How You Pay the Tax Bills of Oil and Gas Investors

Thanks to corporate America’s tireless work shifting its tax burden onto the backs of the middle class, you’re probably paying a little bit of the income taxes of deep-pocketed investors in the oil and gas pipeline business. That’s a result of a small but stunning provision buried deep in the arcane rules of the Federal Energy Regulatory Commission (FERC) that offers a small class of investors a tidy profit through a loophole in the tax code.

The ripoff starts with “Master Limited Partnerships,” or MLPs. Shares in MLPs can be traded on the stock exchange in the same way as the stocks of any mega-corporation. But unlike corporations, which pay income taxes on their profits, limited partnerships’ take is untaxed. Their profits are treated as the partners’ personal incomes.

The rule allows the owners of regulated energy pipelines to operate as MLPs, avoiding corporate income taxes. But they can still charge their customers for a share of the taxes they don’t pay. Who are their customers? Utility companies and gas stations that get their gas and oil delivered by pipeline. And that, ultimately, means you and me — people pumping gas into their tanks and paying their utility bills. The end result is that through an obscure rule, we all end up paying some of the taxes of America’s investor class.

The loophole might have remained obscured in the stilted text of the FERC proceedings if not for intrepid tax reporter David Cay Johnston, who broke the story this week for Johnston, a former New York Times reporter and author (most recently) of Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense and Stick You With The Bill, has been digging through the fine print of the tax codes and federal rules to shine a bright light on these perfectly legal rip-offs for years.

“It is not surprising if you have never heard about this tax-shifting rule,” Johnston wrote:

Unless you dig into the inordinately arcane proceedings of the Federal Energy Regulatory Commission (FERC), a small government agency that wields enormous economic power, you would be in the dark. The commission gets almost no news coverage. The very few, and brief, news reports on the cases related to the MLP charge missed the tax issue.

You would never know from looking at your utility bills and gas station receipts that the federal government has let one type of big business drill a hole in your pocket to collect income taxes, just as when looking across the surface of the planet, you cannot see the rich deposits of oil and natural gas buried under miles of water, soil, and rock. The cost is embedded in the sums your local utility or gas station pays for the natural gas and petroleum delivered via pipeline.

While you may not have heard about MLPs, readers of Barron’s and other publications for savvy investors have. In approving cover stories, Barron’s and other investment journals tout MLPs as a way for investors to earn returns of 8 percent or more each year while paying little or no income tax.

The pipeline MLP scam is one that doesn’t cause enough pain to individual consumers to ignite widespread outrage, but Johnston notes that just a penny a day from 300 million Americans adds up to big money for energy investors.

The MLP provision is a consumer rip-off at the regulatory level. The rule wasn’t debated on the floor of the Congress, and no lawmaker had to defend a yes vote to his or her constituents. It’s highly profitable, and with Washington swarmed by lobbyists it’s likely to expand to other industries. As Johnston notes, all that’s necessary is a change “so minor it does not even require a sentence to be added to…a list of industries that can be owned through publicly traded partnerships without being subject to the corporate income tax.”

If you build a loophole, they will come. “If this tax-shifting policy continues unchecked,” writes Johnston, “you can expect one thing: well-funded and determined efforts to expand it to other rate-regulated monopolies.”

Energy pipelines are big business, but as Johnston notes, they’re “small-time compared with electric, gas, cable, water utilities, and the railroads.”