Gan- Green: Renewable Energy Tax Credit and Corporate Favoritism

June 08, 2012

Sen. Christopher A. Coons, (D-Del) and Sen. Jerry Moran, (R-Kan) have co-sponsored a bill which has just been introduced that would extend Master Limited Partnership (MLP) status to renewable energy companies. Currently, only oil and natural gas companies can organize under this structure. MLP structured firms utilize their status to be traded like C corporations, but are subject to the rules of partnerships. Under this system these companies are subject to taxation only once. While this change has been heralded as “an artful compromise that allows us to move past the current impasse where Democrats introduce bills that would strip tax provisions that benefit oil and gas and Republicans introduce bills that strip tax provisions that favor renewables," further questions should be asked about the overall implications for the tax code.

The compromise focuses narrowly on piecemeal corrections to the existing corporate tax code, further complicating matters. Just two years ago, in arguing for the repeal of the Section 199 deduction enjoyed by oil and natural gas companies, the Treasury recognized that special tax treatment “distorts markets by encouraging more investments in the oil and gas industry than would occur under a neutral system. To the extent the lower tax rate encourages overproduction of oil and gas, it is detrimental to long-term energy security." Of course, this argument applies to green energy too. Additional credits for renewable energy companies distort markets by encouraging overinvestment in “green” companies on the margin.

Instead of picking winners and losers through the tax code, would it not be more prudent to scrap the special status given to MLPs? After all, the US has the highest corporate tax rate in the Western industrialized world, which is disadvantageous to international competition, job creation, and long term growth. By removing the special status and lowering the overall rate, corporations would gain access to financial capital based on their potential future profitability, rather than their status as a favored industry of Congress. This measure would prevent the distortion and overinvestment in green industries sure to occur if the bill is passed. The misallocation of resources will just be another unseen cost of a non-neutral tax code.         

For more on corporate tax reform, click here.

Follow Scott Drenkard on Twitter @ScottDrenkard.

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