Canada, Brazil, Chile, Europe Protest Tax Credit

By THE ASSOCIATED PRESS
Published: May 21, 2009
Filed at 4:22 p.m. ET
WASHINGTON (AP) -- Canada, Brazil, Chile and the European Union protested an unintended tax break for U.S. paper companies Thursday, warning Congress that it could result in trade sanctions.
Struggling U.S. paper companies recently discovered they could qualify for federal tax credits intended to promote the development of alternative fuels because they use a byproduct in the paper-making process as fuel to power their mills. The tax credits were never intended for paper companies, but now they could be worth more than $3 billion a year, according to a congressional estimate.
Ambassadors from the three countries and the head of the E.U. delegation to the U.S. want Congress to end the tax break, even before it is scheduled to expire at the end of the year. They argue that the tax break provides incentives for U.S. companies to overproduce pulp, depressing prices.
''From a legal perspective, it is clear that this tax credit amounts to an actionable subsidy and that any adverse effects caused by this tax credit could be subject to remedies in the WTO (World Trade Organization) or through domestic countervailing duty investigations,'' the ambassadors wrote in a letter to congressional leaders.
President Barack Obama and the head of a key Senate committee have both said they want to exclude paper companies from receiving the tax credit before the end of the year. But lawmakers from paper-producing states object, saying the credit is providing much-needed relief to an industry that is struggling from the economic recession.
Congress expanded the tax credit for developing alternative fuels in 2007, offering firms 50 cents a gallon to blend renewable fuels with traditional fossil fuels like diesel.
Paper mills produce a liquid substance called ''black liquor'' as a byproduct of the process that turns wood into pulp. The pulp is dried to make paper and black liquor is then used as fuel to power the mill.
Last year some paper companies realized they could qualify for the credit by adding small amounts of diesel to the black liquor used for powering their mills.
''The tax credit supports clean energy generation at a critical time as our nation seeks to increase its current supply of renewable energy in the face of the most difficult economic picture in 70 years,'' said Scott Milburn, spokesman for the American Forest & Paper Association.