is to keep money out of government hands at all costs.

Coburn challenged that orthodoxy. The 45-cent-per-gallon ethanol tax credit is not needed, he said, because federal madates that require refiners to blend ethanol into gasoline already act as a subsidy. Moreover, he argued that using corn ethanol in fuel raises food and fuel prices for consumers.

At the 11th hour, he was joined by other powerful conservative groups, including the Club for Growth, Freedom Works, and Koch Industries, who urged conservatives to vote to end tax breaks for ethanol, even without offsets elsewhere in the tax code.

“Taxpayers should be encouraged that Republican senators overwhelmingly rejected the ludicrous argument that eliminating tax earmarks is a tax increase,” Coburn said in his statement. “I’m hopeful that, sooner rather than later, debates like this will lead to the kind of deficit reduction agreement this country desperately needs.”

Indeed, the ethanol debate split conservative groups that have stood shoulder to shoulder on other issues involving taxes and big government. “You’ve got a real ideological divide among people who agree on 98 percent of the world,” says Michael Franc, vice president for government affairs at the Heritage Foundation, a conservative think tank.

That could help negotiations to increase debt limit, which Republicans say they will agree to only if there are spending cuts at least equal to the size of the debt-limit increase. “Eventually there’s going to have to be a deal struck that includes revenue increases as well as spending cuts,” says Donald Marron, director of the Urban-Brookings Tax Policy Center. “The path of least resistance on revenue increases will be reducing tax expenditures.”

ATR’s tax policy director, Ryan Ellis, warns that the ethanol vote is just the beginning of a push by Coburn and others for billions in tax increases. “This is a warmup,” he says. “Ultimately, Senator Coburn says he we need massive tax increases in order to get a deal" on raising the debt limit.

He suggests that if Coburn succeeds, other more popular tax expenditures could be next in line for elimination. “At any point, if you bring up an unpopular tax credit you have to ask yourself: What can you say about this that you also can’t say about your mortgage deduction?” he adds.

But other groups have rallied to Coburn's side. In a June 13 letter, Koch Industries President Philip Ellender urged ending ethanol subsidies – despite the fact that his company produces and blends ethanol.

The subsidies “distort economic signals about price and demand and create inefficiencies that divert resources from productive activities to politically favored ones,” the letter said.

FreedomWorks, which helped launch the tea party movement, favors eliminating tax credits in favor of a flat tax. The ethanol tax credit is “horrible policy,” says Wayne Brough, chief economist at FreedomWorks. “Members of both parties are probably equally guilty of using the tax code to put things in for their favorite industries. Ultimately, our goal is to get a flat tax in place that puts all this debate off the table.”