Monday Mailbag: Taxman, Part 2

09/29/14 | Maria Halmo

With the Treasury Department reviewing potential tax issues, what effect do you expect this to have on MLPs?

The Treasury Department has always had a giant list of potential tax issues to review. So far, they have not released any information that specifically targets MLPs.

The Joint Committee on Taxation (JCT), a nonpartisan committee of the US Congress, releases a study each year delineating US tax expenditures. These expenditures are tax revenues foregone due to special provisions of the tax code. This study measures the difference between taxes currently owed, and what would be owed if the expenditure were to be eliminated, with all other factors held constant. Projected MLP tax expenditures in the August 2014 study decreased to $1.26 billion per year from $1.5 billion per year in the previous year’s study. This fluctuation is not unusual as a similar thing happened in the January 2012 study. More notably, though, is the remarkably low expenditure given the size of the industry (around $600 billion in market capitalization as of the end of August). In 2012, Apple (AAPL) paid $14 billion in US income taxes, and ExxonMobil (XOM) paid $31 billion. Obviously, income taxes are based on income, not size, but even if MLPs suddenly became subject to corporate tax, the industry would likely pay less than $2 billion per year in aggregate. This is due, at least in part, to accelerated depreciation rules, which benefit MLPs that are continually building assets.

More recently, MLPs were brought up in a Senate Finance Committee hearing on energy tax policy on September 17th. The meeting was primarily focused on renewable forms of energy such as solar and wind. MLPs were mentioned as a possible structure for these investments, which would be accomplished by the MLP Parity Act (Senate Bill 795House of Representatives Bill 1696). A replay of the entire hearing is available; the discussion about MLPs begins at 1:22.

In short, we will have to wait for an update from the governmental bodies. However, even if tax change were enacted (which, by the way, took two years to pass the last time—back in 1986-1987), the revenue to be gained from taxing MLPs would barely move the needle.