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An elixir for health reform? Lawmakers offer 'black liquor.'

By Steven Mufson
Washington Post Staff Writer
Sunday, November 8, 2009

House Democrats might use a swig of "black liquor" to help health-care reform go down.

Democratic leaders, who have been searching high and low for ways to pay for health-care reform, have fixed their sights on a cellulosic biofuel tax subsidy that could benefit the paper industry, which has been burning a pulp byproduct known as black liquor as fuel since the 1930s.

In June, the Internal Revenue Service said that without congressional action, paper companies would be able to exploit a $1.01 a gallon tax subsidy that was part of the 2008 farm bill and which was designed to stimulate new biofuel production from plant sources other than corn.

Last month, the Joint Committee on Taxation calculated that the paper industry's use of the subsidy could cost taxpayers $23.9 billion, even though the industry isn't using it, says it doesn't plan to and probably wouldn't have enough profit to offset that much. Under federal budget procedure, closing the loophole would save that amount -- and help pay for President Obama's health-care reform. An amendment made last week by the House Ways and Means committee did just that.

The paper industry says that black liquor probably wouldn't meet Environmental Protection Agency standards to qualify for the credit, which expires at the end of 2012. "We don't believe that the EPA would register black liquor for this, so it's not something the association is currently pursuing," said Scott Milburn, a spokesman for the American Forest and Paper Association.

That debate might sound hypothetical, but this much isn't: Paper companies have been tapping a similar yet smaller 50-cent-a-gallon tax subsidy for "alternative fuels" that was part of earlier legislation and have already received billions of dollars from the Treasury this year.

International Paper said in the third quarter it received a $525 million pretax credit ($320 million after taxes) by qualifying for the "alternative fuel mixture" credits. So far this year, International Paper alone has received $1.5 billion in credits.

This credit is refundable -- which means if a company is profitable the credit reduces its tax bill and if a company isn't profitable it receives a check from the Treasury equal to the credit. Because International Paper was losing money most of this year, the Treasury has been sending the company checks. Yet the company has continued to pay dividends and repaid $1.3 billion in debt in the third quarter. A Bank of America Merrill Lynch analysts' report said that Treasury payments had accounted for more than 60 percent of the company's earnings before deducting taxes, interest payments and amortization expenses.

Packaging Corporation of America said it would use its tax credit receipts to finance much of $295 million in new equipment that it said would make its mills substantially more energy efficient.

The alternative fuels subsidy is scheduled to expire at year's end, but word that paper companies might be able to switch to the lucrative cellulosic biofuel subsidy has shocked even industry analysts.

J.P. Morgan analysts titled an Oct. 14 report "Another Drink From The Subsidy Trough For Forest Products?" The first line read: "Welcome to round two of the alternative energy subsidy bonanza."

The J.P. Morgan report highlighted another way the paper industry might win subsidies. Under the Biomass Crop Assistance Program, the federal government would pay a subsidy for every ton of biomass sold to approved facilities, which would turn the biomass into energy. Because wood fiber is an approved biomass material, the paper industry and landowners could reap more than $3 billion a year, the report said. (The biomass assistance was authorized in 2002 legislation and amended by the 2008 farm bill.)

Last week, however, the Agriculture Department said paper mill byproducts like black liquor would not qualify, though it hasn't issued rules, yet.

The black liquor subsidies have inflamed U.S.-China trade relations, too, as Obama prepares for his first visit to China. On Friday, the International Trade Commission voted 6 to 0 to impose anti-dumping and anti-subsidy duties on imports of coated paper from China and Indonesia. China has already complained that the U.S. industry is getting much bigger subsidies through the alternative fuels credit.

It is "remarkable that the . . . U.S. paper producers have accused Asian companies of receiving government subsidies and then dumping in the U.S. market when they themselves are beneficiaries of so-called 'black liquor' government subsidies," Terry Hunley, managing director of Global Paper Solutions, an importer of Asia paper products, said in a statement. "Indeed, it is the U.S. paper companies that have used government subsidies to take away business from Asian suppliers, not the other way around."

Hunley said that "aside from this hypocrisy, we are concerned about the case's negative impact on the U.S. trade ties with its major Asian trading partners."

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