Balancing the Budget Axe

By Steve Kopperud, Policy Directions, Inc.

In the horse race between political parties, wings of parties and individuals within those sectors as to who gets the biggest gold star for whacking the most out of current federal spending, it’s all about playing to the hometown crowd, facts and impacts be damned. However, there are political phenomena occurring that even the greenest of the House and Senate freshmen should have expected.

The first is a budget variation on the “not in my backyard” phenomenon that occurs every time personal or parochial programs, projects, and promises are threatened. This one is actually more of a “cut his program not mine” kind of thing as the reality of taking a big chunk, for instance, out of federal “public recreation” funding translates into the local public swimming pool two blocks over not opening this summer and what happens to my kid’s lifeguard job.

I’m not going to get into the wisdom or lack thereof of Congress deciding in its inherent omniscience which specific programs should be axed and which should remain whole. For instance, Senator Rand Paul (R-KY) and Representative Michelle Bachman (R-MN), in their respective attempts to cut federal spending to the bone, apparently place little priority on university research to maintain and grow agricultural production and food security, while others are of the school that says it’s wiser to pick a reduction percentage and apply it across the board with a bit of the “bridge to nowhere” identification and elimination thrown in.

Having said all that, there are federal programs producing exactly what they were intended to produce, returning to industry and the overall economy benefits that exceed their cost. These programs are at risk in this rush to judgment on federal spending. They are also programs that meet all of the same criteria for success, but which are increasingly identified as having done their job, so it’s time to cut their federal support.

One of the poster children for misguided and arbitrary cutting is the Market Access Program (MAP), in which the National Renderers Association is a participant. I can only assume those in the White House and on Capitol Hill who almost automatically and annually identify MAP as one of the first candidates for the budget axe don’t understand what the program is today versus what it was 20 years ago, and they have no clue as to how well this program pays off.

MAP gets about $200 million a year in federal largesse. That investment in broad industry export promotion returns, on average, $32 in overseas sales for every federal dollar spent, according to estimates. The program used to be open to branded products, but no more. However, it’s apparent Capitol Hill still believes MAP dollars are going to McDonalds to sell burgers and KFC to sell chicken overseas. House and Senate floor rhetoric and “dear colleague” letters reveal this misconception, and industry is forced to work its collective tail off to preserve the program at spending levels that make it successful. So far, this collective action has worked, but then many of the industry trade associations that receive MAP dollars base big chunks of their annual operating budgets and employee salaries on MAP receipts. Hell hath no fury like a MAP recipient with a threatened export promotion program.

On the other side of the budget-cutting coin, however, is the $6 billion in federal tax benefits estimated to be paid out in blenders tax credits to oil companies to ensure they’re using ethanol in the gasoline blending mandates under the Renewable Fuel Standard (RFS). The ethanol blenders credit and its kissing cousin, the imported ethanol tariff, received a one-year reprieve from Congress last November – along with the blenders credits for biodiesel and renewable diesel – but judging by the 10 separate bipartisan pieces of legislation introduced in just three months designed to either kill all corn-based ethanol support, shift all federal spending to cellulosic (non-corn) ethanol development, or roll back the Environmental Protection Agency’s action to increase the gasoline blend rate from 10 percent to 15 percent, the days of federal corn-based ethanol subsidies are likely numbered.

The reasons I believe Congress will kill off corn-based ethanol tax breaks are well-known to the industry. First and foremost, with food price inflation in the United States rising at its fastest rate in 20 years and foreign governments toppling at least in part because of food availability and pricing, the credibility in the food versus fuel debate is slowly shifting to the nay vote on using this nation’s primary food crop for fuel production. Even the staunchest defenders of corn-based ethanol are starting to waver.

Every segment of U.S. meat production, in announcing increases in consumer prices for its products, points the finger at rising feed costs, jacked up, they say, by record corn prices based on competition from ethanol refiners. One major poultry company estimates in 2011 it will pay in excess of $330 million over 2010 prices for chicken feed, translating into a 10.5-cent per pound increase in production cost. Everybody involved understands this cause and effect. (Unless you’re Secretary of Agriculture Tom Vilsack, and then you continue to preach how U.S. corn production can infinitely, magically produce enough corn to meet ethanol, feed, food, record export, and other industrial demands in a year of record low stocks and the fear of weather reduced production.)

Second, the industry has enjoyed federal support for over 30 years. Those who ask “how long does it take for an industry to mature” are getting new and focused attention.

Third, folks are waking up to the simple fact the blenders credit does not go to the ethanol refiner, be it a small farm cooperative or a major multinational, but is paid to oil companies that refine gasoline. Fourth, ethanol produced last year was about one billion gallons over what is needed to meet the RFS blend mandate; the rest is exported. These four facts alone are enough to create the perfect storm that could very likely capsize federal corn-based ethanol support. An emerging factor: New ethanol varieties that do not use corn as a feedstock, which have simpler refining processes, appear to be faster to commercialize and don’t chemically mess with existing pipelines and engine parts at high concentrations.

Ethanol companies, singly and in unison, can see the political end of the road for the blenders credit and are now talking federal infrastructure investment, not federal tax breaks. The industry wants that $6 billion, give or take, to be dedicated to federal loan guarantees to build pipelines to move ethanol to deficit regions of the country, investment in blenders pumps at gas stations, and federal orders to automakers globally that a relatively high percentage of cars and light trucks sold in the United States must be flex fuel vehicles by a certain date.

Congressional support for other biofuels is pretty much status quo, they having not enjoyed 30 years of government dollars. However, all of the other factors endangering ethanol’s federal check ultimately will come into play with all biofuels, especially as Congress moves toward broader energy policy and tax reform. As the industries involved, including animal-based biodiesel refiners, debate the wisdom of battling for their share of the tax credit pie, Congress is actively looking at how to cut those expenditures while maintaining a commitment to alternative fuel development and commercialization.

Every industry that benefits from federal supports, whether direct payment programs for farmers or tax credits for biofuels refiners, are beginning to recognize they must creatively examine alternative ways in which the government can be an ally, not an auditor.

View from Washington – April 2011 RENDER | back