May 3, 2011

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.

As The Post’s Steven Mufson reported, several firms have claimed a total of hundreds of millions of dollars worth of extra tax benefits in this manner. For its part, International Paper is still weighing the costs and benefits of converting its $2.1 billion alternative fuel mixture credits into cellulosic credits. It did book a $40 million cellulosic credit for 64 million gallons of black liquor that were not eligible for the alternative fuel mixture credit, according to its 2010 annual report.

This is ridiculous. Yes, the tax code is full of conflicting and ambiguous provisions, and IRS lawyers must interpret them as best they can, with an eye toward avoiding litigation . We do not doubt that they did so in this case: Their memorandum argues that black liquor meets the chemical criteria of cellulosic biofuel and that denying companies a credit for burning it would have been inconsistent with the IRS’s treatment of other similar fuels.

But Congress clearly intended to end tax credits for black liquor, which served no energy policy purposes and increased the federal debt to boot. This is just common sense. The IRS’s hypertechnical interpretation thwarts Congress’s purpose, possibly expanding and perpetuating a waste of money that the legislation sought to end. The IRS should have interpreted the statutes in light of Congress’s manifest goal — and dared the paper companies to sue for their corporate welfare in open court if they disagreed.

Alas, the taxpayers have no standing to file a lawsuit of their own. Someone else — higher-ups at the IRS, the Treasury secretary or Congress — must fix this error, and fast.