U.S. House seeks to end biofuels paper tax breaks

By Kim Dixon WASHINGTON, Nov 4 (Reuters) - U.S. lawmakers in the House of Representatives on Wednesday said they would close a loophole that lets paper companies claim a valuable tax credit for making biofuel that is already a byproduct of paper production. Democrats on the tax-writing House Ways and Means Committee propose to close one version of an alternative fuel credit in which companies can claim about a $1 credit per gallon for producing biofuel. By limiting eligibility for the credit, the provision would raise $24 billion over a decade. Democrats want to use the funds to help pay for healthcare reform. Bills are working their way through both houses of Congress so the provision's fate is uncertain. The credit used by most companies now expires at the end of this year.

The provision closes a more lucrative credit that companies are expected to turn to after the currently used credit expires. The credits are intended to spur development of biofuels and are being improperly used by paper companies, critics say. So-called black liquor -- a byproduct of paper production -- is blended with a small amount of diesel fuel to claim the credit, according to Democrats. Paper companies, for their part, say they would not qualify for the second credit, so the move is a ruse to find funds to pay for health care. "We don't think we qualify for this and aren't pursuing it," said Scott Milburn, a spokesman for the American Forest and Paper Association. "If policymakers are going to restrict one energy program it is important to be careful to avoid unintended consequences in other, unrelated ones," he added. Still, analysts at the investor advisory group Concept Capital said the fact that lawmakers are making a special provision to prevent them from using the credit proves the industry could claim it. "There are some strong signals coming from Capitol Hill that it is available," said Mark McMinimy, an analyst at the group. If that is the case, paper companies might be able to claim it for 2009 before the potential tax break is eliminated, he said. International Paper Co reported a $320 million extraordinary gain from the tax break in the third quarter. MeadWestvaco Corp and Domtar Corp are among other companies that have reaped gains from the tax credit. Keywords: PAPER TAXCREDITS/ ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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