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Amid talk of curbing tax breaks, Congress creates a new one

Despite all the talk in Washington about the need to eliminate tax preferences, credits and deductions, the Senate voted just last week to create a new one, and the House is expected to follow suit this week.

Everyone from President Obama's fiscal commission to Republican presidential candidate Rick Perry, the governor of Texas, wants to get rid of them, or at least limit them.

As Perry said in his flat tax plan, the law is “too riddled with loopholes and special interest tax breaks that increase compliance costs and impede economic growth.”

But despite all the talk, Congress is creating another tax break: last week the Senate voted, 94 to 1, to give a tax credit to employers who hire military veterans; it was a small victory, too, for the White House, which had pushed for the new deduction as part of its jobs package. The House is expected to follow suit this week.

The veterans tax credit is just one reminder of how often Congress uses the tax code -– instead of, or in addition to, direct spending -– to help specific groups of Americans.

The bill, sponsored by Sen. Jon Tester (D-MT), would give a tax credit of up to $5,600 for employers who hire a veteran who has been looking for a job for at least six months, and up to $2,400 for those unemployed more than four weeks.

Not only is it hard to argue against helping veterans, but the estimated cost of the new credit, $95 million over 10 years, seems minuscule at a time when members of the deficit reduction “supercommittee” are wrangling over making $1.2 trillion or more in cuts over 10 years. But the supercommittee, in a search for new revenue, may recommend the elimination of some of those long-entrenched breaks in order to meet its deficit-reduction goal.

The conventional wisdom is that once Congress creates one of these tax breaks. They never go away, and year after year, the tax code becomes encrusted with them, while the revenues that would have been collected dribble away.

But we’re approaching the demise of one venerable tax break: the 45 cent-per-gallon credit for blending ethanol into gasoline.
That tax break has been around in one form or another since the late 1970s, and the ethanol industry isn’t pushing Congress to extend it beyond its Dec. 31 expiration date, according to Matt Hartwig, a spokesman for the Renewable Fuels Association.

Why not? Because ethanol, mostly made from corn, has now gained a ten percent share of the vehicle fuel market –- thanks to the tax credit and the Renewable Fuel Standard, enacted in 2005 and expanded in 2007, which essentially mandates the use of ethanol in the U.S. fuel supply.

Even with the demise of the blender’s credit, another ethanol tax break remains on the books at least until the end of 2012: the $1.01-per-gallon producers’ tax credit for cellulosic ethanol, which is made not from corn kernels but from switchgrass, corn stalks, and other agricultural waste. Production of cellulosic ethanol is less than three million gallons a year, compared to about 14 billion of corn-based ethanol.

You can see all the energy-related tax breaks here at the Joint Tax Committee web site.