Black Liquor Tax Credit

Black liquor tax credit is a term coined by the forest-products industry to describe an abusive subsidy scheme within the industry. Black liquor is a byproduct of creating wood pulp and is used as fuel. As part of the 2005 transportation and ethanol bill, the U.S. government created a tax credit called the Alternative Fuel Mixture Credit (AFMC), designed to encourage companies to use biofuels by mixing them with fossil fuels. An extension of the bill in 2007 created a loophole in which paper companies, who were already using the biofuel black liquor, did the reverse of what the bill intended, adding diesel to their black liquor to qualify for tax credits. It is estimated that the forestry industry has received billions of dollars in tax credits through the black liquor tax credit scheme.

Black liquor tax credit is an informal name for the repercussion of black liquor, the biomass byproduct of wood pulp production, becoming eligible for the Alternative Fuel Mixture Credit (AFMC) for corporations. The AFMC was designed to encourage development and use of alternative fuels created out of biomass by giving tax credits for companies who used a mixture of traditional fuels and biomass. Paper companies immediately began exploiting a loophole in the law by taking the black liquor biomass they already had and mixing it with diesel fuel. This mixture qualified under the rules of the credit, although in practice it was the exact opposite process the credit was intended to promote.

The paper companies' use of a biofuel/fossil fuel mixture qualified them for the tax credit, violating the spirit of the bill but not violating the law and allowing them to claim several billion dollars in tax credits. The tax credit distorted global markets by reducing the price of some U.S. paper products, and caused Canada to create a similar subsidy to remain competitive with U.S. forest-products companies. The tax credit was scheduled to expire at the end of 2009, but since forestry and paper companies were allowed to amend their tax returns for 2009, companies were claiming credits as late as 2014 for a loophole that had only been in existence technically for two years, and receiving refunds for these credits in the billions of dollars.

The refunds to the paper companies are not taxable, although refunds from similar tax credit programs for other industries are taxable.

The intention of Congress in creating the Alternative Fuel Mixture Credit (AFMC) and the tax credit that preceded it, the alcohol motor fuel tax credit, was to create incentives for the industry to create liquid motor fuels out of biomass. Since wood pulp processing always left biomass, turning it into usable liquid fuel would be economically and environmentally useful, and the alcohol motor fuel tax credit was intended to accelerate research and conversion to biomass fuels. In June of 2009, black liquor became eligible for the refundable AFMC.