Wednesday, March 17, 2010
Understanding this scheme requires a walk through the smoke-and-mirrors world of federal budgeting.
The scheme involves Google acting as if it will cash in on the “Son of Black Liquor” tax credit, then the Democrats rushing in to block that non-existent tax loophole and using the nearly $35 billion or more in new “savings” to pay for their initiatives. The scheme could use any profitable, high-profile company. But Google is an especially good choice to play along because it needs powerful new friends in Washington to help fend off threats of antitrust action and other government intervention.
The Obama Administration and Congressional leaders squawked last spring when they learned that pulp and paper companies were exploiting a federal biofuel program to get huge tax credits for the burning of black liquor. Then they did nothing while the companies kept raking in the bucks -- $6.5 billion for publicly traded firms and probably at least $2 billion for privately held ones -- until the exploited “alternative fuel mixture” program expired on Dec. 31.
Now the Administration and various Congress members want to declare black liquor ineligible for the new Cellulosic Biofuel Producer Credits (CBPC) – a closing of the so-called Son of Black Liquor loophole. CBPC already requires that a biofuel be approved by the EPA as a motor fuel or fuel additive, which in essence makes black liquor ineligible. No one’s going to put a molasses-like mixture containing water and sediment into their gas tank. The Son of Black Liquor tax credit is a mirage.
You could say that Congress watched while all the horses left the barn, then raced to another, empty barn to slam its door shut.
Nevertheless, various politicians are claiming they are going to save taxpayers $21 to $25 billion by closing the non-existent loophole – and then using the “savings” to pay for new programs. (Congress had never intended or budgeted CBPC payments for black liquor, so even if the loophole existed closing it would be an avoidance of unbudgeted expenses rather than a budget reduction. Still, Congress is counting the closure as revenue.) Some members of Congress on both sides of the aisle wanted to use the funny money to pay for job-stimulus legislation, but the Obama Administration has already claimed it for healthcare reform.
In theory, Son of Black Liquor could be worth $60 billion. (Here’s the math: Publicly traded pulp and paper companies received more than $1.8 billion in alternative fuel mixture credits during each of the last two quarters. Add in companies that don’t report to the SEC and the total is probably $2.5 million. CBPC is twice as generous as the alternative fuel mixture credits and would last for 12 quarters.)
The problem is that, unlike the direct payments from the alternative fuel mixture program, CBPC can only be used to offset income tax payments. Pulp manufacturers haven’t been very profitable in recent years, ending last year in the black only because the black liquor tax credits exceeded their losses from making actual products. Administration and Congressional staff seem to be estimating that only 35% to 40% of the $60 billion would end up being claimed.
That’s where Google comes in. With an annual tax bill of about $1.5 billion, it would have no trouble using all of the CBPC credits from several good-sized pulp mills if black liquor were ever to become eligible for the program.
In announcing the purchase of the pulp mill, Google could make vague comments about “green energy,” converting the mill into a “bio-refinery,” favorable tax laws, and possible research on turning black liquor into a motor fuel. Google wouldn’t actually have to manufacture or market pulp; it could lease the mill back to the seller or pay it to operate the mill.
Tipped-off politicians could be ready to pounce, warning about the possibility of other highly profitable companies buying pulp mills to take full advantage of CBPC for black liquor. Pointing out that the potential drain on the Treasury is $60 billion, not $25 billion, they could then close the loophole and put some of the new “savings” into both the jobs bill and healthcare reform.
Will the news media let the politicians get away with this? Sadly, the answer is probably yes. Capitol Hill reporters have been treating Congressional press releases as if they came down from Mount Sinai. (Not that many of them pay much attention to the Ten Commandments, mind you.) News reports continue to refer to the savings from closing the (mythical) loophole without mentioning an EPA official's letter stating that black liquor doesn't qualify for CBPC.
Of all the mainstream news-media reporting on the subject, Bloomberg BusinessWeek came closest to the truth last week when it said, “The IRS issued a ruling last year that congressional analysts said opened the door for abuses, although companies have expressed little interest in claiming the credit.” But even it didn’t mention that the pulp and paper companies aren’t interested in CBPC credits because they know that black liquor won’t qualify.
For more on black liquor tax credits and the bogus Son of Black Liquor loophole, please see:
Black Liquor Scorecard: 21 Companies Earned $6.5 Billion in 2009: Shows the alternative fuel mixture credits that 21 publicly traded pulp and paper companies received last year for burning black liquor, as well as their net income.
Obama Joins in on the Black Liquor Two-Step: Lazy reporting is abetting the Obama Administration's claim that it will save billions by excluding black liquor from CBPC.
News Media and Congress Are Confused About Black Liquor Subsidies contains the full text of the EPA official's letter and shows where the news media and Congressional staff have gone wrong.
Did Black Liquor Credits Pave the Way for Healthcare Legislation? explains the apparent reason Congress did nothing about the billions paid out to pulp and paper companies last year in the form of black liquor tax credits.
Black Liquor Subsidies – Congressional Shell Game shows that Dead Tree Edition is not the only obscure blog saying that the black-liquor savings being claimed by Congress and the Administration are bogus.
If that's not enough, how about a whole case of black liquor -- every article on the subject (31 to date) that has appeared in Dead Tree Edition?