A tax break used by oil and gas
pipeline companies such as
Kinder Morgan Energy Partners LP (KMP) will
cost the U.S. government $7 billion through 2016, about four
times more than previously estimated, Congress’s tax
scorekeepers said this month.
The nonpartisan Joint Committee on Taxation quadrupled its
cost
estimate for exempting the fast-growing “master limited
partnerships” from corporate income tax in the year ended in
September to $1.2 billion from $300 million. The annual cost
will rise to $1.6 billion by fiscal 2016, the committee said.
The revision reflects the growth of tax-free publicly
traded partnerships. They have taken over the U.S. pipeline
business and are expanding into the rest of the oil and gas
industry, partly by gobbling up dozens of tax-paying companies.
With President
Barack Obama and congressional Republicans
calling for a tax overhaul, the higher cost estimate may make it
harder for industry to protect the MLP subsidy, said John Buckley, a tax professor at Georgetown University Law Center.
“A bigger number always means it’s a bigger target,” said
Buckley, who as a Democratic congressional aide helped draft the
1987 law that included the partnership exemption.
Canada ended a similar break in 2011, saving an estimated
$500 million a year.
Wind, Solar
Lawmakers led by Senator Chris Coons, a Delaware Democrat,
are pursuing a proposal to extend the MLP break to renewable
energy companies such as wind and solar-power producers.
Proponents in both chambers of Congress introduced bills last
year that failed to win passage.
Coons plans to reintroduce the bill in March, said Ian
Koski, a spokesman for the senator.
The estimate increased primarily because the latest data
show MLP’s are generating more income than before, said Thomas Barthold, the chief of staff of the committee, in an e-mail.
The market value of the MLP industry has grown to about
$370 billion, more than double its size as recently as 2009,
according to data compiled by Bloomberg. Pretax income for about
90 MLP’s rose to a record $16.9 billion in 2011, Bloomberg News
reported last month.
Last year, the committee
estimated the cost of the MLP
exemption at $1.4 billion for the four years ended in 2015. The
new estimate pegs the cost during those same four years at about
$5.4 billion.
Partnership Structure
MLP’s don’t pay corporate income taxes because they’re
structured as partnerships, and they don’t distribute taxable
dividends. Individual members pay personal income tax on any
profits, offsetting to some extent the government’s loss of
revenue.
In 1987, six years after large businesses started forming
publicly traded partnerships, Congress passed a law requiring
them to pay the same taxes as corporations, a rate that is
currently 35 percent.
The law included an exception for industries involving oil
and gas and other natural resources. Since then, the pipeline
industry has mostly shifted to the partnership structure. Two of
the biggest are Houston-based Kinder Morgan, run by billionaire
Richard Kinder, and Enterprise Products Partners LP.
The law spurs investment in energy infrastructure that
outweighs the cost of the lost tax revenue, said Mary Lyman, the
executive director of the
National Association of Publicly
Traded Partnerships. She said MLP’s that transport and store oil
and gas spent $113 billion on capital investment from 2007 to
2012.
Good Ratio
“You compare that to even the higher estimate. That seems
like a good benefit to cost ratio,” Lyman said.
Corporate tax overhauls outlined by both Obama and Dave
Camp, the Republican chairman of the House Ways and Means
Committee, would lower the corporate tax rate while eliminating
some breaks. Any reduction in the corporate rate would lower the
cost of the subsidy for MLP’s, even if their special tax status
is left in place, Buckley said.
Investor demand for MLP equity securities, known as
partnership units, has led a variety of companies from outside
of the pipeline business to convert to the form. New MLPs that
went public in the past two years include
CVR Partners LP (UAN), which
uses refinery byproducts to make fertilizer, and
Hi-Crush
Partners LP (HCLP), which digs up the sand used in the hydraulic
fracturing of oil and gas wells.
Congress expanded the break in 2008 to include companies
that transport and store biofuels such as ethanol.
To contact the reporter on this story:
Zachary Mider in
New York at
zmider1@bloomberg.net;
Richard Rubin in Washington at
rrubin12@bloomberg.net
To contact the editor responsible for this story:
Daniel Golden in Boston at
dlgolden@bloomberg.net
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