US Tax Writers Mulling Possible Synfuels Credit Changes

U.S. congressional negotiators are discussing the alteration of the tax credit for synthetic fuel produced from coal, people familiar with the discussion said Friday.

 

 

Details of the proposal are murky because House and Senate tax writers met Friday behind closed doors and declined to comment on their discussions. 

Tax writers are seeking to finalize a $70 billion tax-reduction bill that would renew reduced rates for capital gains and dividends as well as to provide relief from the Alternative Minimum Tax.

House Ways and Means Chairman Bill Thomas, R-Calif., and Senate Finance Committee Chairman Charles Grassley, R-Iowa, met for several hours in the Capitol Friday morning but didn't report any progress.

Negotiators have been seeking ways to raise revenue to offset a variety of tax cuts.

In that context, the "Section 29" tax credit for synthetic fuel produced from coal - which several Democrats have called an excessive corporate subsidy - is being eyed as a possible source of tax revenue.

The Senate-passed tax bill contained a measure to raise about $152 million through 2016 by modifying the formula by which the Section 29 synthetic fuel tax credit is determined.

The measure would calculate the credit based on oil prices from the previous year rather than the current year. This would eliminate situations in which synfuels producers discover they don't qualify for the credit mid-year when the index now is calculated.

It also would remove certain limits so production of coke, a form of coal used in steel mills, would qualify for a related fuels credit.

Two lobbyists familiar with the discussions said Thomas opposes the synthetic fuels provision. This plan may have been dropped in subsequent talks due to House opposition, one lobbyist said.

Generally speaking, the synfuels tax credit benefits companies such as TECO Energy Inc. (TE), Progress Energy Inc. (PGN) and Marriott Corp. Progress Energy said the credit remains under discussion.

"We have been working with lawmakers on the specific tax provision and there are a lot of moving parts," Progress spokesman Keith Poston said.

He called the provision "a good idea" and "an important provision that we're strongly supporting."

Congress created the tax credit more than two decades ago to encourage U.S. companies to develop more energy from domestic fuel sources and reduce dependence on foreign oil.

It has come under repeated attack as an excessive corporate subsidy. Rep. Rob Andrews, D-N.J., has said the tax credit has failed on both fronts by not providing the proposed energy and causing pollution.

Rep. Lloyd Doggett, D-Texas, also has denounced the credit as corporate welfare. In 2004, he proposed to repeal the credit, saying this would save the federal government about $2.8 billion over five years.

The Internal Revenue Service said in 1986 that coal used to create synthetic fuel must undergo significant chemical change to qualify for the tax credit. Critics charge companies have done little more than spray crushed coal with fuel or other substances - a technique derided as "spray and pray."

In 2003, the IRS said companies will need to meet tougher record-keeping and testing requirements before they can qualify for the synthetic fuel tax credit.

The IRS suggested some synthetic fuel manufacturing processes shouldn't qualify for the tax benefit since they don't produce a level of chemical change necessary for the credit.

-By Rob Wells, Dow Jones Newswires; 202-862-9272 rob.wells@dowjones.com

(Maya Jackson-Randall contributed to this report.)