Private Equity’s Tax-Advantaged Rivals
BY CHRISTOPHER SWANN
American buyout barons have new tax-dodge rivals: master limited partnerships.
The low tax rates on private equity bosses’ so-called carried interests save them $1.3 billion a year, according to the United States Treasury, an advantage critics want wiped out. But new data show investors in energy partnerships are now costing Uncle Sam a similar amount thanks to an outdated Internal Revenue Service perk from the 1980s. Both loopholes should be closed.
Lobbyists for master limited partnerships have claimed that the sector’s exemption from corporate income tax costs the Treasury Department about $300 million annually. But as the sector has grown, so has the amount the Treasury Department misses out on. The bipartisan Joint Committee on Taxation says that the annual bill will reach $1.6 billion by 2016. That’s a big enough chunk of change to attract the attention of deficit hawks in Congress.
Given the sector’s expansion, the tax cost of master limited partnerships is likely to rise further. Since the start of 2006, the market value of the top 50 partnerships has climbed fourfold to around $312 billion — far outperforming the Standard & Poor’s 500-stock index along the way – and the number of master limited partnerships over all has nearly doubled. The tax break has also encouraged the sector to spread beyond its roots in pipelines into oil refining and even mining the sand used in hydraulic fracturing.
The exemption for master limited partnerships may have looked sensible when it was adopted in 1987 to help stem declining United States oil production. With oil output booming and master limited partnerships starting to sprawl, it now seems a wasteful subsidy. Supporters argue that taking away the break would slow energy production and infrastructure building. But just as private equity chiefs are unlikely to cut back their activities if forced to pay somewhat higher taxes, there are still adequate economic returns available on energy-related activities without extra help from the I.R.S.
Scrapping both tax perks would only bring in about $3 billion a year — around 0.4 percent of the $845 billion budget deficit forecast by the Congressional Budget Office. But it would be a start, with little downside. And with a shortfall this big, every little counts.