What Does the Obama Budget Mean for MLPs?

 

On February 26, the federal Office of Management and Budget (OMB) released the budget for FY 2010 entitled "A New Era of Responsibility: Renewing America’s Promise," which outlines the Obama Administration's tax and spending proposals for the next fiscal year and beyond.  The budget projects a federal deficit of $1.75 trillion for 2009, which is 12.3 percent of GDP and the highest percentage of GDP since the Second World War. In order to begin reducing the deficit, the budget, while directing substantial funding to stimulus programs and the priority areas of health care, education and energy, and cutting taxes for middle income taxpayers, also contains tax increases on upper income individuals and certain corporate taxpayers and cuts in spending for some areas outside of the President's priorities.

The Administration's tax proposals, as outlined in the budget, contain no provisions directly aimed at publicly traded partnerships.   Only one of the tax proposals outlined in the budget has the potential to impact MLPs solely because of their status as partnerships. 

That provision is the proposal, passed by the House but not the Senate in the last Congress, to tax "carried interest" paid by partnershipsto investment managers as ordinary income, regardless of the character of the income (for an explanation of the carried interest issue and how it would affect MLPs, click here).  The provision is projected to raise $24 billion over 10 years. Its inclusion is not a surprise, as President Obama as a Senator expressed support for changing the treatment of carried interest and cosponsored the Baucus-Grassley bill  that would have taxed investment management PTPs as corporations -- but he has never taken any position on MLPs beyond that (see the article on this website, "Does Barack Obama Support Taxation of PTPs? ")

Many of the energy MLPs, particularly those engaged in production of oil and gas, could be affected by the budget's energy proposals, which tend to direct spending and tax benefits away from oil and gas and towards alternative energy, and by provisions aimed at reducing carbon emissions.  These impacts are general to all companies in the energy industries and are not limited to MLPs, and they will vary among MLPs depending on each company's particular activities.  These proposals include:

• A new excise tax on offshore oil and gas production in the Gulf of Mexico, to begin in 2011
  
• Repeal the enhanced oil recovery credit
• Repeal the marginal well tax credit
  
• Repeal expensing of intangible drilling costs
  
• Repeal deduction for tertiary injectants
  
• Repeal passive loss exception for working interests in oil and natural gas properties
  
• Repeal manufacturing tax deduction for oil and natural gas companies
  Increase geological and geophysical amortization period for independent producers to seven years
  
• Repeal percentage depletion for oil and natural gas
  
• Repeal ultra-deepwater oil and gas research and development program
  
• Charging user fees to oil and gas producers for processing drilling permits on federal lands
  
• "Increasing the return from oil and gas production on Federal lands through administrative actions, such as reforming royalties and adjusting rates."
  
• Implement a cap and trade program to reduce carbon emissions.
  
• Funding to develop low-carbon coal technologies
  
• Funding for biofuels and other clean energy technologies

At this point, these are all simply proposals.  It will be up to Congress to decide whether to adopt any of the legislative proposals in the Administration's budget and, if so, to write the specifics of how the provisions will work.  

To download a copy of the FY 2010 budget from the OMB website, click here.