Tax Credit for 'Black Liquor' Targeted in House Health Bill

House Democratic tax writers switched up a key offset in the manager's amendment to the health care overhaul bill, including new language that would prevent paper producers from claiming a tax credit for the production of "black liquor," a wood byproduct.

The original health care legislation (HR 3962), introduced last week, would have been partially paid for by a multi-year delay in the effective date of a law (PL 108-357) that gives multinational corporations more flexibility in how they handle their interest expenses.

But Senate tax writers decided to use that offset to pay for two tax breaks -- an expansion of the homebuyers' tax credit and a provision to allow money-losing businesses to use their current losses to offset profits over the past five years and receive a tax refund. The provision likely will be added to unemployment benefits legislation (HR 3548) scheduled for a procedural vote in the Senate on Wednesday.

So in the health care overhaul manager's amendment unveiled late Tuesday night, House tax writers removed the worldwide allocation offset and replaced it with a $24 billion offset provision championed by Rep. Chris Van Hollen, D-Md., a member of the Ways and Means panel and chairman of the Democratic Congressional Campaign Committee.

The provision would expand the existing tax credit for "second generation" cellulosic biofuel to include fuel derived from cultivated algae, cyanobacteria and a plant called lemna. It would peg the value of the second-generation biofuel producer credit to the level of British thermal units (BTU) in the biofuel.

But it also would ensure credit ineligibility for biofuels coprocessed with a fuel derived from certain feedstocks. In particular, it seeks to close off the credit to paper companies that have long produced energy using an alternative fuel source -- the liquid wood byproduct produced in the pulp-making process, also known as black liquor.

Paper producers have been claiming a separate alternative energy credit -- the 50-cents-per-gallon tax credit originally enacted as part of the 2005 highway law (PL 109-59) -- offered to companies if they mix an alternative fuel with a traditional carbon-based fossil fuel, such as diesel.

By adding some diesel into the black liquor, paper mills qualify for the tax credit. Top tax writers have called it a loophole, since the original credit was meant to encourage the use of alternative fuels, not the use of diesel fuels.

More recently, an Internal Revenue Service memo suggested that paper companies might also be able to claim the cellulosic biofuels credit for black liquor production. Van Hollen's provision targets that tax credit, seeking to ensure that paper companies cannot benefit.

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