By KEVIN WALKER
Michigan Correspondent

EAST LANSING, Mich. — Agricultural, food and resource Economist Mark Skidmore, of Michigan State University (MSU) published a study he says is designed to make people think more about the true costs of tax subsidies.

The paper, co-authored with University of Wisconsin-Oshkosh Assistant Professor of Economics Chad Cotti, is called The Impact of State Government Subsidies and Tax Credits in an Emerging Industry: Ethanol Production 1980-2007. It was published in the April 2010 issue of Southern Economic Journal.

According to the authors, ethanol subsidies, viewed from the standpoint of a jobs program, are not a good deal for taxpayers. As an example they used the state of Wisconsin, which has an annual subsidy at the rate of 20 cents per gallon up to 15 million gallons.

“According to the National Corn Growers Assoc., a 40 million gallon plant employs 32 full-time workers,” the paper reads. “On a per worker basis for the average-size plant in Wisconsin (53 million gallons), this subsidy is equivalent to about $71,400 per worker. This is a sizable and costly subsidy if the goal is to generate jobs, but clearly the goals of such subsidies are much broader than job creation.”

The authors also write that “existing research on the emerging ethanol industry suggests that the social benefits of ethanol production and consumption are minimal, perhaps even negative. According to the analysis by Gardner (2007), it is likely that federal subsidies and mandates for ethanol actually generate a substantial long-run deadweight loss in the range of $3.5 to $4 billion annually.

“Taking into account state subsidies only increases the magnitude of this deadweight loss measure. From the point of view of a particular state, however, state policymakers should consider offering certain subsidies if the objective is to be a leader in the emerging biofuel industry. In the context of the very recent and growing concern about the tradeoff between food and fuel, the broader implications of increasing subsidies for biofuel production, at least in the context of existing corn-based technologies, should be carefully considered.”

In a follow-up interview, Skidmore acknowledged he’s basically against all subsidies, whether they are for movie-making, ethanol, or the oil industry. It would be nice if there weren’t any subsidies, he said, because these tax breaks push taxes up for everyone else, including other businesses as well as residents.

“I do struggle with this, honestly,” Skidmore said. “About 80 percent of your (ethanol production) costs are covered by subsidies. It’s a notable cost.”

He stated that the social costs of ethanol subsidies are higher taxes and the behaviors that people end up engaging in to avoid those higher taxes. He acknowledged that it’s harder to define the social benefits of ethanol subsidies. For example, how does one define the social benefit of less dependence of foreign oil?
He said that Gardner is one researcher who did attempt to define those social benefits. He added that, although these subsidies benefit corn growers and provide some jobs in rural communities, the view from the agricultural community is not uniform.

“I don’t think you can lump the whole agricultural community together on this,” he said. “If you’re a hog farmer you might have a different view than if you’re a corn farmer.”

The 17-page article is available to read online at the following: www.maes.msu.edu/news/Skidmore_SEJ_StateEthSubs.pdf