If you need proof that the power to tax is the power to destroy, or to enrich, look no further than announcements from two paper companies yesterday.
International Paper revealed that it expects to receive $413 million in "black liquor" credits from the U.S. government for the first quarter of 2009. The estimated credits for its printing-papers segment will total $170 per ton, which was 89% of the segment's EBITDA. In other words, without the credits the segment would have barely covered its cash costs but with the credits it had a rather profitable quarter.
Fraser Papers blamed those same credits, which are being lavished on kraft pulp mills in the U.S., Friday for its decision to shut indefinitely a coated-paper machine at its Madawaska, Maine mill. That mill on the Canadian border is itself a vestige of tax policy -- the former practice of placing tariffs on imported paper but not on imported pulp.
But what worked in the pre-NAFTA era is now backfiring on Fraser. Its pulp mills that supply Madawaska are not eligible for the black liquor credits because they are in Canada. The ideal set-up today would be just the opposite of Fraser's: kraft pulping in the U.S. to get the tax credits, paper making in Canada because its weak currency makes costs there so low.
"We are calling on the U.S. Government to close this outrageous tax loophole that unfairly benefits a select group of paper companies in the country,” Jeff Dutton, president and COO of Fraser, said in a statement yesterday. He said the credits "are providing an enormous incentive to certain of our competitors to produce at full capacity when they may not otherwise do so."
Even with tax credits distorting the paper market, the future of Madawaska's PM6 would have been shaky because of the economies of scale and newer technology on competitors' larger machines. Fraser also blamed the weak market for coated paper. The tax credits were merely the final straw.
The credits are a mixed blessing for one closely watched paper company -- giant AbitibiBowater, which filed for bankruptcy organization last month. It should qualify for millions in black-liquor credits for its U.S. pulp operations, but its Canadian pulp mills will struggle to compete against what are essentially heavily subsidized U.S. competitors.
And one of the company's strengths -- making groundwood papers that are a low-cost substitute for kraft-containing freesheet papers -- will be undermined if the tax credits enable competitors to make freesheet papers less expensively than the groundwood substitutes.
There isn't much confidence in AbitibiBowater these days. Half the voters in a recent Dead Tree Edition on-line poll predicted the company would be broken up. Only 16% thought it would emerge from Chapter 11 stronger than ever; 19% said it would emerge from Chapter 11 but still be weak. And 12% voted for "Put some butter on it; it's toast."
The credits will also cut both ways for NewPage, the largest maker of coated paper in North America. The tax credits will enrich it but will also undermine its argument that punitive tariffs should be placed on allegedly subsidized coated papers from China.