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Monday, February 27, 2006

Turning Coal into Gold through Tax Breaks

There's gold in them thar halls of congress. Gold that starts out as coal and ends up, after being sprayed with diesel or some other substance, as a synthetic fuel tax break. Unfortunately for those exploiting this provision of the tax code, recent increases in oil prices threaten to trigger an end to the tax break bonanza. However, GOP senator Rick Santorum slipped a provision into the hurricane relief bill to ensure the tax breaks would continue and the provision is now in the reconciliation process:

A Magic Way to Make Billions, by Donald L. Bartlett and James B. Steele, Time: The wording is so bland and buried so deep within a 324-page budget document that almost no one would notice that a multibillion-dollar scam is going on. Not the members of Congress voting for it and certainly not the taxpayers who will get fleeced by it. And that is exactly the idea. ... Buried in the huge budget-reconciliation bill ... are a few paragraphs that accomplish an extraordinary feat. They roll back the price of a barrel of crude oil to what it sold for two years ago. They create this pretend price for the benefit of a small group of the politically well connected. ...[who] will walk away with billions of dollars in tax subsidies, not from oil but from the marketing of a dubious concoction of synthetic fuel produced from coal ...

To understand why Washington wants to backdate the price of oil for its friends, it's necessary to return to the oil shocks of the 1970s, when long lines formed at gas stations and people dialed down the thermostats ... so they could afford to pay their utility bills. In 1980, Congress enacted tax incentives ... to spur the development of a synthetic-fuel industry. The goal was to build huge plants using new technologies that would transform raw coal, which the U.S. has in abundance, into synthetic natural gas ... and--here comes the ever popular bromide--reduce U.S. dependence on foreign oil. ...

When oil prices fell, ... the synfuel credit remained on the books, dormant, until a group of enterprising entrepreneurs came across it in the 1990s and saw a way to transform coal into gold. The coal can look and burn like regular coal. The IRS rule for transforming coal into synfuel--and getting the tax credit--requires only that the substance be chemically altered in some way. The alchemy that satisfies the IRS is a simple process: some plants spray newly mined coal with diesel fuel, pine-tar resin, limestone, acid or other substances--a practice that industry critics call "spray and pray." Other operators mix coal-mining waste with chemicals, coat it with latex and blend it with untreated coal to form briquettes. ... Those synfuel operations were a far cry from the state-of-the-art plants that Congress had envisioned ...

For owners and operators, the whole point isn't creating a profitable new energy resource ...; it's about collecting the tax subsidy. Progress Energy Inc. ... reported ... that in 2002-04 its synfuel-production losses added up to $400 million. No problem: the company claimed $852 million in tax credits, magically transforming a money-losing operation into a money-making business with $452 million in profits--courtesy of the American taxpayer. .... And Progress Energy is not alone. ...

This was not what Congress had in mind in 1980 when it enacted the subsidy. The idea was to stimulate ... a new industry that would make synthetic fuel competitive with the price of conventional oil and gas. To achieve that end, lawmakers pegged the value of the credit to the price of crude oil. If oil prices ... rise above a certain level, the synfuel ... subsidy would be phased out. As long as oil prices were below $50 per bbl., synfuel producers could claim the full value of the credit. But in the past year, as prices have risen to as much as $66 per bbl., anxiety has spread through the synfuel ranks that their boondoggle is imperiled. ...

With so much at stake, the synfuelers have pumped money into a campaign to preserve their tax break. At the center of the synfuel lobby in Washington is a consortium called the Council for Energy Independence. It's a name worthy of the most successful Washington lobbies... Since 2002, the Council for Energy Independence has spent $2 million lobbying Congress to preserve the tax credit...

Last November the lobby scored a remarkable coup. Buried deep in a bill called the Tax Relief Act of 2005, passed by the Senate on Nov. 18, was Section 559... Section 559 ... says the synfuel credit will be based not on current oil prices--the yardstick used in the past--but on "the amount which was in effect for sales in calendar year 2004."

In 2004 oil prices were safely below the line to allow synfuel producers to claim the maximum credit. The stealth amendment ... was inserted in the Tax Relief Act, which provides aid for Hurricane Katrina victims ... With so many higher profile issues at stake, the clause on synfuels sailed right through with no discussion. Many lawmakers, if not most, don't even know it's there.

When asked about the provision's origins, Senate Finance Committee aides at first said they did not know ... Asked again by TIME to identify the author, the Senate Finance aide later wrote in an e-mail, "the provision originated as an amendment from Sen. [Rick] Santorum [a Pennsylvania Republican]. ... Chairman Grassley accepted the Santorum amendment ..." ...

The bill is now part of Congress's budget-reconciliation process. But there is no synfuel amendment in the House bill, meaning that it cannot become law unless the House conferees agree to the Senate provision. ... the odds are that synfuel may slip through again. ... The synfuel lobby contends that the exemption from the run-up in oil prices is necessary to create stability in the industry. ... And the synfuel lobby expects to carry the day too, largely because Congress has bigger issues to deal with. Kirk Benson, the chairman and CEO of Headwaters, told analysts that "in the world of Washington, D.C., what we want to do isn't material ... It's an afterthought." ...

We should continue to cut social, education, and health programs, maybe delay infrastructure spending too, in order to protect tax cuts that distort the allocation of resources towards scam synthetic fuel programs that make the people lobbyists represent rich.

    Posted by on Monday, February 27, 2006 at 12:04 AM in Budget Deficit, Economics, Politics, Taxes | Permalink  TrackBack (1)  Comments (3)

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