Master Of My Domain: What The Heck Are Master Limited Partnerships And How Could They Boost Clean Energy?
"Master Of My Domain: What The Heck Are Master Limited Partnerships And How Could They Boost Clean Energy?"
JR: No, Master Limited Partnerships are not when Jerry, George, Elaine and Cosmo engage in The Contest. CAP‘s Acting Vice President for Energy Policy explains they are less fun, but much more useful!
by Richard W. Caperton
For years, the oil and gas industry has claimed that it only receives tax benefits that are available to every other company. This is, of course, patently false. From special treatments of royalties to so-called “percentage depletion,” fossil fuel businesses benefit from all sort of unique provisions that aren’t available to anyone else, including renewable energy companies.
Yesterday, Senator Chris Coons (D-DE) introduced legislation that would be an important step forward in fixing this imbalance. The MLP Parity Act allows renewable energy companies to receive a special tax treatment that has been the exclusive purview of fossil fuel companies for decades. Not only will the MLP Parity Act bring some balance to the energy marketplace, but it would also allow more Americans to invest in renewable energy.
At issue is something called “master limited partnerships.” (Yes, I’m aware that this name is potentially a bigger turn-off than “feed-in tariff.” Energy finance policy clearly wasn’t designed with mass marketing in mind. Please bear with me.) A master limited partnership is a form of corporate structure, just like the better-known limited liability company or C-Corporation, that has unique tax attributes. MLP’s are a type of partnership and, like other partnerships, they don’t pay a corporate income tax. Instead, all of the earnings pass directly through to the partners, who then pay taxes on the income.
What makes MLP’s a unique type of partnership is that they’re publicly traded on the stock market. The general public and other investors can buy a share in an MLP, whereas buying a share in traditional partnerships (like law firms, for example) is virtually impossible.
There are two clear benefits to being organized as an MLP rather than a traditional corporation: It lowers both the cost of taxation and the cost of capital.
First, it reduces your tax burden by eliminating “double taxation” (that is, taxation at both the corporate and individual level). Second, it gives you access to new sources of capital, which makes it easier to raise cost-effective capital. Today, if you want to raise equity money to invest in a renewable energy project, you have to approach individual investors one at a time, which effectively means that only large investors like pension funds and private equity firms can invest. MLP’s, however, can sell shares on stock markets, so that anyone and everyone can buy shares. With more potential investors, the cost of capital will go down, which makes projects more affordable.
Since 1987, only certain types of businesses have been able to enjoy the low taxes and low capital costs of MLPs. In the energy sector, MLPs are limited to businesses that derive 90 percent of their income from “depletable” resources. This is an example of our nation’s tax policy specifically working against an energy mix that’s environmentally and economically sustainable in the long term.
Senator Coons’s legislation is a simple bill that fixes this obvious problem by expanding the definition of resources that qualify for MLP treatment to include wind, solar, biomass, and other renewables. This is a clear “all of the above” strategy that treats all energy sources fairly, which is why it has bipartisan support, including from co-sponsor Jerry Moran (R-KS).
The MLP Parity Act is an important step forward, but it’s not a substitute for extending the Production Tax Credit. And, it’s worth keeping in mind that the Obama Administration has called for ending all MLP’s, not expanding them to new industries.
As Congress considers tax reform in the next year, they should follow Senator Coons’ lead and work to end special tax advantages for the fossil fuel industry.
Richard W. Caperton is Acting Vice President for Energy Policy at the Center for American Progress.
JR: For those who aren’t Seinfeld fans, a 10-minute highlight of the other master partnership can be found here.