gimme-five | The blog of a busy guy.

Jun/11

15

Ethanol Subsidies and Anti-Tax Absolutism

On June 14, 2011, the Senate voted on a bill to repeal $6 billion in annual ethanol tax subsidies.  These ethanol subsidies are wasteful and unhelpful to Americans, as I have discussed in prior posts.  For example, ethanol production requires a large amount of land area, some evidence suggests that ethanol costs more energy to create than it yields, using corn for fuel increases the price of food, ethanol adversely impacts fuel economy and damages older vehicles, and even damages newer vehicles when in high enough concentration (see the prior three links for more information).

Despite the fact that politicians almost uniformly agree that the nation has a debt problem, and thus needs to either decrease spending, increase taxes, or both, the measure failed, because there were not enough votes to overcome a filibuster.

There are two sources of blame for this.  First are the Democrats, who overwhelmingly voted against the bill.  Supposedly one of the major reasons was because Harry Reid whipped against the bill due to alleged procedural problems.  Though I think the more likely answer is so that Democrats can attempt to grandstand about creating or preserving jobs, no matter how worthless the jobs are.  (For example, President Obama recently remarked on the Today Show, that “there were ‘structural issues with the economy. . . . You see it when you go to a bank you use the ATM, you don’t go to a bank teller.'”)  It’s true that subsidizing ethanol will preserve jobs in the ethanol industry.  Though of course if those jobs are worthless, then the government might as well be paying people to dig holes and then fill them up again.  It is inexcusable that Democrats would overwhelmingly continue to support ethanol subsidies when the evidence simply shows that they do more harm than good.

But the more surprising source of blame are a select group of Republicans, led by Grover Norquist (not a senator), the founder of the Americans for Tax Reform.  The ATR members have signed a pledge that they refuse to raise taxes for any reason except for economic growth.  Norquist ordered the members of the ATR to withhold support for the anti-ethanol bill because eliminating the ethanol subsidy, to Norquist, would be tantamount to raising taxes.

I disagree with the rationale for Norquist’s order on two grounds.  First, tax subsidies are spending just as much as they are tax increases.  If the government agrees to give me $10 at tax time (spending) or agrees to give me a $10 decrease in tax liability at tax time (subsidy), the net effect is the same: the government transfers $10 of wealth to me.  Likewise, the tax subsidies that the ethanol industry receives are a transfer of wealth from the government to private businesses.  Whether they are characterized as a tax increase or spending cut is immaterial.  The key question we should be asking is whether the costs of this tax subsidy exceed the benefits.

That leads me to the next objection I have to Norquist’s order, specifically, that Norquist unequivocally refuses to consider the merits of legislation that “raises taxes,” simply because he believes that it “raises taxes.”  Norquist refuses to consider the costs and benefits of what he thinks are a tax increase, even if they benefits would vastly exceed the costs.  This of course will impede bargaining with any politician who believes that solving the federal debt problem requires a combination of spending reduction and tax increases.  And this problem is exacerbated by the fact that Norquist’s definition of “raise taxes,” is much far too broad.

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1 Comment for Ethanol Subsidies and Anti-Tax Absolutism

Steve | June 16, 2011 at 10:33 am

Well put. I was actually just going to send you an article from the Washington Post about this vote in the Senate, before I saw your article.

I’m against subsidizing ethanol production for the same reasons you’ve listed here. At the same time there are still massive subsidies given to the oil industry, which I think are harmful as well. I realize that it will take time for alternative sources of energy to contribute meaningfully to our country’s energy needs, but this transition is hurt by oil subsidies. Currently there are negative externalities from oil production and consumption that are not paid for (pollution and environmental degradation), so subsidizing the cost of oil makes it even less of an honest market price.

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