Tipping point

A contentious tax loophole may save Smurfit-Stone


Roy Houseman, the 28-year-old president of United Steel Workers Local 885, just returned from Washington, D.C., where for three weeks he lobbied to keep open a tax loophole he thinks might save his job and a few hundred others in Missoula.

If his efforts prove fruitful, it could ensure that the bankrupt Smurfit-Stone Container Corp., which temporarily laid him off last November, receives a much-needed, multimillion-dollar shot in the arm from taxpayers.

If his efforts fail, well, paper companies were never intended to receive the money anyway, and the Frenchtown mill, set to start up again in the beginning of June after a seven-week shutdown, may sooner suffer the fate of an unfriendly market.

Paper companies across the country are cashing in on the alternative fuels tax credit contained in the 2005 highway bill. The credit intended to encourage the blending of biofuels with fossil fuels in vehicles. But after Congress modified the definition of bio-based fuel a couple years ago, paper companies discovered they could take advantage of it, too, by adding diesel to the decades-old practice of burning the pulping byproduct “black liquor,” earning $0.50 for every gallon of diesel burned.

“It just turned out that, by chance, the way the law was written, the paper industry could qualify,” Houseman says.

And, pulped themselves by the recession, paper companies will take whatever they can get.

Since late last year, when paper companies began applying for the credits, the U.S. Treasury Department has paid them hundreds of millions of dollars in credits and direct payments. It could cost taxpayers between $3 and $10 billion in 2009—much more than what lawmakers originally intended.

Smurfit-Stone is set to collect as much as $543 million through the credit, according to industry analyst Resource Information Systems, Inc. Houseman estimates the Missoula mill’s black liquor burning would generate between $40 and $50 million.

Smurfit-Stone spokesman Mike Mullin did not return calls for comment before press time.

“I think, combined with other efforts, that this is the tipping point for Smurfit-Stone in Missoula,” Houseman says. “This facility is constantly at a cost disadvantage because of higher fiber prices, and so anything that can help this facility will keep it around that much longer.”

But it’s an uphill climb for Houseman on Capitol Hill. Speaking at a Senate Finance Committee hearing in April, Chairman Max Baucus said, “Unless we plug this loophole, the federal government is liable for billions in credits for black liquor in 2009 alone, even though the credit was never intended for this fuel…We are working to undo that unintended consequence.”

The Obama administration also announced in May its desire to end the loophole. The 2010 budget proposal includes a rewritten alternative fuels credit, which would take effect October 1 if approved by Congress. To end payments sooner, lawmakers would need to pass separate legislation.

“Obviously Max was pretty upset about this because it ballooned into a much larger number than he was expecting,” Houseman says. “But there are some arguments that the credit actually was a very good stimulus. It couldn’t be more timely and is worthwhile recognition to an industry that on average produces 70 percent of its own electricity.”

Environmental groups, though, argue that the only thing the loophole has stimulated is the consumption of fossil fuel. In an April letter to Baucus and Sen. Chuck Grassley, ranking minority member of the Senate Finance Committee, a consortium of 25 environmental groups urged the closure of the loophole because they said it perversely increases fossil fuel consumption and puts environmentally responsible mills at a disadvantage. The Missoula-based WildWest Institute was among the groups that signed the letter.

“How will we ever get to a more sustainable future if the industrial dinosaurs of the past continue to fleece billions of dollars from the American taxpayers?” asks Matthew Koehler, WildWest’s director. “The reality is that Smurfit-Stone Container Corp. has plants in Asia, Mexico, Canada and the United States. They have 140 facilities around the world. In 10 years the stock of the company has gone down 99.9 percent in value. They are in bankruptcy. Their business model is clearly flawed. Let’s face that reality head on and decide what we want to do to use that facility out in Frenchtown for the future.”

In an effort to preserve his future at Smurfit-Stone—and its unexpected windfall—Houseman was one of two union representatives in Washington lobbying lawmakers. It was “Mr. Houseman goes to Washington,” he quips. “It’s been a very eye-opening experience.”

In addition, as soon as Houseman returned, Smurfit-Stone announced that 250 workers (not including Houseman) would return to work at the containerboard plant when it fires up its No. 3 paper machine the first week of June. But the question surrounding the on-again, off-again mill is, for how long?

“If the credit were to be retroactively repealed, or ended prematurely,” Houseman says, “I feel pretty strongly that it would really damage the paper industry and the wood products industry—not just in Montana, but pretty much across the country.”

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