Obama Seeks to Halt Alternative Fuel Tax Credit for Paper Industry

By Steven Mufson
Washington Post Staff Writer
Saturday, May 9, 2009

The Obama administration wants to stop billions of dollars of tax credits and direct payments to the paper industry under a tax provision originally intended to promote alternative fuels for motor vehicles, Treasury sources said yesterday.

A Treasury official said that if left unaltered, the provision would cost taxpayers about $4 billion a year in payments and credits for the paper industry, rewarding companies for a decades-old practice of using a pulping byproduct known as "black liquor" as fuel.

"In our view, and looking at the legislative history and talking to people who were around at the time, this provision was meant to provide a credit for alternative fuel for use in vehicles or other new uses of alternative fuel," said the Treasury official, who spoke on the condition of anonymity because legislation has not been finalized. "It was not meant to provide a subsidy for behavior that was already occurring."

But it remained unclear how quickly the administration could stop the payments. As part of its fiscal year 2010 budget proposal, the administration rewrote the alternative fuel provision to exclude the paper industry. If approved by Congress, that would take effect Oct. 1. To end the payments earlier, lawmakers would need to write the change into another piece of legislation.

The alternative fuels provision, originally part of the 2005 highway bill and expanded in the 2007 energy bill, said that any company mixing alternative fuels with even a tiny bit of traditional fossil fuels would qualify for a 50 cent a gallon tax credit. The provision is scheduled to expire at the end of 2009. The Joint Committee on Taxation originally estimated that it would cost a total of $61 million.

Companies began filing papers with the Internal Revenue Service late last year and early this year to qualify, and payments and credits quickly mounted. International Paper said recently that it received $540 million in the first quarter alone, including $145 million in direct payments from the Treasury. Temple-Inland estimated that it could receive payments for 550 million to 650 million gallons this year, which would amount to about $300 million. Because the tax credit is refundable, companies with no profit or tax liability can get direct payments.

"As soon as the first check went out, the IRS realized this was an issue because it was vastly in excess of what they had been getting claims for," said a Treasury official.

Paper industry executives, trade union representatives and lawmakers from states with a paper industry presence have argued that the payments should continue. They maintain that the paper industry is ailing and that jobs are at risk if the payments stop. Moreover, they said, the companies should not be penalized for the early use of a renewable fuel source.

But the Treasury official said, "Right now this does appear to be a transfer from the taxpayers to this industry." Another Treasury official said, "This is the administration keeping its promise to eliminate unnecessary tax breaks for corporations while making the tax code fair for working families."

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