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.
But the story didn’t end there.
Last year, the IRS said that the provision in the 2010 health-care legislation didn’t prevent black liquor produced in 2009 from qualifying as a cellulosic biofuel, so the paper industry got its calculators out again. The cellulosic biofuel tax credit, part of the 2008 farm bill, is worth $1.01 a gallon.
Some companies amended their 2009 earnings, giving back some of the alternative fuel credits in return for the more lucrative cellulosic credits.
What’s more, although the cellulosic biofuel credit is not refundable, it can be applied in future years, slashing tax bills perhaps as late as 2015.
Packaging Corp. of America said that the cellulosic biofuel tax credit added $47.7 million to its profits in 2010 — nearly 20 percent of its net income. In a Securities and Exchange Commission filing, the company said that an additional $102.0 million of the credits would be kept aside to reduce future federal tax payments.
Domtar says its cellulosic credits total $209 million, most of which it intends to claim against future taxes.
Rock-Tenn, another big paper maker, said that the cellulosic biofuel credit would be worth approximately $112 million when the company finishes restating its tax returns.
International Paper said the cellulosic biofuel credit would cut the company’s tax bill by $40 million in 2010, and that there would be additional credits for later years. It said that 64 million gallons of black liquor that were not eligible for the alternative fuel mixture credit would qualify for the cellulosic credit.
International Paper said it is still trying to decide whether to amend its 2009 tax return and convert the $2.1 billion of alternative fuel credits it received into cellulosic biofuel credits. If it does, it could conceivably save much more.
Other paper companies also tacked lucrative new credits on top of earlier ones. Temple Inland received $83 million in cellulosic tax credits in 2010; earlier it had claimed $228 million worth of alternative fuel credits in 2009.
MeadWestvaco said it received $29 million of tax benefits in 2010 from the cellulosic credit, boosting its profits by 12 percent. It had received $375 million in alternative fuel credit benefits in 2009.
Another company that could qualify for the subsidy is Georgia Pacific, whose parent company, Koch Industries, is owned by the conservative Koch brothers. Because the company is private and doesn’t disclose its results, it isn’t clear whether Georgia Pacific claimed the credit.
Many members of Congress are upset about the continuing cost of credits for burning black liquor. But others, such as Sen. Olympia J. Snowe (R-Maine), sought to protect tax credits for the industry in 2009. At the time, the Obama administration was seeking Snowe’s vote for the president’s health-care legislation.