Eliminating an ethanol subsidy: Does that count as hiking taxes or as cutting spending? 

After killing a similar measure yesterday, the Senate voted today to scrap the federal ethanol tax credit. This tax credit is one of many subsidies ethanol receives -- the most important one is the federal ethanol mandate. The effort to kill the credit is also at the heart of the ugly intra-conservative fight I wrote about in my column today.

Yesterday for the column I sat down with Sen. Tom Coburn and spoke with Americans for Tax Reform President Grover Norquist by phone. In addition to personal and procedural differences, the two disagreed on what the tax credit is, at bottom.

Norquist says it's a tax cut, maybe with some spending mixed in. Coburn calls it "pure spending." You might ask how that's a point of dispute. The short answer: the tax credit is really a handout that has been baked into the tax code to hide the degree to which it is a pure corporate welfare giveaway -- but that doesn't mean it's not also a tax cut.

Some basics. This credit applies to anyone who blends ethanol with gasoline -- such as a gas station. The 45-cent per gallon credit counts against the blender's liability for the federal gasoline excise tax, which is 18.4 cents per gallon.

The first thing to note is that it is a credit, not a deduction. If a gas station sells 1,000 gallons of gasoline, it owes an excise tax of $18,400. If it blends 100 gallons of ethanol into that gasoline, the gas station earns a $4,500 credit, thus reducing its excise tax liability to $13,900 ($18,400-$4,500).

It's a tax break, right?

Not so fast. You might be eligible for the credit even if you're not subject to the excise tax. Check this passage from the an explainer published by the top ethanol lobby, the Renewable Fuels Association:

To the extent that the alcohol fuel mixture credit exceeds one’s tax liability (under Section 4081), or if the person has no Section 4081 liability, ethanol blenders may file for a refund equal to the credit.  The refund may be claimed on Form 8849, “Claim for Refund of Excise Taxes”, in accordance with instruction for this Form.

My understanding is that a blender might not be a retailer, and so might not owe any excise tax. That guy gets the "credit" against the excise tax even though he doesn't owe any excise tax. The RFA explains that for these blenders:

The law requires IRS to pay non-electronic claims within 45 days.  If such a claim is not paid within the required time frame, the IRS is required to pay the claim with interest.  For electronic claims, IRS is required to pay the claim within 20 days, or the claim must be paid with interest.

In other words, you blend the ethanol, fill out a form saying how many gallons you blended, send it to the IRS, and the IRS sends you a check -- once a quarter. The Energy Department puts it this way: "The incentive must first be taken as a credit against the blender's fuel tax liability; any excess over this tax liability may be claimed as a direct payment from the IRS."  That sounds more like a handout than a tax break to me.

But the check comes from the IRS, and not, say, the Energy Department. That's one reason to consider it a tax break.

My conclusion for now: Coburn is right that it really is a handout and should be abolished. Norquist is right that we should take these savings/added revenue and return them to the whole tax base. Ideally, by cutting the federal gasoline excise tax rate.

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Timothy P. Carney

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