Senator seeks to cut ethanol credit to 36 cents

WASHINGTON (Reuters) - Senator Dianne Feinstein on Monday sought to add an amendment to a massive tax bill with a measure that would cut the ethanol tax credit and import tariff to 36 cents a gallon each -- a huge cut in biofuels support rates.

The current U.S. ethanol tax credit of 45 cents and the import tariff of 54 cents would be extended through 2011 under the tax bill. They will expire on December 31 unless the House and Senate agree to renew them.

"Reducing the ethanol subsidies and trade barriers proposed in this legislation would substantially reduce the cost of this bill to the American taxpayer, while allowing the Senate to support the vitally important development of our manufacturing sector," Feinstein said in a letter to Senate Majority Leader Harry Reid and Republican Leader Mitch McConnell.

Her amendment would also cut the 10-cent-per-gallon tax credit that goes to small ethanol producers to 8 cents.

Six senators co-signed Feinstein's proposal. That is down from the 16 senators who joined her in a letter to Senate leaders two weeks ago in favor of letting the supports expire.

The tax package survived a Senate test vote on Monday afternoon, which will allow debate to begin. Reid will announce which amendments, if any, will be considered on the bill.

"It won't be a disaster" if subsidies are reduced, said analyst Mark McMinimy of MF Global's Washington Research Group but it would be a startling rejection of a closed-door decision among senators to keep rates at the current level.

Feinstein said the cost of extending the current ethanol tax credit for another year would total about $5.3 billion, as federal law already requires 12.6 billion gallons (57.3 billion liters) of ethanol to be produced during 2011.

"We cannot afford to pay industry for following the law," she wrote to Senate leaders.

Feinstein also said the import tariff makes the U.S. more reliant on foreign oil from OPEC, because it discourages ethanol imports from Brazil, Australia and India.

"Currently, the federal government intervenes in the ethanol industry in three ways: requiring ethanol be blended in gasoline, providing a substantial subsidy and slapping tariffs on foreign ethanol imports, making us more dependent on foreign oil. This is bad policy and must be fixed," she said in an earlier statement to Reuters.

Feinstein said the $2 billion that would be saved by lowering ethanol assistance could be used to reduce the deficit and extend the advanced manufacturing tax credit.

Ethanol trade groups opposed scaling back their government help. Iowa Sen Charles Grassley said renewable fuels "are a part of a balanced program" along with oil industry subsidies and energy conservation to reduce reliance on foreign oil.

"The president and congressional leaders have worked to put together a very carefully negotiated bill. It would be unwise to attempt at this point to rewrite it -- particularly a green jobs provision certain to help Rust Belt and Midwestern regions where jobs are scarce," said Stephanie Dreyer, spokeswoman for Growth Energy.

The Renewable Fuels Association pointed out the U.S. sends more money to OPEC and other oil producing nations in just one week than would be spent during all of 2011 in ethanol subsidies. "Claiming the use of ethanol increase our reliance on imported oil defies logic," said spokesman Matt Hartwig.

Seventeen U.S. representatives said in a letter last Friday to House leaders "it is time to end or significantly reduce the subsidy for corn ethanol and the tariff on imported ethanol."

They said they would support advanced biofuels that meet food and fuel needs. Advanced biofuels would include ethanol made from cellulose, found in woody plants, grasses and crop debris.

A 2007 law sets an annual targets for use of renewable motor fuels, reaching 36 billion gallons in 2022, the bulk of it from advanced biofuels.

(Reporting by Tom Doggett, Charles Abbott and Richard Cowan; Editing by Marguerita Choy and Sofina Mirza-Reid)