Niche tax breaks targeted; Senate kills ethanol credit

Senate Republicans joined Democrats on Thursday in an overwhelming vote to end an important tax break for the ethanol industry, the first of many niche tax breaks GOP lawmakers are looking to close.

The Senate voted 73-27 to end the 45-cent break refiners receive for each gallon of ethanol they blend with gasoline and to scrap a 54-cent tariff on imported ethanol. The subsidy is worth roughly $6 billion a year to the ethanol industry. The Joint Committee on Taxation estimates ending it by July would save $2.4 billion over the rest of the year. 

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Thirty-three Republicans, 38 Democrats and two Independents supported the measure. Fourteen Republicans and 13 Democrats, mostly from Corn Belt states, voted against it.

Sen. Tom Coburn (R-Okla.) the leading GOP force behind the amendment, which was sponsored by Sen. Dianne Feinstein (D-Calif.), is looking at dozens of other niche tax breaks to end. 

This has put him at odds with prominent conservative activist Grover Norquist, president of Americans for Tax Reform, but it appears that Republican senators are coming around to Coburn’s view.

 “This is just the first of many,” said Sen. Dan Coats (R-Ind.), who voted against the Coburn-Feinstein amendment because he favors a more gradual phase-out of the tax break.

 But Coats says it’s entirely appropriate to end niche tax subsidies, or what he calls tax expenditures, to reduce the deficit. He said the thinking has changed since the 2010 election. Before then, he said, the assumption was that money saved from ending tax breaks would be spent on other federal programs. 

Coburn said the vote sends “a good signal” to ongoing talks to raise the nation’s debt ceiling while reducing deficits. He also said he was sure it would be on the table in the deficit-reduction talks led by Vice President Biden. 

Democratic leaders declared the strong GOP support for ending the ethanol tax break a “watershed moment” that will influence deficit-reduction talks.

 “That means tax expenditures are now fair game in the ongoing deficit reduction talks,” Senate Democratic Policy Committee Chairman Charles Schumer (N.Y.) told reporters after 34 Republicans voted Tuesday to advance the measure ending the ethanol subsidy.

 The Senate blocked the amendment to end the ethanol subsidy on Tuesday because of a partisan fight over procedure, but then approved it on Thursday after Senate Majority Leader Harry Reid (D-Nev.) brought it to the floor.

 Schumer pointed to Senate Republican Conference Chairman Lamar Alexander (Tenn.) as a Republican who wants to reduce the deficit by ending permanent tax breaks that favor particular industries.

 “At a time when we are borrowing 40 cents out of every dollar that we spend, it is a good time to take a hard look at unwarranted tax breaks, and one appropriate use of those funds is to reduce the deficit,” Alexander said Thursday.

“I am looking at energy tax breaks. I am opposed to permanent subsidies for energy as a general matter. I am in favor of jumpstarting new technologies such as electric cars, helping the next few nuclear plants get off the ground, but I am opposed to, for example, a permanent ethanol subsidy and a permanent subsidy for windmills,” Alexander added.

 This has emboldened Coburn, who as a member of President Obama’s fiscal commission voted for a tax reform plan that would wipe out a slew of special tax deductions to raise nearly $1 trillion in new government revenue. 

“This is a tax earmark; anything that is a tax earmark better be careful,” Coburn said of the ethanol tax break. 

Sen. Jon Kyl (Ariz.), a leading Senate Republican voice on tax issues, says he is open to ending niche tax breaks that pick economic winners and losers.

 Kyl has said the revenue from ending these tax favors could theoretically be used to reduce the deficit, though he would prefer to use them to offset other tax cuts.

Earlier this week, Kyl said stripping an industry of a niche tax break and “putting them back on par as everyone else is not so much increasing taxes as it is getting the code back to equilibrium, where it should be.”

 Kyl, a member of the Senate Finance Committee, says there are a lot of such tax breaks and “it adds up.”

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But Kyl, a member of the Biden group, has shied away from saying these tax breaks should be part of a broader deficit-reduction deal. Senate Republican Leader Mitch McConnell (Ky.) has said tax increases and tax reform should be taken off the table.

 Coburn splits with his leadership on this. He said ending the ethanol tax break should be part of the debt-limit deal, though he predicts the House could act on it sooner, given the overwhelming Senate vote. 

In the House, Budget Committee Chairman Paul Ryan (R-Wis.) described the push against ethanol as a sign Republicans “are getting sick of crony capitalism.”

That said, Ryan did not sound open to using the revenue from the elimination of tax breaks to reduce the deficit.

“We’re not going to raise taxes,” Ryan said at a Thursday breakfast hosted by The Hill and sponsored by the advocacy group No American Debt. 

The National Commission on Fiscal Responsibility and Reform found the government loses about $1.1 trillion every year in tax breaks.

Some of those tax breaks are broadly popular, such as the mortgage interest tax deduction. But others are specific to certain industries and give them a special advantage in the marketplace.

Senate Democrats have discussed ending offshore tax havens, which would generate an estimated $100 billion a year in new revenue.

Ben Geman contributed to this report.