How Democrats Helped Finance the Tea Party With Black Liquor

Black Liquor

More than $1 billion in federal money probably flowed to key backers of the Tea Party because the Democratic-controlled Congress failed to shut off black liquor tax credits.

The money was paid last year to paper giant Georgia Pacific, which is part of the Koch Industries conglomerate that has been the center of much political controversy and media coverage of late.

The coverage and often-heated discussions – including an environmental group's anti-Koch spot that debuted on a Times Square superscreen last week -- have overlooked the ironies of GP’s black liquor windfall.

Democratic Congressional leaders complained in March 2009 when they learned that pulp manufacturers like GP were exploiting a loophole in a federal biofuel program. But they failed to close the loophole, enabling the companies to rake in billions of dollars in direct subsidies from the IRS for basically doing what they and pulp makers around the world have been doing for decades – burning black liquor, a pulp byproduct, to power their mills.

Environmental groups have attacked Koch’s owners and executives for being, in the words of Greenpeace, “a financial kingpin of climate science denial and clean energy opposition.” Liberals, including Obama himself, also point to the generous support of Koch’s owners and executives for Tea Party organizations and conservative political candidates.

And conservatives are crying foul over the Obama Administration’s alleged persecution of Koch. Six Republican senators recently requested an investigation of whether the Internal Revenue Service leaked confidential tax information about the company to an Obama advisor as part of a campaign to harass conservative political donors.

Now for the ironies:

Irony #1, Alternative fuel mixture (AFM) tax credits: This federal program was supposed to subsidize new eco-friendly fuels, but manufacturers of kraft pulp spotted a loophole that enabled them to get the credits for using black liquor as a fuel, which they were doing anyway. A United Steelworkers publication claims GP, the country’s #2 maker of kraft pulp, raked in $5 billion in black liquor tax credits. But, based on the company’s pulp-making capacity, the number was more likely in the $1 billion to $1.5 billion range.

In any case, a program that was intended to subsidize green alternatives to petroleum-based fuels paid out huge sums to a conglomerate that is mostly an oil and chemicals company and that generously funds attacks on renewable-energy programs and claims of human-caused climate change.

Irony#2, ObamaCare: Why, after fuming about the black liquor loophole in the spring of 2009, did Congress and the Obama Administration not try to close it? The best theory is that they did a deal with Sen. Olympia Snowe, R-Maine and a champion of the pulp and paper industry, so that they would have at least one GOP yes vote in the Senate Finance Committee for the Administration’s sweeping healthcare legislation.

Democrats' use of black liquor money to grease the skids for healthcare legislation could backfire: Americans for Prosperity, a Tea Party-affiliated group that was started and largely funded by Koch's owners, has spun off an organization called Hands Off My Healthcare, which is campaigning against pro-ObamaCare Congress members who are seeking re-election.

Irony #3, Internal Revenue Service: The IRS came under suspicion when a senior Administration official told reporters in August, "So in this country we have partnerships, we have S corps, we have LLCs, we have a series of entities that do not pay corporate income tax. Some of which are really giant firms, you know, Koch Industries is a multibillion dollar business."

The Republican senators seeking an investigation of a possible IRS leak responded, "The statement that Koch is a pass-through entity implies direct knowledge of Koch's legal and tax status, which would appear to be a violation." Koch Industries has issued a statement saying that it’s a corporation and pays corporate taxes.

The suspicion of the IRS is a strange turn of events considering how helpful, perhaps unwittingly, the agency has been to Koch’s Georgia Pacific.

IRS rulings on black liquor have been favorable to all kraft-pulp manufacturers, enabling them to claim alternative fuel-mixture credits even on the portion of black liquor that has no energy value, such as water. The result was about $6.6 billion paid out to publicly traded pulp makers, plus probably at least $2 billion more to privately held companies like GP.

But the agency’s strangest ruling on the tar-like pulp byproduct appears to be of special benefit to GP. The “Son of Black Liquor” ruling made black liquor eligible for another green-energy program, Cellulosic Biofuel Producer Credits (CBPC), despite a law saying that only EPA-approved motor fuels were eligible.

These tax credits are twice as generous as the original black liquor credits, but they can only be used to offset income taxes, making them virtually worthless to the many unprofitable and marginally profitable pulp and paper companies. The country’s #1 pulp maker, International Paper, has said it isn’t sure whether it will have enough tax liability to justify paying back any of its $2.1 billion in AFMs to get the new tax credits.

Not so with Koch. With an estimated $100 billion in annual revenue, much of it from its presumably profitable oil sector, the big conglomerate should have no problem making immediate use of the approximately $2 to $3 billion in tax credits it would receive if it returned all of its original black liquor subsidies.

Dead Tree Edition has published more than 40 articles on the strange saga of black liquor tax credits. Here are a few that provide more background on these eco-credits that did nothing for the environment (including links to original documents so that you know I’m not making this stuff up):

• U.S. Taxpayers' Black Liquor Tab Surpasses $30 Billion: For the next several years, taxpayers will be footing the huge bill for Congressional shenanigans regarding pulp byproducts, with most of the money going to hide increases in the federal deficit rather than to pulp manufacturers.
• Congress and Paper Companies Covet 'Son of Black Liquor' Funds: Plans to use, or not use, Son of Black Liquor tax credits vary widely from company to company.
• What, Exactly, Is Black Liquor? Just Ask the Tax Man: If you want to understand that once-obscure, now infamous pulp byproduct known as black liquor, you can turn to an unlikely source – the lawyers at the Internal Revenue Service.

And here’s more background on Koch Industries, the billionaire brothers who own most of it, and their political activity:

• Meet Koch Industries: The green group that produced the Times Square provides chapter and verse on environmentalists’ and liberals’ complaints about Koch and the Koch brothers.
• Shutting Up Business: A lengthy Wall Street Journal opinion piece presents the Obama Administration’s attacks on Koch Industries as part of a broader campaign to stifle business support for conservative candidates.
• Tea Party movement: Billionaire Koch brothers who helped it grow: An interesting profile of the Koch brothers and how they inherited their libertarian leanings from their John Bircher father.
• A Consistent, Principled Effort: Koch Industries describes its commitment to "liberty and free-market principles" as well as its charitable and advocacy giving.