The Tea Party Didn't Succeed in Beating Big Ethanol After All

The movement still deserves credit for helping to end the ethanol tax credit -- but the special interest has found another way to get paid.

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Earlier this week, I wrote that Americans should thank the Tea Party for helping to end the ethanol tax credit -- and we still should. Alas, opponents of ethanol subsidies haven't fully stopped the special interests, who benefit from getting as much taxpayer help as before.

Kevin Drum alerted me to the bad news. And through his post, I found Aaron Smith at the American Enterprise Institute:

Deficit hawks, environmentalists, and food processors are celebrating the expiration of the ethanol tax credit. This corporate handout gave $0.45 to ethanol producers for every gallon they produced and cost taxpayers $6 billion in 2011. So why did the powerful corn ethanol lobby let it expire without an apparent fight? The answer lies in legislation known as the Renewable Fuel Standard (RFS), which creates government-guaranteed demand that keeps corn prices high and generates massive farm profits. Removing the tax credit but keeping the RFS is like scraping a little frosting from the ethanol-boondoggle cake.

The RFS mandates that at least 37 percent of the 2011-12 corn crop be converted to ethanol and blended with the gasoline that powers our cars. The ethanol mandate is causing corn demand to outstrip supply by more and more each year, creating a vulnerable market in which even the slightest production disturbance will have devastating consequences for the world's poor. It is time for the federal government to stop requiring cars to burn food.
Drum builds on the point:

As the Congressional Budget Office wrote back in 2010, "In the future, the scheduled increase in mandated volumes would require biofuels to be produced in amounts that are probably beyond what the market would produce even if the effects of the tax credits were included." [Italics mine.] In other words, the mandates have grown so large that the tax credits barely made a difference anymore. Demand for ethanol is driven by the mandates, not by the tax credit. When you take away the tax credit, nothing happens: demand stays high because the law says so, corn prices go up accordingly, and corn farmers stay rich. The subsidies were a nice little fillip on top of that, but at this point it's basically chump change.
What would be great is if the Tea Party made doing away with this other subsidy a high-profile goal. For now, its ability to actually shrink government is a work in progress with an outcome yet to be written.

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