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Posted on  

January 27, 2004

State fails to fund ethanol subsidies

Associated Press

In the 1990s, when Missouri's economy was rolling, the state decided to help farmers by setting up a system of tax credits and incentives to turn corn into ethanol.

The system helped spur the construction of plants which today produce about 65 million gallons of ethanol per year.

But the state hasn't been able to pay the full subsidies the past three years, and the total program debt will soon hit $10 million. On top of that, taxpayers will owe subsidies for future production plants.

Legislators have reduced the ethanol subsidy for three straight years, diverting the money to other government operations because of shortfalls in state revenue.

Ethanol producers say that while they need the money the state promised, the two existing plants in Holt and Macon counties are surviving without it. Construction began last year on a third plant, in Saline County, and financing for a fourth is near completion.

Farmers qualify for the subsidies by forming investment groups to build ethanol plants. When financing is secured, the farmer-investors receive credits against their state income taxes, to a maximum of $3 million per plant. For a $30,000 investment, a farmer can receive a $15,000 tax credit.

Once production starts, the Ethanol Producers Incentive Program pays direct subsidies to the plant -- 20 cents per gallon for the first 12.5 million gallons produced per year and 5 cents per gallon for the next 12.5 million gallons. Each plant's subsidy is capped at $3.1 million a year and is intended to help pay down debt until the plan becomes profitable.

State funding for the incentives dries up quickly every year. The state doesn't pay interest on the money it owes, but it does still owe those plants money.

"Those ethanol plants basically receive an IOU from the state that when money becomes available in the future they'll make up the shortfall," said Tony Stafford, director of the Missouri Agricultural and Small Business Development Authority, a quasi-governmental agency that oversees agricultural incentive programs.

When the current fiscal year ends June 30, the state will owe $10.4 million in incentives to the two existing plants dating back to 2002. On top of that, the state could owe $3.1 million to each of the two plants if they produce at least 25 million gallons of ethanol in the fiscal year that starts July 1.

Byron Fink, chairman of the board that oversees the Holt County plant, said the plant was in no danger of shutting down despite not receiving the full scheduled subsidy in three years. The plant is owed $4 million in back incentives, he said.

"It's made it very challenging," Fink said. "The one thing it's taught us early on is not to count on state government for their promises."

He said neither the farmers nor the banks would have invested in the project had they known the subsidies would not be forthcoming.

Sen. John Cauthorn, R-Mexico, said the state's payments are well worth the cost, since ethanol helps Missourians in rural and urban areas.

Gasoline sold in the St. Louis region now contains a 10 percent ethanol blend, part of a move to reduce pollution in the densely populated area. Ethanol also often replaces MTBE, a pollution-cutting additive that has contaminated water supplies in parts of the country.

Democrats and Republicans alike are trying to find a way to fully fund the subsidies. State Agriculture Department Director Peter Hoffher and Cauthorn have both set up committees to address the matter.

Gov. Bob Holden has proposed some sort of fee increase to fund ethanol incentives, but he left his proposal ambiguous.

Holden has pledged at least $3.2 million to the incentive program in next year's budget, which would leave at least $3 million unfunded, depending on when the Saline County plant opens and how much each plant produces.

But Holden's budget proposal asks the Legislature to create a fee system that would generate $9.9 million for the incentive program.

Having seen ethanol incentives cut in recent years, Cauthorn was glad the governor is offering to increase the funding.

"I think he's giving us the opportunity that he would support it, if we came up with it," Cauthorn said.


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