By Steven Mufson
Washington Post Staff Writer
Saturday, May 2, 2009
Federal government payments to the U.S. paper industry continued to mount during the first quarter, as companies raced to take advantage of a loophole that richly rewards them for a long-established method of burning byproducts of the pulping process.
During the first quarter, the Treasury pumped $540 million in cash and tax credits into the coffers of International Paper, one of several paper companies that qualify for billions of dollars in alternative fuel tax breaks under legislation that experts say was written for other purposes.
The tax benefits reward companies for burning a pulping byproduct known as "black liquor," a practice that has been common in the paper industry since the 1930s. International Paper said $145 million of its total has been delivered in checks from the Treasury; because the tax credit is "refundable," it can result in direct payments to companies with no tax liability.
The huge payments are being made under a tax credit clause in the 2005 highway bill that was designed to promote the blending of biofuels with gasoline or diesel for use in vehicles. In an energy bill adopted in late 2007, the clause was altered slightly to help the Alaskan fishing industry in the home state of then-senator Ted Stevens (R).
Late last year, paper companies began to apply for the credits. PricewaterhouseCoopers pushed the idea, according to industry and congressional sources who spoke on condition of anonymity because of their access to confidential conversations. David Nestor, a Pricewaterhouse spokesman, would not comment on guidance provided to clients. The tax credit expires at the end of the year.
Senior lawmakers, including Senate Finance Committee Chairman Max Baucus (D-Mont.), are weighing amending the legislation to put an early end to the lucrative payments. Canadian and Brazilian trade associations have also protested that the payments give U.S. firms an unfair advantage.
"Unless we plug this loophole, the federal government is liable for billions in credits for black liquor in 2009 alone, even though the credit was never intended for this fuel," Baucus said at a hearing last week. "We are working to undo that unintended consequence."
Because the Internal Revenue Service deemed that paper companies were eligible for the credit, the Joint Committee on Taxation has had to raise its estimate of the cost of the credit nearly 50-fold, from $61 million to $3.3 billion. Wall Street analysts put the cost as high as $8 billion.
Last week, Doyle R. Simons, chief executive of Temple-Inland, said that the IRS had approved payments to his company. He said Temple-Inland will use 550 million to 650 million gallons of black liquor this year. Because the tax credit is worth 50 cents a gallon, that would yield $275 million to $325 million in credits.
"They ought to change the law, but you can't blame the paper companies for saying there's money on the table and we're going to pick it up," said Bob McIntyre of Citizens for Tax Justice.
The United Steelworkers and other unions are backing the ailing paper industry. "Many companies are depending on this tax credit to keep mills running. In short, this credit could not come at a more appropriate time," Michael V. Draper, a vice president of the United Brotherhood of Carpenters and Joiners, wrote to Senate Finance Committee members this week.
Sen. Olympia J. Snowe (R-Maine), a Senate Finance Committee member, defended the credit's use. "This tax credit is a lifeline," she said, for an industry "hanging on for survival in this economic crisis through no fault of their own."
Many economists and environmentalists say that the paper industry shouldn't reap rewards for old practices. Snowe argued that the paper industry was "ahead of the curve." But analysts note that the industry burns black liquor because it is toxic to fish. Leaks are punishable by fines.
Some analysts cautioned that in the midst of the auto industry bailout, Congress would block a program resembling another bailout.
But a UBS analyst's report said: "At the very least, this is creating debate, slowing the process. . . . In the meantime, the industry can continue to claim credits. The longer the delay, the more cash they stand to collect."