From Top Kill to tax kill

From the Huffington Post:

"No "top kill" or "blind shear ram" can stem this leak, which is costing taxpayers billions. And unlike the Deepwater Horizon leak, which will eventually be closed off, this costly tax loophole is poised to grow much larger."

This is based on a story by the U.S. tax writer David Cay Johnston in Tax Notes. A simplified explanation is available on youtube, where Johnston explains how anyone filling up for gas in the U.S. is "being forced to pay the income taxes of some of the wealthiest people in America." The full details are available here.

In brief, utilities in the U.S. are regulated monopolies that set rates based on formulas for a "just and reasonable rate of return."

Johnston discovered a rule buried in the regulations that lets companies to organize as MLPs to avoid paying corporate income tax on the earnings and simultaneously apply to the government to set higher rates based on the "potential" tax costs they are avoiding by being organized as MLPs. The result is billions in added costs passed on to consumers and, according to Johnston's calculations, 75 percent higher after-tax profits for the pipeline investors.

The Tax Notes report is here, courtesy of TaxProf.