The New Black Gold–will tax boondoggles never cease?

The tax code seems to foster one boondoggle after another. The ones getting my attention this week are the alternative fuel tax credits enacted in the 2005 highway bill. This was intended as a credit to encourage the development of alternative fuels for vehicles to cut our reliance on global warming-causing fossil fuels. See Natural Gas Vehicles for America, “Regulatory Summary: Alternative Fuel Credit-IRS Notice 2006-92″ (Sept. 30, 2006) (discussing the alternative fuel credit of 50 cents a gallon under section 11113 of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users). But it was modified in 2007 , and as a result the paper mills discovered a credit for a process the industry had been using since the 1930s –it just had to add (in some cases) enough diesel fuel to qualify.

The paper industry essentially cooks wood pulp to turn it into paper, and a byproduct of that process is a dark sludge called “black liquor”. The companies use the black liquor as a fuel to generate steam for electricity. And by adding just a small amount of real diesel fuel to the mix, they qualify for the alternative fuel mixture tax credit. And, not surprisingly, they love the “extra cash flow and income.” See Sharon, Paper Industry: Don’t Kill Fuel Credit, NPR (June 6, 2009) (reporting a $10 million savings from the credit in the past year for one company).

Sen. Bingaman suggested that the paper industries discovery of this black gold hasn’t got much to do with the development of alternative fuels.

The alternative fuel mixture credit was originally intended to encourage
the development and use of alternative fuels as a way to decrease global warming
pollution. But by adding fossil fuel to their black liquor mix, Bingaman
says, paper companies are rewarded 50 cents a gallon for doing the
opposite. Id.

Bingaman wasn’t the only critic. Canada joined with other countries to demand that the US end the paper industry subsidy, threatening a trade action because of the way the credit had distorted global pulp markets. Schott’s Vocab: Black Liquor, NY Times, June 11, 2009.

Some companies had in fact used diesel all along in their effort to burn their own byproduct to produce energy, while others had changed the fuel blend to benefit from the tax credit. Companies claimed that they are doing exactly what the law intended. The Natural Resources Defense Council disagreed, calling it a “travesty” because it has meant reduced reliance on biomass fuels and increased consumption of fossil fuels “in order to rip off the American taxpayer.” Lawmakers May Limt Paper Mills’ Windfall, NY Times (Apr. 17, 2009).

This particular credit is supposed to sunset at the end of 2009, but companies wanted it continued. Let’s face it, few corporations that have found a piece of corporate welfare in the Code are interested at all in seeing that “entitlement” turned off. The amounts are significant–for International Paper, $71.6 million for just one month from mid-November to mid-December last year. See Papermakers Dig Deep in Highway Bill to Hit Gold, Washington Post, Mar. 28, 2009. Not surprisingly, representatives of pulp mill states seem to think the credit is great–Republican Olympia Snowe called it a “critical lifeline to thousands of paper mills”. Snowe, What the Black Liquor Tax Credit Means for Maine, Apr. 25, 2009.

The Obama administration wanted to stop the billions flowing under this provision to the paper industry, we were told in May. See Obama Seeks to Halt Alternative Fuel Tax Credit for Paper Industry, Washington Post, May 9, 2006. At $6 billion a year, eliminating the credit–even retroactively for 2009 (it expires in December, unless extended)– for the paper industry could generate some revenue and at least some in Congress were considering just that. See Black Liquor Tax Credits: A Closing Loophole for the Pulp & Paper Industries, Accuval, Sept. 2009. Of course, the companies lobbied for maintaining it through 2009 and in fact for extending it for at least three years. See Appleton Papers et al, Comments to the Senate Finance Committee on the Alternative Fuel Mixture Tax Credit (July 9, 2009).

Now, it turns out that there is another biofuel tax credit that already extends through 2013, passed as part of the 2008 Farm Bill. See Voegele, IRS: Cellulosic biofuels are eligible for tax credit, BioMass Magazine (Dec. 29, 2008) (describing Notice 2008-110, which describes the tax credits under sections 40A, 6426, and 6427(e) for biodiesel and cellulosic biofuels, enacted in the 2008 Farm Bill for the years 2010-2013). See Committee on Finance, Finance Committee Leaders Detail Elements of Farm Bill Tax Package, page 3, Apr. 14, 2008.

Black Liquor is certainly cellulosic, so the mills may have something even better to replace the expiring black liquor alternative fuels tax credit–instead of 50 cents a gallon, they may qualify for the cellulosic biofuel credit amounting to $1.01 a gallon! Let’s see. That’d apparently mean a subsidy double the current one invested in “incentivizing” paper mills into doing what they’ve already been doing since 1930–converting wood waste into a source of energy to power the mills. See Donville, U.S. Paper Makers’ Black-Liquor Tax Break May Reach $25 Billion, (Oct. 15, 2009) (quoting Mark Connelly that we should “Think of this as a potential black-liquor II” and Marty Sullivan as forecasting “$25 billion in tax reductions for pulp producers claiming the cellulosic biofuel tax credit over the next three years”).

This credit for the paper industry is of slightly smaller magnitude than the bailout we gave the auto industry. In both cases, the argument is that these industries employ many who would otherwise lose their jobs, and who but the government will be willing to help them through these extraordinarily tough times. Yet both industries produce a product that we ought to learn to do without–the gas guzzlers that Detroit was producing pollute the air, require the destruction of vast land for roads, and use enormous amounts of energy in the process, while pulp mills chew up world forests at a frightening rate producing tons of waste that must be absorbed.

I wish it were as easy to get Congress to increase the taxes owed by the superrich as it is to get them to add boondoggles for one industry or another in the form of a tax break in the tax code. I want to see alternative energy succeed, but I’m not sure these tax credits are targeted sufficiently at the new technologies that we should be encouraging.