Paying For Healthcare: How Democrats Closed an Energy Tax Loophole That Doesn't Exist

(MoneyWatch)  Democrats turned to black liquor -- a gooey wood pulp byproduct -- to help pay for President Obama's $940 billion healthcare package. It doesn't matter that black liquor, which paper companies have used for years as a fuel to power their plants, has absolutely nothing to do with healthcare. It's about the $24 billion in revenue the government could capture over 10 years by closing a possible loophole that would allow paper companies to collect a biofuel tax credit by using black liquor.

There's just one problem: There's no loophole. So, there's no $24 billion.

The so-called black liquor loophole is a complicated tale, which may explain why some are convinced that there's $24 billion in savings to be had. Here's the lowdown. The IRS determined that black liquor, when combined with diesel fuel and used to power paper plants, qualified for a 50-cent per-gallon alternative fuel mixture credit. The IRS paid out upwards of $7 billion to paper companies in 2009, according to the Congressional Budget Office. The alternative tax credit expired in December, which ended the payouts.

But wait. There's another tax credit hanging out there, just waiting for paper companies to claim. And that's where the $24 billion comes in. The House health care reconciliation bill inserted a provision to keep paper companies from claiming a $1.01-per-gallon cellulosic producer biofuel credit for its production of black liquor. Concerns arose last year after the IRS said paper companies may qualify for the cellulosic tax credit, which was included in the 2008 farm bill. But the EPA -- which has regulatory power here -- disagrees.

Here's why. To qualify, black liquor has to meet the EPA's requirements for fuel and fuel additives under the Clean Air Act. In short, it has to be used as a fuel for cars or trucks. As this letter from the EPA -- via Dead Tree Edition blog -- clarifies, black liquor, with its molasses-like consistency, wouldn't qualify as a motor vehicle fuel. The EPA hasn't registered black liquor as an approved fuel for tax credit, according to a recent E&E article. And no one has extended any cellulosic credits to paper companies.

Still, it didn't prevent the House from claiming some $24 billion in savings by closing the "loophole." The non-existent black liquor loophole was pretty popular this past year. Before it ended up in the House's reconciliation health care bill, lawmakers wanted to use it in the Senate jobs bill.

Photo of black liquor from Chemrec