Giving Away the Farm, Part II: Splash and Dash
By: BJ Lawson
[Splash and Dash] also illustrates a cautionary tale of how government incentives, no matter how well-intentioned, can sometimes be subverted into windfalls for the few.
We are increasingly faced with evidence that our government exists to serve lobbyists and special interests. From the recent Farm Bill, the veto for which was (maybe) overturned, to irrational government favors showered on ethanol proponents, we have created systems ripe for abuse and exploitation.
Splash and Dash is a perfect example. Thanks to the American Jobs Creation Act of 2004, your taxes and our government’s debt are paying a $1 per gallon subsidy for blended diesel that combines petroleum diesel with diesel from agricultural products such as soybeans. Now, foreign biodiesel manufacturers are exploiting this subsidy for fuel that benefits European drivers, but we’re paying the bill. Here’s how it works:
The maneuver begins with a shipload of biodiesel from, say, Malaysia, which pulls into a US port like Houston, says John Baize, an industry consultant in Falls Church, Va. Unlike domestic diesel-biodiesel blends, which typically contain from 1 to 10 percent of biodiesel, the Malaysian fuel starts off as 100 percent biodiesel, typically made from palm oil.
Then, the vessel receives from a dockside diesel supplier a “splash” of US petroleum diesel. It doesn’t take much to turn it into a diesel-biodiesel blend that is eligible for US subsidies.
If the ship holds roughly 9 million gallons, it takes only about 9,000 gallons of traditional diesel (0.1 percent of the total) to make the entire load eligible for the blenders tax credit.
The US importer of the load applies to the Internal Revenue Service for the credit – a dollar for each of the 9 million biodiesel gallons, Mr. Baize calculates. The next day the tanker can set sail – dash – for Europe. There, the US importer resells the biodiesel, taking advantage of European fuel-tax credits that, in effect, keep biodiesel prices above US prices.
You must be kidding me.
I’m not kidding, but I am realistic and a bit cynical. Government incentives, no matter how well-intentioned, will always be subverted into windfalls for the few.
Our income tax system is irreparably broken. Even though the American Jobs Creation Act was designed as a tax reform bill to reduce the burden of government, tinkering with our tax code always results in unintended consequences through interactions with our maze of special-interest-driven subsidies and favors.
May 22nd, 2008 at 5:31 pm
BJ,
Thanks for giving us one more example of the ridiculous effects of trying to use the tax code as a way to implement policy. The legitimate purpose of taxation is to fund the constitutional activities of the government, not to try to manipulate markets.
We need our congress to get out of the business of selling tax code manipulation to campaign contributors.
-jcr
May 23rd, 2008 at 7:20 am
Hi BJ,
Ah you have discovered the fated splash and dash loop hole. If you think your mad about this, just wait until you hear the farmers and MPs in Europe complain about it. But there is something that your overlooking:
1. Soybean prices are so high right now that biodiesel producers can’t sell biodiesel at a competitive rate in the US market they only place they can ship it to right now and stay in business is Europe that has mandates for biofuels use and higher fuel prices.
So a possible solution to this problem would be to amend the law to say only oil produced in the US should be eligible, but the problem but you need to remember that 85% of the costs to biodiesel producers is feedstock, and if they can’t augment their supplies with cheap foreign vegetable oil then they may just have to shut down.
I have a better idea. Instead of getting our supplies of cheap vegetable oil or biodiesel from Malaysia why not turn to a closer neighbor: Mexico.
Right now the US has tarrifs on both ethanol and biodiesel produced in other countries and shipped into the US. This might make sense with Brazil that could flood our market. But what about southern Mexico whose agricultural sector has been collapsing ever since NAFTA flooded their market with subsidized US farm products (well until food prices shot back up, now with Mexican ag sector nearly destroyed).
Unlike the US southern Mexico can support growing biofuel crops like jatropha and sugar cane which have much lower input costs and much higer outputs. So this accomplishes two things:
1. Makes the US less dependent on petroleum from rogue nations.
2. Puts Mexicans back to work in Mexico curtailing the necessity to illegally immigrate to the US.
Europe is doing the same thing in the Sahel region of Africa, and its working great there.
Roey
May 24th, 2008 at 5:38 am
“I have a better idea. Instead of getting our supplies of cheap vegetable oil or biodiesel from Malaysia why not turn to a closer neighbor: Mexico.”
I have a better idea still. How about letting the market handle it? Just remove the subsidies and the penalties, and let the buyers and sellers work it out.
-jcr
May 26th, 2008 at 12:28 pm
Wow, great little discussion - Mr. Lawson, would you chime in? I see both arguments, and philosophically tend toward the latter and letting the market it sort it out…but I’m fascinated with the idea of trying to take some of the responsibility for ruinous trade policy in Mexico….
May 26th, 2008 at 8:55 pm
With respect to subsidies and “tweaks” for biofuels… I know a LOT of folks who are really concerned with their grocery bills. And restaurants, as well, struggling to absorb the rising cost of food:
http://blog.lawsonforcongress.com/2008/04/02/the-high-cost-of-food/
Should we continue to use government money to encourage turning food into fuel? Hungry people and food prices are telling us that we should be eating the soy at this point, instead of burning it.
I think discriminatory tariffs and subsidies are BOTH bad. We shouldn’t be destroying foreign growers through domestic subsidies and tariffs that lock out foreign suppliers. I’ve tried to find examples of subsidies that have “helped”, and come up empty. Any help there is greatly appreciated.
While it’s difficult to quantify, evidence suggests that our federal government actually subsidizes our addiction to oil:
http://media.cleantech.com/node/554
Two wrongs don’t make a right — so why don’t we stop subsidizing oil as well as biofuels? Letting the government “pick winners” in the energy business might make special interests happy, but it’s not helping the average American.
May 29th, 2008 at 4:54 am
I’ve tried to find examples of subsidies that have “helped”, and come up empty.
Well, they help the recipients of the subsidy, at the expense of everyone else. That’s axiomatic.
-jcr
September 19th, 2008 at 5:19 pm
Wednesday, September 17 was Constitution Day. I bought myself and several friends a new copy.
I reread Article I, Section 8 of the Constitution. I see very clearly where Congress has the authority to lay taxes, duties, imposts, and excises on trade items coming into this country from other nations.
I do not see anywhere in there were Congress has the Constitutional authority to provide taxpayer money to subsidize private business. It does not matter if that business is big oil, agriculture, or banking.
I agree with Comissioner Larson that subsidies are detrimental to the market and should not exist.
It is my greatest hope that should Comissioner Larson be elected to Congress, he will keep in mind that the first step on the road to supporting or opposing a bill should a review of the Constitution of the United States.
It is also my hope that he be willing to cite very specifically where within that document he is given the authority to pursue the course of action he chooses to support.
We are a nation built on laws and the protection of individual liberty. The Constitution is that law which we are built on. We need to stop the blatant disregard for this document in Washington.