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  • Energy Tax Facts
  • 20 Jun 13

NAPTP Responds to NY Times Article on Oil and Gas MLPs

The following is a guest blog post from the National Association of Publicly Traded Partnerships (NAPTP).

In his latest New York Times entry – How the I.R.S. Encourages Oil and Gas Spinoffs – Mr. Fleischer is correct to assert that if Congress were to pursue comprehensive tax reform, it must examine our current corporate tax system and determine whether or not changes must be made to improve its effectiveness. However, his assumption that master limited partnerships (MLPs) somehow constitute a “loophole” in our tax code is a mischaracterization and fails to recognize the important reasons why Congress determined that MLPs appropriately qualify for pass-through tax treatment.

The rules governing MLPs were not enacted as part of the Tax Reform Act of 1986, which contrary to Mr. Fleischer’s assertion lowered rates for corporations as well as individuals.  It was the following year, in 1987, that Congress took up the question of which business entities should be subject to corporate tax.  The fact is lawmakers decided that the energy industry, which is vital to our country’s well-being and had always raised capital through partnerships, along with the real estate industry and investments generating passive income like interest and dividends, should continue to attract investor capital through the use of MLPs.  In addition, the language of the law they passed makes it clear that MLP qualification was intended to apply to a very broad range of natural resource activities.

Fast forward to today and the vast majority of MLPs operate in the midstream energy sector, which is focused on activities such as gathering and processing; natural gas compression; transportation of traditional fuels and biofuels by pipeline, ship, or truck; storage; and distribution services. In summary, MLPs are now an integral way our nation finances our expansive energy infrastructure and ensures that a wide variety of energy products make their way efficiently and safely from the production fields to American homes, businesses and communities. These critical activities also have the added benefit of supporting approximately 330,000 quality U.S. jobs.

The increase in the number of qualifying MLPs that Mr. Fleischer refers to is due primarily to the fact that MLPs do not just own and operate existing midstream assets; they are building, expanding, and operating new infrastructure projects associated with America’s transformational “energy boom”. Some of these new production areas do not have the infrastructure required to process and transport the underlying resources; others have overwhelmed the infrastructure that does exist.

And while MLPs are formed for a number of reasons, it is the pass-through tax treatment that makes the MLP structure such an effective vehicle for energy infrastructure investment. Pass-through taxation lowers the cost of capital for a capital-intensive industry and provides ordinary investors with a reliable income source in return for participating in the build-out of U.S. energy infrastructure.

If MLPs were taxed at the corporate level, there would initially be significant disruptions in the financing and construction of pipelines and related facilities. This reduction in investment and construction would directly lead to higher prices for gasoline, diesel fuel, electricity, and other forms of energy in the United States. Consequently, this would lead to larger negative impacts on the broader U.S. economy.

Therefore, although tax reform is a worthy aspiration for the U.S., it would be bad policy and extremely short-sighted to pursue reform at the expense of building out the nation’s energy infrastructure – an endeavor that in itself would lead to greater investment, economic growth and job creation in America.

The National Association of Publicly Traded Partnerships, formerly the Coalition of Publicly Traded Partnerships, is a trade association representing the publicly traded limited partnerships (PTPs) that are commonly known as master limited partnerships (MLPs), and those who work with them. Learn more about the group on their website