UPDATE 1-Ethanol industry splits on future of US tax breaks

* US ethanol tax breaks expire at end of this year

* One ethanol group pursues long-term extension

* Another backs a phase-out after blend pumps, FFVs

* Deficit fears have blocked revival of biodiesel credit (Recasts, industry splits on incentives)

By Charles Abbott

WASHINGTON, July 15 (Reuters) - A group of U.S. ethanol makers proposed a phase-out of federal subsidies on Thursday -- the first such offer by a biofuels group, although the offer was tied to the creation of a more open market for the alternative fuel.

Growth Energy, a trade group that produces 30 percent of U.S. ethanol, presented its idea as Democratic leaders in the Senate sought consensus on an energy bill. Ethanol incentives worth $6 billion annually are due to expire at year’s end.

U.S. support for ethanol, popular in the Farm Belt as a home-grown fuel, may be at a turning point. Congress has been unable to extend the less-costly biodiesel tax credit, which expired at the end of 2009, partly out of concern about the federal deficit.

Other leading ethanol trade groups support an extension of the existing incentives through 2015. They said it was too late in the congressional session to suggest broader-scale changes.

“Now is not the time to add uncertainty and complexity to the energy tax debate,” said Bob Dinneen of the Renewable Fuels Association. “Losing the tax incentive will shutter plants and cost tens of thousands of jobs.”

The American Coalition for Ethanol and three farm groups said they support the straight-forward extension. The National Farmers Union however supported Growth Energy’s approach.

An early version of an energy conservation and renewable energy bill in the House tax-writing committee would cut the ethanol credit by 9 cents, to 36 cents a gallon, and reduce a tax credit for small producers by 2 cents, to 8 cents a gallon. The one-year extensions would cost $3.8 billion, according to a description that circulated on Thursday.

Leaders of Growth Energy said their plan was a pragmatic approach for a cost-cutting era and would create an “open market” where ethanol would be as widely available as gasoline. Ethanol makers say they have nearly saturated the fuel market at the 10 percent blend now in use.

“We feel it’s important to get this out there as an option,” said Tom Buis of Growth Energy.

It would convert the ethanol tax credit into tax credits for installation of 200,000 “blender” pumps at service stations and loan guarantees for construction of pipelines to move biofuels around the nation.

Growth Energy also said the government should require all automobiles sold in the United States to be flexible fuel vehicles, which can burn fuel that is up to 85 percent ethanol. Gasoline commonly contains 10 percent ethanol.

The blender-pump credit could cost $5 billion over five years, said Buis. The pumps can cost $15,000 each.

A 2007 law guarantees renewable fuels a share of the U.S. market of at least 36 billion gallons from 2022. The mandate for this year is 12.95 billion gallons, most of it made from corn.

The largest ethanol makers are Archer Daniels Midland Co ADM.N, Valero Energy Corp VLO.N and privately owned POET.

POET chief executive Jeff Broin said the petroleum industry enjoyed many tax breaks. With a blender pump on every corner and a flex fuel vehicle in every garage, ethanol can compete against oil without the tax incentive,” he said. (Reporting by Charles Abbott; Editing by Sofina Mirza-Reid)