Joint Tax Committee Quadruples Cost Estimate of MLP Tax Break for Oil and Gas Pipeline Companies

Bloomberg:  U.S. Quadruples Pipeline Tax Break Cost to $7 Billion:

A tax break used by oil and gas pipeline companies ... 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. ...

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. ...

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%. 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.  

For more, see Karen C. Burke (San Diego), Passthrough Entities: The Missing Element in Business Tax Reform, 40 Pepp. L. Rev. ___ (2013).