The heart of the issue is the tax treatment of a substance called “black liquor,” a byproduct of the wood-pulping process at paper mills. The companies have burned black liquor to generate power since the 1930s.
It was not the intent of Congress to reward that behavior, but the industry and its accountants persuaded the Internal Revenue Service to allow black liquor to count as an alternative fuel in 2009. Under that program, the paper industry received more federal money than almost any industry outside the auto sector.
The new binge of tax breaks is the result of an IRS ruling on June 28, 2010, that allows black liquor to qualify for a different tax credit meant to encourage new cellulosic biofuels for transportation.
The credits have been “a boon to the industry,” according to a J.P. Morgan analysis of the pulp and paper industry. Even though Congress attempted in two separate pieces of legislation last year to limit the benefits for burning black liquor, the boon continues.
At Weyerhaeuser alone, the new use of the cellulosic biofuel credit added $149 million to the company’s 2010 profits. At least a dozen other companies also have claimed the credit or will do so over the next couple of years. A private company owned by the Koch family business also could qualify for the subsidy.
“It’s outrageous that the IRS and Congress have let these companies get a tax windfall for something that serves no public policy purpose,” said Martin A. Sullivan, a private tax economist who previously worked at the Treasury and on the staff of the Joint Committee on Taxation.
The IRS, he said, “definitely could have shut it down and, for reasons that are hard to understand, they caved to everything the industry asked for.”
The industry says it’s just good business. “Companies have a fiduciary responsibility to their shareholders to use the credits if it is advantageous for them,” said Chuck Fuqua, spokesman for the American Forest and Paper Association.
The black liquor saga began in 2009, when the industry started taking advantage of the “alternative fuel mixture credit,” originally part of a massive 2005 highway bill. The 50-cents-a-gallon credit was, in tax jargon, “refundable,” meaning companies that were losing money received checks from the Treasury. In 2009, International Paper alone received $1.7 billion in cash and cut its tax bill by another $379 million because of the alternative fuel mixture credit, according to its annual report.
Eager to limit the cost to the Treasury — more than $4 billion by the end of fiscal year 2009 — Congress said that black liquor would not qualify for the alternative fuel tax credits after Dec. 31, 2009. And to help cover the cost of the January 2010 health-care law, Congress also barred black liquor from qualifying for the cellulosic biofuel tax credit.