What's In Your Paper Tax Credit Scandal?

by Joshua Martin of Environmental Paper Network

Upset by the big taxpayer money giveaways of the financial and auto bailouts? Outraged by the AIG bonus scandal? Well wait until you hear about the billions of dollars in free money you are now handing out to paper companies if you are a US taxpayer, thanks to some tricky use of an obscure tax credit loophole.

Paper companies could each get hundreds of millions of dollars in cash payments from the Treasury this year by taking advantage of an alternative fuels tax credit that there consultants found on page 804 of the massive 2005 highway bill and devised a way to exploit. International Paper in March 2009 received a first payment of $71.6 million for one month of burning the fuel. The alternative fuels clause was intended primarily to increase the use of ethanol and other biofuels in cars and trucks.

Paper companies, in a scheme devised by consultants, are now being handed taxpayer cash for the long-standing practice of using a byproduct of the wood pulping process known as "black liquor" as a fuel to run their mills. They have not needed to alter or improve their existing business practices to qualify for the tax breaks. Burning the fuel known as "black liquor" dates to the 1930s, and paper companies have consumed nearly all of the byproduct since the 1990s. In order to carry out the scheme, paper companies have been now simply adding a small amount of diesel fuel to each gallon of black liquor in order to be a qualifying mixed fuel type and then applying with the IRS to be registered as an "alternative fuel mixer" and to claim the credit.

A recent Goldman Sachs report on the loophole and its exploitation, cited in a great article in The Nation, states that paper companies use of this tax credit is "the opposite of the what the lawmakers intended when creating it." That's because it actually results in an increase in the use of fossil fuel, thanks of the scheme's method of adding diesel fuel to the black liquor. Analyst reports from JP Morgan and Goldman Sachs anticipated Congressional outrage when the loophole and the massive payments are discovered, yet, to date clear Congressional action has not occurred. Various reports cited in the Washington Post and The Nation estimate that the loophole could result in $8-10 billion in payments to the 10 largest paper companies. An average size U.S. pulp mill can burn more than 175 million gallons of black liquor a year in its recovery boilers, which implies an annual tax credit of $90 million, according to a J.P. Morgan report cited by the Washington Post. (Also, according to the Washington Post, this past fall the Joint Committee on Taxation computed the cost of extending the tax credit for three months and projected it would cost a manageable $61 million. This was before the paper companies figured out how to exploit it.)

In addition to the insult and injury to taxpayers, the massive payments are also eliminating the functioning of the free market in the paper industry and creating a disproportionate advantage for certain types of producers. This is not only dangerous for the marketplace, but the losers include more environmentally responsible producers using more efficient grades of paper or recycled paper content. Such mills, which will be critical to developing a green jobs economy, are being put at severe disadvantage. In fact, these billions of dollars of payments are encouraging the overproduction of paper, suppressed prices, and additional emissions of greenhouse gases at some of the most polluting and least efficient mills in America, just to burn the fuel and claim the credit and collect the money.

Please call and voice your outrage to your Members of Congress via the Congressional Switchboard: (202)224-3121 and ask for your Senator and/or Representative.

Editors Note: This is the eighth installment in an 8 week "What's In Your Paper?" series on the Paper Planet focusing on specific sectors of the paper industry or paper from specific Endangered Forest regions.