Senate To Clarify US Alternative Fuel Tax Credits

by Mike Godfrey, Tax-News.com, Washington

18 June 2009

The US Senate Finance Committee has released a legislative staff draft proposal to clarify the types of fuels that qualify for the alternative fuels tax credit and eliminate from eligibility fuel derived from the processing of paper or pulp.

The proposal comes in response to reports that paper mills, contrary to Congressional intent, have been adding diesel fuel to “black liquor,” a byproduct of the paper-making process, in order to qualify for the tax credit for biomass-based fuel under Section 6426 of the US tax code. The proposal, released June 11, would close the loophole for black liquor fuel produced after the date of enactment. The Senators are seeking public comment on the proposals until July 10, 2009.

“Our measure ensures this tax credit is used consistently as the law intended, not through an unintended loophole. Like so many American businesses, I know the paper industry is struggling, but taxpayers don’t want to see another billion-dollar bailout,” said Finance Committee Chairman Max Baucus. “This credit was not meant to provide a boon to companies for a process they’ve already been doing for several decades. This is good policy, plain and simple, and I’m pleased to propose legislation to make the situation right.”

“The paper industry was not intended to receive the alternative fuels tax credit when the credit was enacted,” added ranking member Chuck Grassley. “This staff draft proposal is meant to clarify that legislative intent.”

Passed originally as part of the 2005 highway bill, the alternative fuels tax credit consists of a 50-cent per gallon refundable credit for a range of fuels, including liquefied petroleum gas, compressed or liquefied natural gas, liquefied hydrogen, liquid fuel derived from coal and biomass-based fuel.

However Canada has been joined recently by the European Union, Brazil and Chile in protest against the ‘black liquor’ loophole, which, these countries argue, gives US paper and pulp mills an unfair advantage and distorts the international pulp market.

Canadian Ambassador Michael Wilson, Brazilian Ambassador Antonio de Aguiar Patriota, Chilean Ambassador Jose Goni and the head of the European Commission Delegation John Bruton are signatories to a letter sent May 20 to the US Congress, calling on the US to end the tax credit. Canadian Minister for International Trade Stockwell Day, also raised the black liquor issue with US Trade Representative Ron Kirk and US Congressman Charles Rangel in his visit to Washington, D.C. on April 27.

It is estimated that the credit has been worth as much as USD7bn to the US paper industry, allowing them to cut costs by as much as 60%.

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