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

  

IRS Brings Son of Black Liquor Back From the Dead; Ruling May Be Worth Billions to U.S. Pulp Makers

The Internal Revenue Service may have handed U.S. pulp and paper companies a multibillion-dollar gift by ruling that black liquor produced in 2009 is eligible for an even more lucrative tax credit than the one claimed by manufacturers last year.

The June 28 ruling contradicts previous guidance from the Environmental Protection Agency that the molasses-like pulp byproduct could not qualify for Cellulosic Biofuel Producer Credits (CBPC) because it is not a motor-vehicle fuel or fuel additive. The new IRS ruling does not allow the same black liquor to receive both the original black liquor credits ("alternative fuel mixture") and CBPCs, the so-called Son of Black Liquor tax credits.

The exact impact of the ruling is unclear, but in theory it could be worth more than $10 billion to U.S. companies.

Publicly traded U.S. companies received more than $6.5 billion in black liquor tax credits last year by exploiting a loophole in legislation designed to subsidize "green" fuels. Privately held companies probably qualified for at least another $2 billion.

CBPCs are paid at the rate of $1.01 per gallon, versus 50 cents for the original black liquor credits, so there could be $8 billion to $9 billion available if companies can refund the black liquor tax credits they have already received so that they can get the CBPCs instead. The IRS ruling provides no guidance on that point.

Late to the party
Also, many pulp makers were late to the black liquor party last year, not qualifying for the credits until several months had passed. Publicly traded companies received about $800 million more credits in the second half of the year than the first, suggesting they produced about 1.6 billion gallons of black liquor in 2009 that did not receive the credits. Add in privately held companies and there's probably at least 2 billion gallons -- worth more than $2 billion in CBPCs -- that could qualify without the companies having first to return money to the IRS.

Because it can only be used to reduce income-tax payments, rather than being a direct payment like the original black liquor tax credits, CBPC may not be of much benefit to unprofitable or barely profitable companies. The credits, however, can be carried forward for several years, which could be helpful to the many pulp makers that paid no income taxes for 2009 but are more profitable this year. The ability to use the credits in subsequent years could make unprofitable companies more attractive for acquisition by profitable ones.

The alternative fuel mixture program expired at the end of 2009. The "ObamaCare" healthcare legislation disqualifies black liquor for CBPCs starting on Jan. 1, 2010 but had no impact on 2009, the first year of the program.

Pulp makers have already applied
"For black liquor sold or used before January 1, 2010, however, a number of black liquor producers have indicated they intend to claim a [CBPC] credit," the ruling says. "In addition, a number of these black liquor producers have applied to the IRS . . . to be registered by the IRS as producers of cellulosic biofuel."

Prior to the ruling, several pulp makers had said they did not expect any further tax credits from black liquor. A presentation from International Paper -- which could net more than $2 billion from the ruling -- stated last year "we believe that pulp & paper producers do not qualify" for CBPCs.

The IRS ruling acknowledges that one requirement for a substance to receive CBPCs is that it "meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency (EPA) under section 211 of the Clean Air Act". Because those registration requirements only apply to motor vehicle fuels and fuel additives, an EPA official indicated last year that the CBPC law apparently excludes black liquor, which is not suitable for motors.

But the new ruling cites previous IRS guidance (in logic that only a lawyer could love) stating that a "fuel meets the EPA registration requirements if the EPA does not require the fuel to be registered."

"Cellulosic fuel that is not used for fuel in a motor vehicle does not have to be registered by the EPA," the ruling adds. "Practically speaking, black liquor cannot be used as a fuel in a motor vehicle."

Republican Senators Defend Bogus Black-Liquor Accounting

The news media are finally realizing that ObamaCare's supposed savings from ending a black liquor tax credit are a mirage. It's making for some interesting reading.

Todd Zwillich, Washington correspondent for The Takeaway radio show, had an enlightening and amusing piece yesterday basically confirming that Congress knew that there was no black-liquor loophole even though the healthcare-reform legislation claims savings of more than $23 billion from closing the loophole. Especially interesting is that he found two Republican senators who oppose the bill but said the Democrats's black-liquor shell game is nothing new on Capitol Hill.

"Republicans and Democrats have both put together bills like this," said South Carolina Sen. Lindsey Graham.

Zwillich said Iowa Sen. Charles Grassley was unfazed by the claim that the black liquor loophole was worth billions even though no paper companies are exploiting it.

"This is the way it works. They may not use it, but they could use it, okay?" Grassley said. "Even though somebody tells you it wouldn't happen, it could happen, and it could cost the Treasury."

Sorry, Charlie, it couldn't happen. Even without the healthcare legislation, a substance has to get EPA approval as a motor fuel or fuel additive to qualify for cellulosic biofuel producer credits. Black liquor, "a gooey wood pulp byproduct" in the words of BNET's Kirsten Korosec, doesn't belong in a gas tank.

Korosec gets credit for being the first on the black liquor story (other than a couple of obscure blogs) with last week's article Paying For Healthcare: How Democrats Closed an Energy Tax Loophole That Doesn't Exist.

Olga Pierce of ProPublica wins the honesty award for her item at the On The Hill blog today admitting that she previously got the black liquor story wrong. This time she nailed it: "Closing a tax loophole no one was planning to use doesn’t actually save the government any money."

So far, no one in the news media has reported another Congressional goof: If indeed black liquor could qualify for cellulosic biofuel producer credits, the loophole would be worth $60 billion, not $24 billion. Even when it generates imaginary revenue, Congress can't get the math right!

For more information on how a once-obscure pulp byproduct became such a political football, please see:

• ObamaCare's Black Liquor Tab: $23.6 Billion 
• How Google Could Help the Democrats By Buying a Pulp Mill  
• News Media and Congress Are Confused About Black Liquor Subsidies

ObamaCare's Black Liquor Tab: $23.6 Billion

Despite a Democratic Congressman almost ruining the scheme by committing a cardinal political sin – He told the truth! – the historic healthcare legislation President Obama signed today assumes $23.6 billion in savings from eliminating a mythical black liquor tax credit.

Congressman Scott Murphy, whose district in the Adirondack Mountains of New York includes two operating paper mills (and several closed ones) almost spilled the beans on the bogus savings a few days ago. In an interview with the local newspaper about his support of the healthcare legislation, he made the following statement:

"We worked with IP (International Paper Co.) and Finch. And the language that's in here about the black liquor credit is not something that's going to impact their business. They're not going to be impacted by this in terms of what they were planning to do and what they're doing going forward."

In a similar statement last week crying out for explanation, Bloomberg BusinessWeek said that the loophole closure “would prohibit paper makers such as International Paper Co. from claiming a $1.01 tax credit for producing fuel from a type of pulp-making byproduct called black liquor. While International Paper and other forest product companies said they weren’t seeking the credit, the IRS determined they might be eligible.”

The payouts from the real black liquor tax credit, which expired last year, indicate that International Paper accounts for more than 20% of the country’s black liquor production. (See Black Liquor Scorecard: 21 Companies Earned $6.5 Billion in 2009.) If indeed the healthcare legislation plugged a “Son of Black Liquor” loophole worth $23.6 billion, then IP’s share would certainly be in the billions.

Question: Why would IP and “other forest product companies” not be interested in pursuing such generous tax credits? (After all, skyrocketing pulp prices could lead to hefty profits, and a hefty tax bill, for some of the companies this year.)

Answer: Because they knew they could never collect Cellulosic Biofuel Producer Credits, even before passage of healthcare reform. Those credits are only for EPA-approved motor fuels and additives. Executives at pulp-making companies understand that no one's going to put black liquor into their gas tank.

(News Media and Congress Are Confused About Black Liquor Subsidies explains further why, despite the IRS memo, black liquor would not qualify for the credits. How Google Could Help the Democrats By Buying a Pulp Mill explored black liquor's role in the healthcare debate.)

By the way, I’m sympathetic to some other aspects of the ObamaCare legislation, such as government help for the uninsured. But seeing how part of the program is allegedly being paid for with these bogus black-liquor savings make me wonder what other surprises are lurking in the law.

How Google Could Help the Democrats By Buying a Pulp Mill

Black Liquor

Here’s a way for Democrats to pass their ambitious healthcare and jobs proposals without looking like budget busters: Persuade Google to buy a pulp mill – specifically a U.S. mill that makes kraft pulp.

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?

Obama Joins in on the Black Liquor Two-Step

The Obama Administration announced today that it wants to close the non-existent "Son of Black Liquor" loophole to help "pay" for new healthcare legislation.

A few hours later, Senate Democrats won a key vote on jobs legislation that, in some versions, would be paid for partly with the "savings" from closing the same mythical loophole.

Meanwhile, the watchdogs of the news media acted more like lapdogs, taking Administration and Congressional statements at face value without bothering to check the facts. For example, a New York Times article on Obama's proposal states flatly, and falsely,: "Rescinding the 'black liquor' tax credit could generate as much as $24 billion in revenue over 10 years, helping to pay for a chunk of the health care legislation."

The Hill went further astray by saying the Obama proposal "rescinds the 'black liquor' tax break abused by paper companies that claim undeserved alternative fuel tax credits."

"Current law provides a tax credit for the production of cellulosic biofuels," notes the Obama Administration's summary of its new healthcare bill. "The credit was designed to promote the production and use of renewable fuels. Certain liquid byproducts derived from processing paper or pulp (known as 'black liquor' when derived from the kraft process) were not intended to be covered by this credit. The President’s Proposal adopts the House bill’s policy to clarify that they are not eligible for the tax credit."

As Dead Tree Edition has explained previously, black liquor is already ineligible for the Cellulosic Biofuel Producer Credit program, so there is no loophole to close. No money has been budgeted to provide such credits for black liquor, so there is no savings to be budgeted for healthcare, creating jobs, or anything else.

Only in Washington would people try to use the same fake money to pay for two different programs.

For further reading, see:

• Heroic Senators Rush to Close Non-Existent 'Son of Black Liquor' Loophole explains that Cellulosic Biofuel Producer Credits can only be issued for motor-vehicle fuels, which excludes black liquor.
• News Media and Congress Are Confused About Black Liquor Subsidies describes how major news outlets have confused the original black liquor credits, which expired Dec. 31, with the mythical Son of Black Liquor (CPBC) credits and blindly accepted statements about projected savings from closing the non-existent tax loophole.
• Did Black Liquor Credits Pave the Way for Healthcare Legislation?  This isn't the first time black liquor has been mixed up in healthcare reform. Congress knowingly allowed pulp and paper companies to receive billions of dollars in original black liquor credits, apparently to help get a healthcare bill out of committee.

Heroic Senators Rush to Close Non-Existent 'Son of Black Liquor' Loophole

Senate Democrats started circulating a proposed jobs bill Tuesday that would be paid for partly by closing the "Son of Black Liquor" tax loophole. There are only three problems with that:

1. Congress never budgeted any money to pay for the loophole, so closing it would not reduce the federal budget. 
2. The $25 billion in "savings" from closing the loophole are already supposed to be used to pay for the Democrats' stalled healthcare legislation. 
3. An EPA official recently confirmed that the loophole doesn't actually exist.

A leaked draft of the "Hiring Incentives to Restore Employment Act" includes a provision intended to exclude black liquor from the new Cellulosic Biofuel Producer Credit program. It would block the eco-credits from being paid for any fuel consisting of more than 4% water and sediment or having an ash content of more than 1%.

Talk of a Son of Black Liquor loophole arose a few months ago because of an IRS ruling that black liquor, an energy-rich byproduct of the kraft pulping process, is indeed a cellulosic biofuel. The original black liquor loophole resulted in pulp and paper companies receiving $8 to $10 billion last year from the government without doing anything extra to help the environment.

With the CBPC being twice as generous and lasting for three years, the tab for Son of Black Liquor could theoretically exceed $50 billion. But an EPA official confirmed recently that black liquor does not meet a requirement for the program -- approval by the EPA as a gasoline or diesel fuel for motor vehicles.

"Based on available and limited information at this time, black liquor would not appear to be either a motor vehicle gasoline or diesel fuel," wrote Karl J. Simon, director of the EPA's Compliance and Innovative Strategies Division, in response to a coalition of 27 environmental groups. "As a result it does not appear that EPA would register black liquor as a fuel."

A manufacturer could request registration of a motor-fuel additive, but that has never been done, Simon wrote. Having, in Simon's words, "the consistency of molasses", black liquor is an unlikely motor-fuel additive. Pulp manufacturers derive value from black liquor by burning it to power their mills, not by using it in motors.

Still, brave Congress will probably try to slay the evil Son of Black Liquor and tell us how many billions that will save us. Here's how you can apply Congress' budgeting magic to your personal life: Suppose your budget is tight -- in fact, you're spending more than you are making -- and a neighbor hurts herself falling in your yard. You are concerned that you will have to pay her $25,000 in medical bills, but then learn you are not liable. Now you can use the $25,000 you saved to pay for a new car!

The jobs bill would also reinstate the "alternative fuel mixture credit" program that was the source of the original black liquor loophole but with language excluding "any fuel . . . derived from the production of paper or pulp."

Related articles:

• Environmentalists Try To Put a Cork Into Black-Liquor Loopholes: A coalition of environmental groups asked the EPA to block the subsidization of black liquor, which encourages the use of virgin rather than recycled pulp.
• Did Black Liquor Credits Pave the Way for Healthcare Legislation?: Senate Democrats apparently left the original black liquor loophole open as a favor to Sen. Olympia Snowe of Maine. The "Maine Squeeze" got far less press than the Cornhusker Kickback or the Louisiana Purchase that were also intended to line up votes for healthcare overhaul.
• Black Liquor Bonanza: Earnings Exceeding Projections of Experts and Congress: For pulp and paper companies, the original black liquor credits were fun while they lasted.

Black Liquor Bonanza: Earnings Exceeding Projections of Experts and Congress

Never underestimate the power of American ingenuity when it comes to taking maximum advantage of tax breaks. And never underestimate the ability of Congress to mess up a calculation involving money.

Pulp and paper companies' 3rd Quarter earnings statements suggest that the industry is earning more black-liquor credits than analysts thought possible and far more than Congress projected.

Publicly traded companies racked up more than $1.8 billion in the controversial credits for the pulp byproduct from the U.S. government, according to an exclusive Dead Tree Edition analysis of Securities and Exchange Commission reports. Most of the companies would have been unprofitable without the credits, and some were unprofitable even with them.
 
Through the end of September, the public companies had earned more than $4.7 billion for mixing diesel fuel with the pulp-mill byproduct and then burning the mixture to power their mills. (See the accompanying article, Black Liquor Scorecard: $4.7 Billion Through September, for a listing by company.)

With more than one-fourth of the country’s kraft-pulp capacity in the hands of private companies, the numbers indicate that the industry earned well over $2 billion in credits during the quarter and about $6 billion during the first nine months of the year. At this rate, by the time the program expires at the end of this year, the U.S. pulp and paper industry will blow past the $8 billion that analysts had said would be the maximum it could earn from controversial program.

ERA Equity Research Associates, which earlier this year projected the program would yield $6.6 billion, recently estimated it would $8.5 billion. The earlier estimate assumed an 85% operating rate, but U.S. mills have been running full steam for months because of rising prices and the generous subsidy. Some companies’ numbers suggest their mills are squeezing more than the usual amount of black liquor from the wood they process into pulp.

Congressional Goof
Congress still seems to be using a $5 billion estimate for the program, an error that could affect healthcare legislation it is considering. The faulty estimate is based on a September report from its Joint Committee on Taxation (JCT) stating:

"For the first six months of 2009, and just for liquid fuel derived from biomass, more than $2.5 billion in cash payments has been claimed. The bulk of that $2.5 billion is attributable to paper manufacturers using “black liquor” and a small quantity of diesel fuel in their boilers (a stationary fuel use). Because the paper
manufacturers have no excise tax liability, they receive the full amount of the claim as a cash payment from the Treasury."

That statement was the basis of tax expert Martin A. Sullivan's projection that the so-called Son of Black Liquor credits could be worth $25 billion to U.S. pulp mills. If six months of the black-liquor loophole was worth $2.5 billion, then the full year should be worth $5 billion. And because the new cellulosic biofuel producer program will be twice as generous and last three times longer, simple math put the potential payments at $30 billion. Sullivan estimated that only $25 billion would be paid out for black liquor because the program will require the credits to be used to offset income taxes.

The healthcare-reform legislation passed by the House earlier this month arrives at the same number. By proposing to close the Son of Black Liquor loophole, the House figured it was "finding" another $25 billion to help pay for new healthcare programs.

But based on the Third Quarter financials, publicly traded companies alone could create enough black liquor for $44 billion in Son of Black Liquor credits. Adding privately held companies would push the number close to $60 billion -- or about $50 billion if we accept Sullivan's reasonable assumption that a small portion of the claims would not be paid out.

Using the JCT estimate to project the size of the black liquor or Son of Black Liquor credits failed for two reasons:

1. Many companies were late to the black liquor party. Few were mixing diesel into their black liquor at the beginning of the year, and some didn't start until March.
2. Because of uncertainty about whether the credits are taxable income, some companies are not claiming the credits as they are earned but rather are waiting to include them with their 2009 income tax returns. Buckeye Technologies's Third Quarter financial report explains why: "We have treated the credits received in cash as taxable income and the income tax credits as non-taxable income."

For more information, please see:

• Did Black Liquor Credits Pave the Way for Healthcare Legislation?, which describes how both the original black-liquor credits and the potential Son of Black Liquor loophole are entwined with healthcare-reform politics.
• Will the EPA Stop 'Son of Black Liquor'?, which shows that the Son of Black Liquor loophole may not even exist, with or without the House's healthcare bill.
• International Paper Drowns Its Sorrows in Black Liquor, which states that International Paper's 3rd Quarter credits were more than double its profit for the quarter.

Did Black Liquor Credits Pave the Way for Healthcare Legislation?

The Democrats' healthcare plan hasn't even been approved by Congress yet, but it already seems to be doing wonders for several hundred pulp-mill workers in Baileyville, Maine.

Pundits have been expressing surprise the past few days that the House version of healthcare reform includes a seemingly unrelated provision to block the so-called "Son of Black Liquor" loophole that could be worth $50 billion in tax credits to U.S. pulp mills. But as The Reel Time Report newsletter pointed out this week, that doesn't seem to be the first time that black-liquor subsidies have been entwined with healthcare politics.

The newsletter, published by Forestweb, suggests Democrats used the oldest trick in the book to get a woman to say yes -- plying her with liquor. In this case, the woman is Sen. Olympia Snowe (R-Maine), and the liquor is black liquor, an energy-rich byproduct of the kraft pulping process.

The following chronology from the past eight months tells the story:

• March 5: Domtar Corp. announced it would indefinitely idle its Woodland pulp mill in Baileyville, ME in May, putting 300 people out of work.
• Late March: Stock analysts and the news media revealed that some pulp companies had discovered a loophole in a U.S. law that was meant to encourage production of "green" motor fuels. By mixing a bit of diesel with black liquor, the companies were able to get government alternative-fuel payments equal to one-third to one-half the market value of the pulp they produced. See Pulp Fiction: Eco-Credits for Black Liquor.
• April 5: Word started circulating that Sen. Max Baucus (D-Montana), chairman of the Senate Finance Committee, wanted to close the black-liquor loophole before its scheduled expiration at the end of this year. Reports indicated that legislation, supported by the Obama Administration, was imminent.
  
• April 6: Sen. Snowe visited the Woodland mill and told workers that her goal was to save the mill.
• April 23: "The black liquor tax credit is crucial to the survival of the paper industry, and to maintain and create jobs," said Sen. Snowe as she joined joining several other senators from pulp-making states to urge continuation of the credits. NewPage, Verso, and Sappi also own kraft pulp mills in Maine.
  
• June 10: Domtar announced it would reopen the Woodland mill, partly because of black-liquor credits.
• June 11: Baucus and Sen. Chuck Grassley (R-Iowa) released a draft of legislation that would close the black-liquor loophole.
  
• Sept. 16: After months of Finance Committee work on the subject, Baucus introduced his version of healthcare-reform legislation.
• Late September: Baucus and other Democrats backing healthcare reform stepped up their wooing of Sen. Snowe because she was the only Republican member of the Finance Committee who was not clearly opposed. A yes vote by Sen. Snowe, some said, would kill any hopes of a Republican filibuster if the legislation made it to the Senate floor.
• Oct. 13: Sen. Snowe joined 13 Democrats on the Finance Committee in approving Baucus' bill.
• Nov. 5: The Reel Time Report published a special report estimating that about $6 billion in black-liquor credits have been paid out to U.S. pulp mills this year and that the total will surpass $8.5 billion by the end of the year. If anything, the estimates appear to be a bit low because in some cases the newsletter used companies' reports of black-liquor credits "net of expenses" rather than the full, pre-tax amount of the credits.
• Nov. 8: As of this date, the Baucus-Grassley draft on black liquor has not been introduced. The Reel Time Report notes that Baucus and other Democratic critics of the credits "became quiet" at the same time that Snowe "took up the cause of the kraft pulp producers." The newsletter adds, "The point is that Senator Snowe was the key that kept this money flowing."

Another black-liquor/healthcare-reform connection arose a few days ago when House Democrats decided to help "pay" for healthcare legislation by closing the "Son of Black Liquor" loophole. (See Son of Black Liquor: A $50 Billion Loophole for the U.S. Pulp and Paper Industry for an explanation of the loophole and 'Black Liquor' Tax Credit Restriction Rides on Health Care Bill for a description of the House's action.)

Never mind that closing the loophole would not add any money to the federal budget, just prevent the government from doling out funds that weren't in the budget. And never mind that the Son of Black Liquor loophole probably doesn't even exist because EPA regulations won't allow it. (See Will the EPA Stop 'Son of Black Liquor'?)

With the kind of Alice in Wonderland accounting that occurs only in Washington, House Democrats can claim they found a way to help pay for healthcare legislation and to prevent a continuation of controversial pulp-mill subsidies. But if Democrats once again find themselves coveting some key moderate votes from paper-producing states, don't be surprised to see Son of Black Liquor rise miraculously from the dead.