U.S. House seeks to end biofuels paper tax breaks

* Tax credit intended for biofuels used by paper companies

* Limiting credit could raise $24 bln over a decade

By Kim Dixon

WASHINGTON, Nov 4 (Reuters) - U.S. lawmakers in the House of Representatives on Wednesday said they would close a loophole that lets paper companies claim a valuable tax credit for making biofuel that is already a byproduct of paper production.

Democrats on the tax-writing House Ways and Means Committee propose to close one version of an alternative fuel credit in which companies can claim about a $1 credit per gallon for producing biofuel. By limiting eligibility for the credit, the provision would raise $24 billion over a decade.

Democrats want to use the funds to help pay for healthcare reform. Bills are working their way through both houses of Congress so the provision's fate is uncertain.

The credit used by most companies now expires at the end of this year. The provision closes a more lucrative credit that companies are expected to turn to after the currently used credit expires.

The credits are intended to spur development of biofuels and are being improperly used by paper companies, critics say. So-called black liquor -- a byproduct of paper production -- is blended with a small amount of diesel fuel to claim the credit, according to Democrats.

Paper companies, for their part, say they would not qualify for the second credit, so the move is a ruse to find funds to pay for health care.