Senate tax bill extends ethanol credit, tariff

WASHINGTON (Reuters) - The tax-cut package under debate in the Senate on Friday would extend through 2011 the 45 cent a gallon ethanol tax credit and a 54 cent tariff on imported ethanol -- the two major supports for the biofuels industry.

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Without congressional action, they will expire on Dec 31. A test vote was scheduled for Monday for the bill. The House and Senate must agree on terms for a bill to become law.

Two ethanol trade groups said they believed the extension would be enacted by Congress. That would open the way for discussion of a longer-running biofuels program, said one of the groups, Growth Energy.

Biofuels subsidies in the tax bill would cost $7 billion according to congressional economists. Extension of the ethanol credit would cost nearly $5 billion.

The bill also revives through 2011 the $1 a gallon biodiesel tax credit that expired at the end of 2009. It would cost nearly $2 billion, according to cost estimates for the bill.

Also tabbed for extension is the 10-cent tax credit for small ethanol producers and a 50-cent a gallon credit for alternative fuels expected to cost $202 million. It excludes “black liquor,” a co-product of paper plants.

Foodmakers, livestock producers and environmentalists say the subsidy should die. Brazilian ethanol producers argue for removal of the tariff.

Ethanol leaders say their renewable fuel, which accounts for nearly 10 percent of gasoline sales, reduces U.S. reliance on imported oil and is a proven job-creator in rural America. Without the credits, output could fall by 5 percent, says a think tank at Iowa State University.

“Letting these items lapse would be a case of penny-wise, pound-foolish legislating,” said Iowa Sen Chuck Grassley, a bulldog supporter of the biofuels.

The ethanol industry said it would accept lower subsidy rates and other reforms as part of a longer-term plan for biofuels.

There have been suggestions to convert the ethanol credit to a producer credit or to replace the credit with a fund to pay for “blender” pumps that dispense fuel that is up to 85 percent ethanol and to provide loan guarantees to build ethanol pipelines.

“We look to that opportunity next year, when Congress hopefully addresses some energy legislation,” said Tom Buis of Growth Energy. Buis said discussions with the White House over long-term policy have been set aside while the one-year extension is at issue.

A $1.01 credit for ethanol from cellulose is scheduled to expire at the end of 2011. Cellulose, found in woody plants, grasses and crop debris, is supposed to succeed corn as the leading feedstock for ethanol.

Reporting by Charles Abbott; editing by Sofina Mirza-Reid