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In The Public Interest: An Oil Industry Tax-Dollar Leak No Amount of "Top Kill" Can Stop

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Just when you thought you had learned about all the ways the oil industry has taken shortcuts and dodged regulations, another one came to the surface this week, and all of us - not just those in Louisiana and the Gulf - are paying the price.

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.

At issue is an obscure ruling by the Federal Energy Regulatory Commission (FERC) which allows oil and gas pipelines to charge consumers billions in higher utility rates to cover the companies' income taxes at the same time as they organize themselves as "master limited partnerships" (MLPs) to avoid paying any taxes on their profits.

Consumers lose out twice.

First, since utilities are regulated monopolies that set rates based on formulas for a "just and reasonable rate of return," consumers end up paying for these phantom tax costs in higher monthly bills or at the gas pump. Second, taxpayers end up picking up the tab to make up for the lost tax revenue that pipeline companies avoid paying.

The scam was brought to light this week in Tax Notes (PDF), a news magazine for tax experts, in a piece by Pulitzer-Prize winning former New York Times reporter David Cay Johnston. It is also available for free at tax.com.

In "Master Limited Partnerships: Paying Other People's Taxes," Johnston follows on his 2006 investigation for the Times in which he combed through utilities' Security and Exchange Commission filings to document consumers getting charged for phantom taxes in a majority of states for billions of dollars. In those cases, the companies at least in theory faced potential tax costs, even if their taxes tended to be far less than the costs they passed on to consumers.

What Johnston found this time is worse.

The rule, buried in the FERC regulations, allows 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.

BP tried this scam back in 2004, but in a federal court, judges made clear that regulators ''cannot create a phantom tax in order to create an allowance to pass through to the ratepayer'' and that a company cannot be allowed to collect ''for the phantom income taxes it did not pay.''

But a few years later FERC quietly changed the rule. Johnston warns that the leak could turn into a flood.

If this tax-shifting policy continues unchecked, you can expect one thing: well-funded and determined efforts to expand it to other rate-regulated monopolies. Given the complexity of the issue, hiding the tax shifting would be easy -- or at least it would have been until now -- by obscuring the issues in an era when few news organizations report on regulations. Pipelines are big, but small-time compared with electric, gas, cable, water utilities, and the railroads.

Lobbyists will surely seek to add their clients to the list of industries that benefit from this loophole. And unless the Obama administration steps up to defend the public interest and shut down the massive tax-dollar leak, it is likely to turn into a geyser.

Corporations already benefit from a myriad of loopholes
that allow them to shirk paying taxes and shift the burden to taxpayers and businesses that play by the rules. Incredibly for example, Transocean, the owner of the Deepwater Horizon, has cut is tax bill by 50 percent by changing its address from Texas to Delaware to the Cayman Islands to Switzerland.

If the lack of regulation, corner-cutting, loophole-seeking and shirking responsibilities sound familiar, that's because it's déjà vu all over again. President Obama and Congress need to get some serious "top kill" going on the corporate tax loopholes which allow greedy corporations to shirk their responsibilities and add billions of dollars to the tax bills of those who play by the rules.