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October 07, 2003

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More than two decades ago in the wake of the energy crisis of the 1970s, Congress enacted a tax break to spur the creation of a broad-based synthetic-fuels industry to ease U.S. dependence on foreign oil. The idea was to turn plentiful coal into synthetic natural gas or synthetic crude oil.

But instead of creating a strong synthetic fuel industry in the United States, investigative reporters Don Barlett and Jim Steele reveal how the tax credit has become an easy way for corporations to improve bottom lines or to make a quick dollar at the expense of taxpayers.

Here’s how it works: A synthetic coal company buys raw coal. Under IRS rules, the chemical composition of the coal must be changed to qualify it as synthetic fuel. At the synthetic fuel plant that change often consists of spraying diesel fuel or pine tar onto the coal. The company then sells the coal to a user such as a power plant and then claims huge tax credits for manufacturing a synthetic fuel.

The problem is that to qualify for the tax credits, the maker of this so-called "synfuel" don’t have to prove that they are making a better kind of coal, one that burns more efficiently or offers any other benefit. By IRS ruling, they need only to modify the chemical composition of coal.

While corporations in a range of industries have profited millions from the tax credit, it is estimated to have cost taxpayers $4 billion since 1999.

Congress could resolve the issue by ending the credit, but it has shown little inclination to do so. The IRS launched an investigation in June into the tax credit, and industry supporters subsequently persuaded a House appropriations subcommittee to introduce a bill to call off the industrywide audit. It failed to pass in an 8-8 vote.

To preserve the credit, the synfuel industry is continuing to lobby intensely in Washington with the industry’s Council for Economic Independence meeting with officials from Congress and the IRS.

• Donald Barlett, editor-at-large, Time. Barlett co-authored the special report in this week’s Time magazine, "The Great Energy Scam" He has received two Pulitzer prizes and is co-author of six books including "America: What Went Wrong."
• James Steele, editor-at-large, Time. Barlett co-authored the special report in this week’s Time magazine, "The Great Energy Scam" He has received two Pulitzer prizes and is co-author of six books including "America: What Went Wrong."
• Kenneth Kies, managing director of the Federal Policy Group of Clark Consulting who represents the Council for Energy Independence. The firm is a leading lobbying group specializing in tax, trade, and health issues in Washington DC.