A bipartisan group of Midwestern state senators introduced legislation Wednesday to update ethanol tax credit policies, but not repeal the tax credit.

The bill would provide an alternative to another bill introduced in the Senate on Tuesday aimed at eliminating the Volumetric Ethanol Excise Tax Credit (see Senators Introduce Bill to Repeal Ethanol Tax Credit).

Instead of getting rid of the tax credit completely, the bill introduced Wednesday, the Domestic Energy Promotion Act of 2011, would significantly reduce tax incentives for ethanol. It would extend, through 2016, at descending levels, the Volumetric Ethanol Excise Tax Credit, or VEETC, which is also known as the blenders’ credit.  It also would extend, through 2016, the alternative fuel refueling property credit, the cellulosic producers’ tax credit, and the special depreciation allowance for cellulosic biofuel plant property.

The new bill was introduced by Sen. Chuck Grassley, R-Iowa, and Kent Conrad, D-N.D. The bill also has attracted the co-sponsorship of Sen. Mike Johanns, R-Neb., Amy Klobuchar, D-Minn., Al Franken, D-Minn., Tom Harkin, D-Iowa, Tim Johnson, D- S.D., and Ben Nelson, D-Neb.

“Affordable energy is a major concern for Americans, and Congress needs to keep energy security on the front burner,” Grassley said in a statement. “Now more than ever, it’s time to ramp up production of traditional energy sources here at home and to expand alternative fuels and renewable energy sources. We’ve seen what ethanol can do, and the sky is the limit as we move to the next generation and cellulosic ethanol.”

Sen. Tom Coburn, R-Okla., has introduced a series of bills that would completely repeal the tax credit, arguing that the 45 cents a gallon tax credit is largely unneeded today to subsidize the ethanol industry and wastes $6 billion a year.

However, farm state lawmakers have resisted Coburn’s efforts to repeal the tax credit. “Our nation is spending more than $850 million every day on imported energy,” Conrad said in a statement. “Imagine what it would be like if we spent that money on energy from the Midwest instead of the Middle East?  We need to do more to boost domestic energy production, especially from alternative fuels such as ethanol.”

He and the other senators co-sponsoring the latest bill noted that many existing tax policies have helped to successfully develop ethanol, the only source of alternative energy that is substantially reducing America’s dependence on foreign oil and generating economic activity in the United States. 

Ethanol already comprises nearly 10 percent of the U.S. fuel supply, they argued. The senators said they introduced their legislation because it would provide the certainty necessary for the additional private investment and job creation that would help further develop ethanol as a leading alternative energy source.

“The debate over energy tax policy should be comprehensive and include all sources of energy,” said Grassley. “With this bill, ethanol has taken the lead in looking forward. No other energy sector has stepped up to do that in the current legislative debate.”

A similar battle has been playing out lately over the repeal of special tax credits for major oil producers. President Obama has urged Congress to repeal approximately $4 billion in tax breaks, such as the Section 199 manufacturing deduction, at a time of near-record profits for the major oil companies. Congressional Republicans have argued, however, that the tax credits are needed to ensure domestic energy production.

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