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Black Liquor Tax Credits: A Closing Loophole for the Pulp & Paper Industry 
Black Liquor Tax Credits: A Closing Loophole for the Pulp & Paper Industry
Black liquor is a fuel produced from paper byproducts and small amounts of diesel fuel. This chemical qualified as an alternative fuel eligible for tax credits under legislation passed in 2007. The Alternative Fuels Provision initially began as part of a 2005 highway bill as a tax credit intended to promote alternative fuels for motor vehicles but was expanded in the 2007 energy bill. An interpretation of the tax code by the Internal Revenue Service paved the way for several industries, such as pulp and paper manufacturers, to avail themselves of these new tax credits. Unfortunately, the black liquor tax credit may be close to being eliminated – a potential $6 billion impact on the pulp and paper industry.
What is black liquor?
Black liquor is a byproduct of the kraft process, one of the processes used by pulp mills during the production of paper pulp. Wood is decomposed into cellulose fibers, lignin fragments and hemicelluloses. This aqueous solution contains more than half of the energy content of the wood fed into the digester. Paper mills have used black liquor as an energy source since at least the 1930’s. Most kraft pulp mills use recovery boilers to recover and burn the black liquor they produce, generating steam and recovering the cooking chemicals. This has resulted in mills reducing water emission problems, lowering the use of chemicals and increasing in energy self sufficiency. In the U.S., pulp and paper companies have consumed nearly all of the black liquor produced since the 1990’s. According to the American Forest and Paper Association, black liquor plants produce 28.5 million megawatt-hours per year – more than all of the solar, wind and geothermal energy technologies combined.
How did black liquor qualify to begin with?
Initially, the Alternative Fuels Provision was designed for motor vehicles in 2005 and expanded to non-mobile uses of liquid alternative fuels in 2007. In order to qualify for the tax credit, one of three fuels specified by law must be used: gasoline, kerosene or diesel. These fuels must then be mixed with an alternative fuel – in this case, black liquor. The pulp and paper manufacturers replaced the original fuel used - natural gas - with diesel fuel, thereby meeting the requirements of the law and qualifying for the tax credit.
Why is black liquor being targeted?
With the federal deficit expected to be in excess of $1.58 trillion by the end of 2009, many private analysts believe black liquor is a big target for lawmakers to eliminate in an effort to increase tax revenue and to help fund the $630 billion health reform reserve fund. When initially passed, the Joint Committee on Taxation estimated that the tax credit would cost taxpayers a total of $61 million. But it allowed U.S. pulp and paper mills to qualify for a $0.50 per gallon tax credit for using a mix at 0.1% of diesel with black liquor, and now it is estimated that these tax credits are worth $6 billion per year to the paper industry.
What could be the consequences?
Some in Congress argue that a repeal of this tax credit will cost many jobs in the pulp and paper industry. The paper industry is one of the top 10 manufacturing employers in 42 states, employing more than 1.3 million Americans. This industry has lost a cumulative $2.1 billion in the fourth quarter of 2008. More than 40 paper mills in the U.S. have announced plans to temporarily close in 2009 in an effort to save money. Many consider this tax credit a lifeline, bolstering the bottom line of many pulp and paper companies. International Paper Co. reported that its first quarter net income jumped 93% as a result of a biofuel tax credit for powering its paper mills with the black liquor. International Paper and Verso received more than $100 million combined and Smurfit Stone is expecting to receive $543 million.
But, in 2008, the earnings of publicly traded companies in the pulp and paper industry were down 40% compared to 2007; and fourth quarter earnings were down by as much as 83.5% compared to the fourth quarter of 2007. As paper prices remain significantly lower than a year ago, mills continue to curtail production and idle facilities due to lack of demand. With the loss of the tax credit, the pulp and paper industry will be even more crippled. Senator Olympia Snow is reported as stating that “The black liquor tax credit is crucial to the survival of the paper industry and to maintain and create jobs.”
As it stands now, the administration has rewritten the Alternative Fuel Provision to exclude the paper industry for the fiscal year 2010 budget proposal. If approved by Congress, the provision will take effect October 1, 2009. Other tax codes facing scrutiny in addition to the black liquor tax credit include estate and gift taxes, tax breaks for the life insurance industry, certain accounting methodologies pertaining to the ability to deduct expenses, and a requirement for companies to file business tax returns electronically.