It’s always tough to get a new business off the ground. It has proved extraordinarily tough for renewable energy companies, despite all the subsidies. Congress could help. It could allow renewable energy companies to organize as Master Limited Partnerships (MLPs). Of course, that would require liberalizing current legal requirements and qualifications for MLPs.
MLPs allow a company to organize in such a way that its shares are publicly traded (meaning expanded access to cheaper capital), but taxed only once. Income passes straight to the partnership’s owners and is taxed according to the income tax, unlike other publicly traded companies that pay corporate taxes as well as taxes on dividends and capital gains.
In the energy sector, mineral extraction, natural gas, oil, pipelines, geothermal and the transportation and storage of ethanol, biodiesel and other alternative fuels all have the ability to form MLPs. But renewable energy generation (such as wind and solar projects), as well as commercial nuclear activities, do not qualify.
A market-based alternative to government subsidies, MLPs offer a more sustainable way to encourage production and attract capital. Targeted production and investment tax credits for renewable energy create government dependency on those handouts and remove incentives to innovate and lower costs.
What stands in the way of such common sense reform? It’s simply a matter of changing the definition in the tax code of who qualifies for MLP designation. As the law stands, only companies that earn 90 percent or more of their income from “passive” sources — rents, royalties, natural resource income — are allowed to form as MLPs. That’s really rather arbitrary. All energy projects, from renewables to nuclear, should be able to form MLPs. Changing this definition should be something Democrats and Republicans can rally around.
But opening renewable companies to the free market should not stop there. Proponents of including renewable energy in the definition for forming MLPs argue that we need to level the playing field and stop picking winners and losers through the tax code.
However, many targeted tax credits for all energy sources exist beyond MLPs. In fact, the tax code has been an increasingly popular method by which politicians and bureaucrats can favor one industry over another. The number of targeted tax credits more than tripled from 1999 to 2007.
The wisest and simplest way to proceed is to remove all targeted tax credits and subsidies for all energy sources. That should be accompanied with a broad lowering of the corporate tax rate. The net effect would be a more market-based energy economy that keeps the government out of energy decisions and leaves them in the hands of American producers and consumers. It would be a boon to both — especially to new companies looking for investors to help them launch.
And here’s another common sense reform: Make immediate expensing permanently available for all business investments. Immediate expensing for all new plant and equipment costs — for any industry or type of equipment — would let new equipment come online faster, which would improve energy efficiency and overall economic efficiency.
Together, these three changes — liberalizing MLPs, removing targeted tax credits, and allowing all businesses to immediately expense their costs — would go a long way toward removing man-made barriers to get renewable energy companies off the ground and moving. The fewer unfair market barriers renewable energy companies have to hop, the more access these companies have to healthy competition and American consumers — the best, first, and final arbiters of market winners and losers.
-Nicolas Loris is the Heritage Foundation’s Herbert and Joyce Morgan Fellow. He and research associate Katie Tubb work on energy and environmental issues in Heritage’s Roe Institute for Economic Policy Studies.