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Category Archives: MLP Taxation

Published
Jan 18th, 2012

Category:
MLP Market Post, MLP Taxation

MLP Implications of the Latest Annual Report from Joint Committee on Taxation

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Concerns over the potential for MLPs to be taxed as corporations arise periodically.  The concerns come in waves, often during times of political uncertainty.  The waves crested in the middle of 2011, when congressmen and senators were throwing out all manner of half-baked ideas for lowering the massive public debt in this great-ish country of ours.  MLP investors and research analysts will beat back the rumors with comments on how well MLPs have done to create much needed energy infrastructure and jobs, how taxing MLPs would damage many individual investors, and how small a piece of the pie the potential tax revenue gains from MLP taxation would be.

Yesterday, we got an update on that last point in the form an official report from Congress’ Joint Committee on Taxation (JCT).  The JCT produces a report each year with a list of all tax “expenditures”, which are basically defined as the lost tax revenues from tax breaks.  The report projects the next 5 years of Tax Expenditures for each line item, more on what the categories are below.  This year’s report indicates that MLPs are expected to cost the government substantially less in lost tax revenue than was estimated a year ago.  Conversely, taxation of MLPs represents a smaller potential gain to tax revenue based on official estimates than it represented last year and represents a very small potential revenue gain relative to the overall pie.

Click here to read the full report from the Joint Committee on Taxation, released yesterday.

There are two line items related to MLPs in the report:

  • Exceptions for publicly-traded partnerships with qualified income derived from certain energy-related activities
  • Treatment of income from exploration and mining of natural resources as qualifying income under the publicly-traded partnership rules
The total of those two line items in the report is $1.5 billion over the next 5 years, down from $2.9 billion in last year’s report, and $3.0 billion the year before.

How big a piece do MLPs represent of the overall pie?

There are 14 pages of tables with individual line items of tax expenses.  Most of the numbers and items are much larger than the MLP exemption.  In fact, MLPs represent only 0.025% of the total expenditures listed of $6.1 trillion over the next 5 years.  $6.1 trillion for 5 years works out to about $1.2 trillion per year, compared with $2.3 trillion in collected taxes for 2009′s tax year, according to the IRS.

The biggest category is commerce and housing, with a total of $1.75 trillion in tax expenditures.  This category includes large line items like the mortgage interest deduction, lower tax rates on long-term capital gains and dividends and the capital gains exemption upon death.

In terms of specific line items, the chart below highlights the top ten largest expenditures, which collectively account for $3.8 trillion in tax expenditures over the next 5 years.

I say all of this to highlight that the lost revenue from MLPs being allowed flow through status is not going to make a big difference, and it seems like there are much bigger potential sources of revenue for congress to target before they reach MLPs.

What is the Joint Committee on Taxation?

For those who are feeling helpless without Wikipedia today and are interested in what the JCT is and who is part of that committee, below I provide some details.

The JCT is a non-partisan committee consisting of 5 members from the Senate Finance Committee (3 from majority and 2 from the minority, so that’s not exactly non-partisan) and 5 members from the House Committee on Ways and Means (again 3 from majority and 3 from minority).  The main duties of the JCT are to investigate the operation and impact of taxes, to investigate methods for simplification of taxes, to report on the results of those investigations and to provide revenue estimates for all proposed tax legislation (which then become the official estimates reported for tax legislation).

Current members from the Senate:

  • Max Baucus (Vice Chairman, Montana, Democrat)
  • John D. Rockefeller IV (West Virginia, Democrat)
  • Kent Conrad (North Dakota, Democrat)
  • Orrin Hatch (Utah, Republican)
  • Chuck Grassley (Iowa, Republican)

Current members from the House:

  • Dave Camp (Chairman, Michigan, Republican)
  • Wally Herger (California, Republican)
  • Sam Johnson (Texas, Republican)
  • Sander Levin (Michigan, Democrat)
  • Charles Rangel (New York, Democrat)

In addition, there is a staff of 63 people currently employed by this committee, including economists, statisticians, computer analysts, accountants and attorneys, who I guess are responsible for the analysis and determination of the numbers in the reports put out by the committee.  Some of them are also probably responsible for getting coffee and making copies.

Reason for the large staff: this committee receives between 6,000 and 7,000 requests from individual members of Congress each year for tax revenue estimates, a figure that has doubled since 2004, and was only 484 in 1986.

How the Fish Sticks are Made

Starting point for a revenue estimate is the Congressional Budget Office 10-year projection of Federal receipts, also called the revenue baseline.  The baseline assumes the status quo of law for the budget period of 10 years.  The JCT also assumes a fixed gross national product for the country during the projection period.  The JCT then uses individual tax return data from the Statistics of Income Division of the IRS, in combination with government data, survey data, constituent data and third party data to develop its estimates.  The JCT uses “several highly developed microsimulation tax models” to estimate revenue impact from tax law changes.

Details of how the JCT arrives at specific estimates is not provided, but the JCT has released a pamphlet that describes the general methodologies employed in estimating.  So, its not real clear what causes changes in the estimates from year to year.

Take MLPs, for example.  With 11 IPOs in 2011, and a larger pool of investors than this time last year, you would think that the estimate of tax revenue potentially gained from taxing MLPs would have increased year over year.  I guess its good news that it went down, but that also implies it could go up next year if a staff member changed the calculation or fixed an errant formula somewhere in the process.