Senator Coburn Plan to End Ethanol Credit Tests Republican Tax Principle

Senator Coburn Plan to End Ethanol Credit Tests Republican Tax Principle
By Richard Rubin and Steven Sloan - Mar 30, 2011 12:00 AM ET


Senator Tom Coburn's proposal to end a tax credit for ethanol is slated to reach the U.S. Senate floor for a vote this week. Photographer: Somodevilla/Getty Images

Senator Tom Coburn is trying to challenge the proposition that all tax breaks are created equal.

The effort by the Oklahoma Republican to end a tax credit for ethanol places him in conflict with farm-state senators who want to keep the tax incentive. It also puts him at odds with tax-cut advocates in the Republican Party, who argue that eliminating the tax break would result in an unacceptable tax increase. The proposal could reach the Senate floor this week.

A vote would force many Republicans to choose between their no-tax-increase pledge and their desire to reduce the budget deficit by cutting what they view as waste. Coburn’s amendment reaches beyond the ethanol debate and draws attention to tax expenditures, which reduce federal revenue by more than $1 trillion a year. They range from the mortgage interest deduction to tax credits for security cameras in fertilizer warehouses.

“Continuing to issue blanket defenses of all tax expenditures is a profoundly misguided embrace of progressive, activist government and a strategy for tax complexity, tax deferment, excessive spending and unsustainable deficits,” Coburn wrote yesterday to Grover Norquist. He is president of Americans for Tax Reform, a Washington advocacy group that established the “no-new-taxes” pledge.

Norquist’s group, which opposes ending tax breaks that aren’t paired with offsetting tax cuts, responded later in the day. In a letter, the group stated its opposition to the ethanol tax credit but said Coburn’s amendment would violate the no-tax- increase pledge because it would increase federal revenue. Coburn is among 40 Republican senators who have signed the pledge, according to the group.

Meaningful Distinction

The philosophical debate between Coburn and Norquist turns on the question of whether there is a meaningful distinction between targeted tax breaks and targeted spending.

“If the government lets Tom Coburn keep a dollar of his own money, that is not the same thing as the government stealing a dollar from Ryan Ellis and giving it to Tom Coburn,” wrote Ryan Ellis, the group’s tax policy director. “The differences between tax relief and spending are unambiguous.”

Pledges to prevent tax increases are akin to pledges to prevent changes to Social Security, because they create barriers to discussion of the government’s alternatives, said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a Washington group that supports deficit reduction.

“Ending mistargeted tax breaks should be a conservative’s dream,” she said. “This is exactly what you want to be doing to improve how capital’s allocated in the economy.”

In an interview, Ellis said proposals such as Coburn’s amendment weaken Republicans’ negotiating position.

‘Blood in the Water’

“If Republicans are supporting a net tax increase, that will limit their ability to have a strong hand in any of their future budget dealings,” he said. “Democrats will then smell blood in the water.”

Congress last extended the ethanol tax break in December 2010 as part of a package of extensions of expiring tax cuts. The main tax credit, which provides 45 cents a gallon to blenders, is scheduled to expire at the end of the year. Coburn’s proposal would eliminate it upon enactment of the legislation he seeks to amend -- a small-business measure.

Coburn maintains that the credit is a giveaway to ethanol refiners. He points to a report issued by the Government Accountability Office, saying that the credit duplicates the government’s biofuels production mandate.

Republican Senator John Thune of South Dakota said ending the credit in the middle of the year would hurt businesses’ plans and create uncertainty in the market.

“I think we’re better served talking about the types of issues that unite us,” he said.

Tax Pledge

It’s not yet clear if Coburn’s amendment will be voted on or when it will occur. He said yesterday that he would ultimately get a vote.

Coburn has an ally in Arizona’s Jon Kyl, the Senate’s second-ranking Republican. Kyl, who is listed as a no-new-taxes pledge signer, said in an interview yesterday he would support Coburn’s proposal, though it would mean a tax increase for those affected.

“I absolutely support striking the subsidy,” he said. “In fact, I support striking any of the so-called tax expenditures, which are just another way for taxpayers to be writing a check. They are spending by the government, and we shouldn’t have those in the tax code.”

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net Steven Sloan in Washington at ssloan7@bloomberg.net