Too Big to Ignore: Subsidies to Fossil Fuel Master Limited Partnerships
Special legislative provisions have allowed a select group of industries to operate as tax-favored publicly-traded partnerships (PTPs) more than 25 years after Congress stripped eligibility for most sectors of the economy. These firms, organized as Master Limited Partnerships (MLPs), are heavily concentrated in the oil and gas industry. Selective access to valuable tax preferences distorts energy markets and creates impediments for substitute, non-fossil, forms of power, heating, and transport fuels.
Financial innovations, combined with statutory changes and regulatory rulings from the IRS have gradually expanded and routinized the conversion of tax-paying corporate assets into tax-favored MLPs. The pace of growth has been accelerating in recent years, reaching about $385 billion in fossil-fuel assets that are exempt from corporate income taxes as of the end of March 2013. Strong investor demand for MLP units, coupled with surging new investment into fracking-related oil and gas projects and a large amount of existing oil and gas assets still held as tax-paying C-corporations all indicate large scale growth in tax-favored oil and gas assets is likely in the near term.
Historically, subsidies to MLPs have been largely ignored by all federal bodies responsible for tracking government spending and subsidies. The only federal body tracking MLP-related tax expenditures is the Joint Committee on Taxation, which has been doing so only since 2008. This review also suggests that the official estimates of revenue losses may be understating the actual tax cost of fossil fuel MLPs by billions of dollars per year. Losses over the 2009 to 2012 period for which we have data may have been as high as $13.6 billion, more than six times federal estimates for the same period.
Understating MLP subsidies does nobody outside of the oil and gas industry any favors. Economic losses, market impediments to renewable energy, and headwinds against activities that can help mitigate climate change are all higher than currently assessed. Political efforts to curb or eliminate the tax preference are muted, and the costs of further expanding eligibility to new energy resources and new stages of the fossil fuel production cycle are understated. Congress eliminated tax-exempt PTPs for most sectors of the economy in 1987; Canada did the same in 2006. In both cases, the sectors adjusted and survived. The time has come to finish the job Congress began 25 years ago by eliminating tax preferences for MLPs.