Fuel Tax Credit

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DEFINITION of 'Fuel Tax Credit'

A federal subsidy that allows businesses to reduce their taxable income dollar for dollar based on specific types of fuel costs. There are several types of fuel credits. For example, a 2005 fuel credit to companies that produce biofuels provided a tax credit to companies that combined diesel derived from biomass with diesel derived from petroleum to create an alternative fuel mixture.

BREAKING DOWN 'Fuel Tax Credit'

The black liquor tax credit, once part of the alternative fuel credit, was a tax loophole allowed to companies for using black liquor - a paper production byproduct that the paper and pulp companies were already using - mixed with diesel as a fuel source. The paper and pulp companies began adding diesel to their black liquor so they could claim a tax credit. This achieved the reverse of what the bill intended, increasing the use of fossil fuels and reducing the use of biofuels.