How Congress Can Level the Energy Playing Field

With energy costs steadily rising, the debate surrounding America’s energy future is starting to heat up. The conversation will center around energy independence and will inevitably include a call for an “all-of-the-above” energy strategy. While such a method should garner support from both sides of the aisle, taxpayers should be concerned that this could lead to market-distorting policies that pick winners and losers. Lawmakers should promote free markets and limited government by leveling the playing field rather than playing favorites.

One tax opportunity some energy firms take advantage of is the ability to form Master Limited Partnerships (MLP). MLPs provide the tax benefits of a partnership, where profits are only taxed once, but, at the same time, shares can be publicly traded and therefore subjected to market pressure. Unlike other companies that are subjected to multiple layers of taxation, the income from MLPs passes straight to the shareholders where it is taxed according to the shareholder’s income bracket. Generally, this makes MLPs an attractive acquisition for investors and expands access to cheaper capital for energy projects.

This gives an enormous edge to capital-intensive projects like pipelines, natural gas and mineral extractors, or biodiesel producers, all of which are able to organize as an MLP. However, renewable energy projects — namely, wind, nuclear, and solar — are not able to form an MLP under the current tax code. As a result, many capital-intensive renewable energy projects are either starved of proper financing and or not undertaken at all.

Instead of continuing to throw tax credits at renewable energy sources, a more market-centered strategy would be to grant all energy projects the option to form an MLP. This approach would make the energy sector fairer, encourage energy production by drawing new capital, and reduce the need for government to be involved in the market.

Part of the solution is found in the “Master Limited Partnerships Parity Act,” bipartisan legislation authored by Sens. Moran (R-KS) and Coons (D-DE), and their House counterparts Reps. Poe (R-TX) and Thompson (D-CA). Their legislation would level the playing field for renewable sources by extending the same tax benefits that non-renewable sources already enjoy. As a result, renewable power projects would finally have access to the same low-cost capital as other energy sources. 

According to industry data, expanding MLPs to renewables could mean up to an additional $5.6 billion capital inflow into the industry between now and 2021. Access to more capital will assuredly increase the amount of new clean energy projects across the country that may have been paused due to a lack of investors. With billions of new capital flowing to this sector, there will be more construction and energy jobs, greater energy production, and expanded economic activity.

While the MLP tax structure was not changed in the recent Tax Cuts and Jobs Act, the tax reform law did make many beneficial changes for pass-through entities. In addition to a new 20 percent deduction for pass-through income, it substantially lowered individual tax rates, which will allow more Americans to keep more income in their pockets. The new law also permits temporary full expensing for all business investments, allowing firms to fully deduct the cost of new equipment and building materials. This will be a boon for all businesses, including the clean energy industry. 

These pro-growth changes to the tax code are great and long overdue, but the work is not yet finished. Aside from adjusting the tax status for MLPs, lawmakers should also explore ways to target market-distorting tax credits. Far too often politicians use tax credits to artificially prop up unprofitable businesses. Lawmakers should specifically eye the Renewable Energy Production Tax Credit and the Solar Investment Tax Credit, which are expected to reduce revenue by $24 billion.

All energy projects, be they oil, shale, wind, solar, or nuclear should be allowed to form MLPs. Such a change, coupled with the pro-growth changes to the federal tax code would be a boon to America’s future energy industry. Reforming market-distorting tax credits would also go a long way towards removing government’s role in the energy market, which will benefit consumers, businesses, and the economy as a whole. These changes should put America’s energy producers on a path for prosperity and ensure a more secure energy future.

Thomas Aiello is a policy and government affairs analyst with the National Taxpayers Union, a nonprofit dedicated to lower and fairer taxes at all levels of government.