Government fail: Alternative fuel tax credit

Victor Joecks

When both the Las Vegas Review-Journal and the Las Vegas Sun editorial pages agree (on the same day, no less), you know the fail was pretty epic. And it was. Unless you were one of the paper companies that received tax benefits of up to a billion dollars.

From the RJ:

To promote the development of alternative fuels, which unfortunately cost a pantload, Congress in 2007 expanded the tax credit for using non-fossil fuels, offering firms 50 cents a gallon to blend renewable fuels such as ethanol with traditional fossil fuels like diesel.

This caught the interest of a number of struggling American papermakers. Paper mills traditionally produce a liquid called “black liquor” as a byproduct of turning wood to pulp. The pulp is dried to make paper; the “black liquor” is used as fuel to power the mill.

What if they were to add small amounts of diesel to that black liquor, the paper manufacturers wondered. Wouldn’t that qualify them for the tax subsidies, even though it actually meant they’d be using more fossil fuels than they used to?

It sure did. Although the credits were never intended for paper companies, they could end up being worth more than $3 billion a year, according to a congressional estimate. One company, Memphis-based International Paper, has already received $71.6 million in credits for a single month.

From the Sun:

The law seemed straightforward. It offered companies tax credits if they used blended fuels – fossil fuels blended with renewable fuels – in their operations.

As the Associated Press reported last week, the word blended was not defined. But who in Congress could have known about a substance called “black liquor”?

This is a byproduct produced at paper mills and used to power much of the mills’ machinery.

Although black liquor is renewable, it did not qualify for the tax credit because it is not blended with anything. What came next was predictable only to those familiar with paper mills.

Managers began adding diesel fuel to the black liquor. Suddenly, they had a blended fuel eligible for the tax credit.

The report being reviewed by the congressional tax committee was prepared by Goldman Sachs. According to the AP, it estimates that International Paper, based in Memphis, alone could qualify for more than $1 billion in blended-fuel tax credits this year…

Nevada ran into this problem in 2006. Officials were stunned to learn that a law offering tax breaks to developers of new buildings if they met “green” construction standards could cost $1 billion. The state had projected that it and local governments would be out only a total of about $250,000. Although the 2007 Legislature modified the law, it still cost about $500 million.

And don’t think the program is going to go peacefully into the night. The RJ:

Sen. Olympia Snowe, R-Maine, called the credit a “lifeline” for the struggling papermakers. “We should be doing everything we can to salvage this industry,” she said.

Sen. Ron Wyden, D-Ore., agreed the credits will not be allowed to expire without paper companies receiving some other relief, if he has anything to say about it. “I won’t let that happen,” the senator told The Associated Press.

So the alternative fuel tax credit program ended up costing billions more than anticipated, may cost billions for years to come and led to an increase in the use of fossil fuels. Epic fail.

Reminds me of something Milton Friedman once said.

There is a sure-fire way to predict the consequences of a government social program adopted to achieve worthy ends. Find out what the well-meaning, public-interested persons who advocated its adoption expected it to accomplish. Then reverse those expectations. You will have an accurate prediction of actual results.

Unfortunately, the RJ and Sun differ on the solution to the problem.

The RJ:

Here’s a novel idea: What if the Congress were to enact modest taxes designed to spread the burden of government as evenly as possible, abandoning once and for all their hopeless â’€ and often hilarious â’€ attempts to reward favorites, punish the unpopular, and generally manipulate behaviors through “targeted tax breaks”?

The Sun:

The lesson is that green tax breaks, which we generally support, can be tricky. Legislation enabling them should be crystal clear about for whom and for what they are intended.

The Sun just doesn’t get it. First, it isn’t the role of government to pick the winners and losers in an economy. The government should instead establish a uniformly low tax and regulatory burden. Second, the Sun’s own editorial shows why legislators passing tax credits can’t always “be crystal clear about for whom and for what they are intended.”

“But who in Congress could have known about a substance called “black liquor”?

Exactly: No one had a clue. No one could have had a clue. That’s why it isn’t the role of government to pick the winners and losers and why things go so poorly when the government strays from that principle.

Good news. We get to pay for Congress’ and Nevada’s mistakes.