Commentary

Ethanol Keeps ADM Drunk On Tax Dollars

This article appeared in the Investor’s Business Daily.

Congress is back, and the GOP has promised to. put taxes at the top of its agenda. But rather than simplify and lower tax rates, Republicans plan to expand tax preferences for their business friends, including ethanol producers such as Archer-Daniels-Midland Co., the poster company for corporate welfare today.

At least 43% of ADM’s profits come from products subsidized by the taxpayers. Most of ADM’s fortunes come from ethanol, produced through the distillation of corn into grain alcohol. Ethanol can either be mixed with gasoline to yield gasohol or be turned into gin.

Over the years, ethanol has benefited from a host of taxpayer supports. The Carter administration provided hundreds of millions of dollars in subsidized loans to a dozen gasohol producers and imposed a tariff on imported ethanol. The Reagan administration provided surplus corn to gasohol producers, including $29 million worth to ADM. And the Clinton administration ordered, on dubious environmental grounds, inclusion of small amounts of ethanol in gasoline.

Most expensive is Washington’s 54 cent-per-gallon tax break for gasohol. This special-interest loophole accounts for the bulk of the more than $10 billion in subsidies to ADM since 1980. All told, analyst James Bovard estimates that every dollar in profits earned by ADM costs taxpayers $30.

This mammoth subsidy benefits ADM (by far the largest gasohol producer), not the public. Ethanol is a poor energy source, costing more than twice as much as the wholesale price of gasoline to produce. Yet gasohol generates less power than gasoline, delivering about 5% fewer miles per gallon.

In fact, gasohol is so inefficient, observes Bovard, that “producing ethanol may actually be a net destroyer of energy.” Nor is gasohol environment-friendly. It often leads to vapor lock and is more explosive than gasoline. And while ethanol use might reduce carbon-monoxide emissions, it increases hydrocarbon and nitrogen oxide output.

One curious side effect of the ethanol subsidy is to underwrite ADM’s liquor sales. Although Washington does not formally subsidize gin, ADM can use its ethanol production capacity, long funded by Uncle Sam, to make booze. The firm proudly announced last year: “The expansions (in capacity) provide ADM the flexibility to produce beverage or industrial alcohols to maximum capacity, or fuel ethanol depending on market conditions.”

Also, the diversion of corn into uneconomic gasohol raises corn prices between 22 cents and 40 cents per bushel. This penalizes distilled alcohol producers, which receive no gasohol subsidies. Sugar import quotas, which encourage use of high-cost corn syrup as a substitute for sugar, also artificially inflate corn prices.

A program so bereft of public benefit as the ethanol subsidy exists only because it has powerful friends.

For years ADM’s chairman, Dwayne Andreas, donated generously to Republicans and Democrats alike. His efforts paid off handsomely— billions in federal subsidies for one company.

Robert Dole’s departure from the Senate, however, has removed ADM’s leading political patron. ADM, too, is weaker: Andreas retired recently; his son and heir apparent, Michael, was indicted in a federal price-fixing investigation and had to resign; and the company paid a record $100 million government fine and nearly $100 million to settle private lawsuits.

And earlier this year, House Ways and Means Committee Chairman Bill Archer, R-Texas, attempted to shave the tax preference and speed the planned phase-out of the ethanol subsidy (now set to end in 2000).

Archer lost in the face of combined pressure from the White House and Republican congressional leaders, including House Speaker Newt Gingrich, R-Ga. But there’s no public support for this blatant special interest rip-off, and the GOP needs an issue.

If the Republicans are serious about governing— and if they want to restore their faded political fortunes— they should start by kicking ADM off the federal dole.

Doug Bandow is a senior fellow at the Cato Institute and the author of “The Politics of Plunder: Misgovernment in Washington.”