Black Liquor Hangover: U.S. Paper Industry Cheers GOP Victory After Gorging on Democrats' Handouts

Snark alert: I believe in both the laws of science and the laws of economics, which these days means I'm neither a Republican or a Democrat. So don’t try to read any political bias into the following article; it is intended to be equally offensive to liberals and to conservatives. 

The Obama Administration has enabled U.S. paper companies to pocket an estimated $25 billion in black liquor tax credits the past six years, but here’s a clear sign the tap is about to run dry: The paper industry’s trade association this week hailed the recent Republican election victories as a sign of “Americans’ real appetite for change in Washington, D.C.”

“The bureaucracy that causes delay after delay and regulations that fail to balance benefits with costs have created an atmosphere of uncertainty in the business community, making it difficult to plan for future investment when the rules change faster than they can be implemented,” said Donna Harman, president and CEO of the American Forest & Paper Association. She specifically singled out environmental regulations.

To understand this turn of events, and why the paper industry is biting the Democratic hand that fed it so lavishly, it’s time for a quick civics lesson about the political parties’ competing approaches to climate change:

Democrats want to tackle climate change head on, promoting regulations to tamp down greenhouse gases and new programs to encourage clean energy sources. But those well-intentioned programs mostly end up getting hijacked to benefit favored companies in ways that do nothing to help the environment.

The quintessential GOP approach is to scoff at climate change or the need for carbon-reducing regulations and incentives. Conservatives declare disagreement with the diagnosis (humans are speeding up dangerous climate change) because they don’t like the proposed cure (big government programs). But that doesn’t stop savvy Republicans from investing in companies that will profit from the new Arctic shipping lanes being created by the melting of polar ice.

Some liquor to ease the pain 
The Democrats’ approach started paying off for the paper companies about six years ago, when "the miracle of black liquor" in the form of round-heeled Internal Revenue Service rulings literally kept several companies afloat during a down paper market. The IRS gave the companies permission to abuse biofuel-incentive programs by collecting billions in eco-incentives for doing what they had already been doing for decades – burning black liquor, a pulp byproduct, as a fuel source.

“Industry-wide, black liquor may have cost taxpayers upward of $25 billion,” Jane J. Kim, an IRS lawyer, stated recently in a letter to select Congress members and Treasury officials. She cited Black Liquor, “Son of Black Liquor”, and “Grandson of Black Liquor” tax credits as prime examples of “IRS Management abuse.”

Her protest adds to that of William Henck, a whistleblower IRS lawyer who says IRS employees examining the black liquor credits were told by high-level agency officials “to take a position that was contrary to the law and to published IRS guidance.”

Clearly a cover-up
“There was in my opinion clearly a cover-up of the decision to allow well connected taxpayers to avoid reporting the black liquor tax credits as taxable income,” he wrote. He sees evidence that the cover-up goes all the way to the IRS’s Chief Counsel, an Obama appointee. (In one of many ironies in this twisted saga, one of the largest beneficiaries of the credits, Georgia-Pacific, is owned by the Koch brothers, who are not exactly known for their friendliness to the Obama Administration.)

There is evidence that Democrats left the original black liquor tax credits in place to win a key pro-Obamacare vote from Republican Sen. Olympia Snowe of Maine, where the credits helped a large pulp mill remain in business. (Republican legislators may not like big government in general, but they sure like it when it means bringing some pork home to their constituents. And it’s hard to say which party is worse about creating corporate welfare programs for companies that make generous campaign contributions.)

The Obama Administration and Democratic Congressional leaders also finagled with the credits and threats of additional credits to help “pay” for Obamacare. (Another civics lesson: The concept of "paying" for stuff in the Alice-in-Wonderland world of Congress has little to do with covering its costs. Don't try this at home, unless you want to take an extended tour of a federal correctional facility.)

Closing time
Paper companies are just about done squeezing the last drops from the black liquor credits. For example, Domtar said that the $222 million in earnings it booked last month because of favorable (and questionable) IRS rulings on the taxability of the credits is the last it will see of the government’s black liquor largess.

With no more black-liquor credits or other handouts coming down the pipe, suddenly big government doesn’t look so good to the paper industry.

Said the AF&PA’s Harman: “In the coming months, I look forward to working with the new Congress to help create policies that make businesses a partner in meeting the needs of society through sustainable regulations that balance environmental, social, and economic considerations.”

Translation: “We could stomach the Democrats’ big-government policies as long as the hand-outs exceeded the cost of anti-business regulations. But now that the money has stopped flowing, we might as well throw in our lot with the party that is likely to roll back those regulations.”

Related reading:

• WikiLeaks Reveals Praise for Dead Tree Edition from an Unlikely Source: What a consultant to the AF&PA said about our coverage of the black liquor scandal.
• What, Exactly, Is Black Liquor? Just Ask the Tax Man
• Why U.S. Pulp Mills Are Like NBA Players