Subject All Publicly Traded Partnerships to the Corporate Income Tax

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Revenues 0.3 0.5 0.6 0.6 0.6 0.6 0.6 0.7 0.7 0.7 2.6 5.9

Source: Staff of the Joint Committee on Taxation.

This option would take effect in January 2017.

Until 1981, all companies whose shares were available for purchase through a public exchange were incorporated and subject to the corporate income tax. The profits of those corporations were, and continue to be, paid to shareholders as dividends or capital gains and taxed again to some extent under the individual income tax. During the 1980s, however, partnerships that were not subject to the corporate income tax began raising capital by offering shares, or “units,” on public exchanges. The profits of such partnerships were allocated among the partners and added to their taxable income. Income that was allocated to partners who were individuals (as opposed to corporations) was subject only to the individual income tax. By avoiding the corporate income tax, the partnership form of organization reduced the cost of investing by individuals, making it an increasingly popular choice.

In 1987, the Congress made newly created publicly traded partnerships subject to the corporate income tax unless 90 percent or more of the partnership’s revenues were derived from qualifying activities—specifically, activities related to natural resources (including exploration, mining, refining, transportation, storage, and marketing), real estate, and commodity trading. Preexisting publicly traded partnerships that did not meet the 90 percent threshold in 1987 were exempted from that restriction, but only a handful survive today—the rest having incorporated, abandoned the public trading of their units, or been acquired by other companies.

This option would eliminate the exceptions enacted in 1987 and make all publicly traded partnerships subject to the corporate income tax. Between 2017 and 2026, it would increase revenues by $6 billion, according to estimates by the staff of the Joint Committee on Taxation.

An advantage of this option is that it would treat the taxation of different economic activities more similarly. When the tax treatment of economic activities is more uniform, investors are more likely to direct their money to where it would realize the greatest return, not to where it would save the most in taxes. Such efficient investing would increase the overall size of the economy. The option would also encourage companies to choose a form of organization and a method of raising capital that best suit the company, not those that minimize tax liabilities.

Most of the affected companies are engaged in activities related to oil and gas (especially pipeline transportation), and the option would probably increase the price of those products. An advantage of the option is that those higher prices would reduce the consumption of oil and gas and the harmful effects of carbon emissions and other pollutants associated with that consumption. However, increases in the costs of oil and gas would probably cause the cost of transporting all types of goods to rise. A disadvantage of the option is that the resulting increases in the price of goods would probably place a greater burden on lower-income households than on higher-income households.

Another disadvantage of the option is that it would increase the cost of investing in activities that are currently exempt from the corporate income tax and thus would probably reduce such investments. A reduction in investment in oil and gas pipelines could leave regions of the United States with a less reliable energy supply.