Three senators reached a deal on Thursday to repeal the $6 billion-per-year ethanol tax credit by the end of July, an agreement that must still be passed by Congress.

The loss of the subsidy could add extra costs for ethanol blenders such as Valero Energy and Marathon Oil, but it is unlikely to reduce demand for corn.

"This agreement is the best chance to repeal the ethanol subsidy, and it's the best chance to achieve real deficit reduction," said Sen. Dianne Feinstein from California, who made the deal with Sens. John Thune from South Dakota and Amy Klobuchar from Minnesota.

Government mandates require increasing amounts of the corn-based fuel until 2015. The ethanol industry uses some 40 percent of the U.S. corn crop to make the alternative motor fuel.

The deal would reduce the federal deficit this year by $1.33 billion and direct $668 million to extend tax breaks for technologies to help alternative motor fuels including biofuels get to market, Feinstein said.

Model for other tax credit cuts?

The call on Capitol Hill to reduce tax breaks for ethanol and other industries has increased as President Barack Obama and Republicans in Congress search for ways to break the budget deadlock.

Feinstein won a symbolic vote in the Senate, 73-27, on June 16 to end the payments on July 1.

The path for the deal to become law is still uncertain. It could be attached to a standalone tax bill or become part of a wider measure to raise the federal debt limit.

Klobuchar told reporters the proposal could be attached to a tax bill that starts in the House of Representatives or "more likely" be part of the debt ceiling agreement as part of a package of provisions to reduce U.S. debt over the long term.

She said she hoped that repealing oil tax breaks, a goal of Obama's, could also be added to the package.

"This is a model that can be used going forward," Klobuchar said. "The same can be done with the oil subsidies."

The trio of senators have asked Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell to help move the measure through Congress before the August break, and said they could not promise to support it after that deadline.

If Congress fails to enact the proposal before the break, the deficit reduction and infrastructure tax breaks would no longer be possible, the senators said.

Ethanol producers support deal

Thursday's deal focuses on ending the 45-cent-per-gallon blenders' credit by the end of July. It would also kill the 54-cent-per-gallon tariff on ethanol by the end of the month, which is added mostly to imports from Brazil, where ethanol is made from sugarcane.

Ethanol producers and industry groups had supported a deal that would end the tax credit, but keep tax credits to support ethanol industry infrastructure, such as advanced pumps at gasoline stations that would allow drivers to select their own blends of ethanol.

Tom Buis, the CEO of ethanol industry group Growth Energy, praised the deal, saying it would "benefit consumers at the pump, reduce our dependence on foreign oil by investing in next-generation biofuels and make a significant contribution to reducing our nation's budget deficit."

Under Thursday's deal, tax credits for cellulosic ethanol, set to expire at the end of 2012, would be extended for three years, at a cost of $308 million. Cellulosic is expected to be made in commercial amounts from non-food crops and agricultural waste, but first costs need to come down.

In addition, tax credits for alternative fueling--including electric charging stations for battery-powered cars and natural-gas filling stations--would be extended through 2014, at a cost of $253 million.

Also a tax credit for small producers of biofuels would be extended for one year to the end of 2012, at a cost of $107 million.