Master limited partnership exchange traded funds have been pushed to the side along with other yield generating assets ahead of the U.S. fiscal cliff and potential tax changes. However, the markets could be overreacting.
The market fear over MLPs stems from concerns that the Obama administration would burden the asset class with additional tax consequences as a result of the country’s burgeoning deficits. [MLP ETFs in Focus After Sell-Off on Yield, Taxes]
However, the higher rates on dividends would not affect MLPs because income generated from MLPs are not considered “qualified” to begin with and therefore did not receive the favorable 15% tax rate.
Any potential changes may not be as severe as many would think, given that both parties support energy independence and that it would be unlikely Congress would add additional constraints on the infrastructure sector, reports Stan Luxenberg for TheStreet.
Moreover, MLPs would still enjoy near-monopoly like operations since the necessary permits to layout the pipelines are hard to come by.
MLPs are pipeline infrastructure operators. As such, they charge oil companies the right to use their pipelines, so MLP revenue is less based on energy prices and more on how much volume flows through. With energy demand rising, usage of the pipelines should continue to rise as well.