IT WOULD BE hard to imagine a purer case of corporate welfare than the tax credit that paper manufacturers reaped in 2009 for powering their plants with a liquid industrial byproduct known as “black liquor.” There was no need for any subsidy: Paper mills had been recycling the substance for decades. But in 2007, Congress enacted a 50-cents-per-gallon “alternative fuel mixture” tax credit to encourage new industrial liquid fuels from biomass. And the paper mills saw a chance for easy money: They asked the Internal Revenue Service if black liquor, mixed with diesel, qualified; the IRS said yes. Result: Since the credit was “refundable,” paper companies reaped billions of dollars from the federal government in 2009. International Paper alone received about $2.1 billion. Congress closed the loophole effective Dec. 31, 2009, using the projected savings to pay for health-care reform.
Now it turns out that paper companies are still exploiting the tax code to make money from black liquor. The convoluted story begins on June 28, 2010, when IRS lawyers issued an opinion permitting paper manufacturers to retroactively claim a different benefit for the black liquor they burned in 2009: the cellulosic biofuels credit. To be sure, companies choosing to switch to the cellulosic credit would have to give back the money they got from the alternative fuel mixture credit (with interest). But for some companies, that may be profitable, since the cellulosic credit is $1.01 per gallon — twice as much as the alternative fuel mixture credit. Furthermore, companies can “carry forward” the 2009 cellulosic credit to offset future tax bills well into this decade.