Ethanol issue threatens energy plan

Legislators disagree over new tax breaks for use of gasoline additive

October 28, 2003|By Julie Hirschfeld Davis | Julie Hirschfeld Davis,SUN NATIONAL STAFF

WASHINGTON - The details of a politically vital deal to boost consumption of the corn-based fuel additive ethanol are threatening to derail a broad energy plan that congressional leaders had hoped to clear for President Bush by the end of this week.

The importance of ethanol to voters in Midwestern farm states has helped drive the energy bill this year, prodding key lawmakers - from House Speaker Dennis Hastert, an Illinois Republican, to Senate Minority Leader Tom Daschle, a South Dakota Democrat - to back the plan.

But a dispute between the House and Senate about whether to grant new tax breaks to encourage the use of ethanol has stalled the overall bill.

That puts the other elements of the measure - including reliability standards for electric utilities and fuel production incentives - at risk for the year. It would be a major setback for Bush and Republican leaders, who are pushing hard for a new energy plan.

The top Republican tax-writer in the Senate, Charles E. Grassley of Iowa, has hinted that he might block agreement on the package unless the tax break for ethanol is included. Grassley, who spoke yesterday with Karl Rove, Bush's chief political adviser, ratcheted up pressure on the president to side with him. That the White House has not done so, Grassley said, suggests a failure to understand the politics of ethanol.

"The White House," he said, "is out to lunch on this issue."

Grassley suggested that Bush, who visited an ethanol plant while campaigning in 2000, could benefit in his re-election bid by backing the tax break. The issue has pitted Midwestern farmers who produce ethanol against California and other coastal states that have been forced to blend it with their gasoline to improve air quality.

"They ought to realize that I'm 100 percent right politically, because they have a better chance of winning Iowa than they do of winning California," Grassley said, referring to Bush's campaign next year.

After two months of talks, Republican negotiators from the House and Senate have resolved most of their disagreements. What remains is a package of some $16 billion in energy tax breaks that still has tax writers deeply divided.

Finance Committee Chairman Grassley is insisting the bill include the $4 billion ethanol provision. But Rep. Bill Thomas of California, the Republican Ways and Means Committee chairman, opposes the tax preference, which he says belongs in a highway measure slated to go before Congress next year.

Putting off the tax break, Senate tax writers warn, would be leaving the future of ethanol in the hands of a lawmaker whom they characterized yesterday as "hostile" to the substance.

Thomas has opposed tax preferences for ethanol in the past. A spokeswoman said yesterday that the Californian preferred not to comment on the negotiations over the energy package.

The holdup poses what could be a fatal obstacle to a deal among farm-state lawmakers, oil and gas interests and highway groups to nearly double the use of the corn-based fuel additive ethanol within a decade. The pact, pushed through the Senate this year by Daschle and Majority Leader Bill Frist of Tennessee, would require refiners to use a certain amount of ethanol in all their gasoline.

Ethanol is typically blended with gasoline to make a cleaner-burning fuel, with 10 percent ethanol and 90 percent gasoline yielding a substance called "gasohol." First used during the oil embargoes of the 1970s, it caught on once Congress amended the Clean Air Act to require cities with serious pollution to sell gasoline containing at least 2 percent oxygen.

Ethanol and the additive MTBE qualified. But MTBE, which has been found to contaminate water supplies, is set to be banned in January in California, Connecticut and New York. The bill would drop the oxygen-blending rule and instead mandate that ethanol use rise to 5 billion gallons a year.

Critics, however, see ethanol as a government giveaway, arguing that it neither protects the environment nor provides a more efficient fuel source.

Still, ethanol advocates in the Senate are pushing not only to mandate its use but also to ensure that the tax exemption that's long been in place to encourage fuel refiners to use ethanol would no longer siphon money from the federal account set aside for road construction.

Grassley has proposed granting the refiners a tax credit from the Treasury, rather than reducing the amount they must pay into the highway trust fund.

Opponents say the bill could pass without the ethanol provision. But ethanol's champions say they could hold up the bill if the tax break is not included.

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