Senate keeps ethanol credits but sends a message on tax breaks

Reporting from Washington —  The Senate rejected a proposal Tuesday to do away with annual ethanol subsidies in a vote that was closely watched for clues about the willingness of Republicans to take on tax breaks and loopholes.

Despite the measure’s defeat, conservative Sen. Tom Coburn (R-Okla.) won support from 40 senators for ending the ethanol credit. That was interpreted as evidence that some Republicans are willing to close loopholes despite the conservative view that such steps are tantamount to tax hikes.

“You have a good number of Republicans that are willing to close tax loopholes for deficit reduction,” said Rep. Chris Van Hollen (D-Md.), a negotiator for House Democrats on deficit talks. “That should be a good example.”

Many Republicans consider any action that results in more federal revenues to be a tax increase. Democrats argue that ending tax breaks and closing loopholes are essential to reducing deficits. The issue is a sticking point in negotiations over the federal debt and budget deficits.

The Senate vote came as Vice President Joe Biden began a three-day round of talks with congressional negotiators to raise the nation’s $14.3-trillion debt limit by Aug. 2. Treasury officials have said the nation risks a potentially catastrophic default without action to raise the debt ceiling.

“We’re making good progress,” Biden said after leaving the closed meeting. The group is scheduled to resume talks Wednesday morning.

Proposals for spending cuts dominated Tuesday’s talks, and an aide familiar with the negotiations called the discussion “robust.” The talks focused on domestic spending as the GOP seeks to cut “trillions” over the next decade. The current GOP spending plan would also require raising the debt limit.

The White House also suggested expanding a 2% reduction in employees’ contributions to payroll taxes, an effort to stimulate the economy.

Tuesday’s Senate vote on ethanol subsidies spotlighted the debate over taxes and deficits. The ethanol subsidy provides a 45-cent-per-gallon federal tax credit to those who blend ethanol with gasoline.

The Government Accountability Office said in a report earlier this year that the credit was duplicative and no longer necessary. But farm-state senators argued that the tax credit remained important and should not be singled out for elimination.

Coburn and other critics have argued that the ethanol tax break is federal spending by another name, amounting to $6 billion a year.

“There’s nothing about this that makes sense,” Coburn said during the Senate debate.

Conservative activist Grover Norquist, of the group Americans for Tax Reform, also opposes the ethanol subsidy. But Norquist has argued that doing away with tax credits would amount to a tax increase unless the revenues were redirected to tax breaks elsewhere.

The vote split across parties and regions. Many Democrats voted against the proposal when leaders encouraged a “no” vote on procedural grounds after Coburn used an unorthodox move to bring the bill to a vote.

In all, 34 Republicans, including party leaders, supported the proposal to end the credits, even after leaders offered an alternative with farm-state Democrats that siphoned off some GOP support for Coburn’s bill.

Republicans said opposition to controversial ethanol credits did not necessarily translate to widespread support ending other tax breaks as a means of reducing deficits.

Also Tuesday, the director of the nonpartisan Congressional Budget Office warned again of the “dangerous gamble” of failing to expand the nation’s borrowing capacity.

The office’s director, Doug Elmendorf, said such an outcome had no recent precedent. “That’s why it’s a gamble,” he said at a breakfast sponsored by the Christian Science Monitor.

lisa.mascaro@latimes.com