Congress should immediately close a US tax loophole used by paper makers that distorts world pulp markets and violates trade rules, ambassadors from the European Union, Canada, Brazil and Chile said on Thursday. A tax credit designed to boost biofuel use has been an unintended windfall for US paper manufacturers, who stand to receive up to $8 billion in 2009, the ambassadors said in a joint statement.
"From a legal perspective, it is clear that this tax credit amounts to an actionable subsidy and that any adverse effects ... could be subject to remedies in the (World Trade Organisation) or through domestic countervailing duty investigations," the ambassadors said in a letter to top trade lawmakers in Congress. The global economic downturn has hurt demand for paper, but the credit gives US producers an incentive to overproduce pulp, the ambassadors said, noting some US companies claimed tax credits that amount to about 30 percent of the selling price of pulp.
At issue is a by-product called "black liquor," produced when wood is processed into pulp to make paper. Paper makers have traditionally used the by-product to fuel their mills. But last year, companies such as International Paper Co, Verso Paper Corp and Temple-Inland Inc began adding small amounts of diesel to the by-product to qualify for a biofuel tax credit.