Trump’s Tax Plan: More Questions than Answers for MLPs
Trump’s tax plan
President Trump’s tax plan, proposed on September 27, 2017, leaves many unanswered questions for MLP investments. So, investors need to wait for more details to assess the final impact of the plan. In this series, we’ll discuss the possible impact of the plan if it gets approved. We’ll also discuss the questions that remain unanswered.
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Lower corporate tax rate
The new framework lowers the corporate tax rate to 20% from 35%. It doesn’t impact MLPs directly. MLPs are pass-through entities—they don’t pay corporate taxes. However, a lower corporate tax rate slightly reduces MLPs’ attractiveness compared to C corporations. The tax benefit that MLPs enjoy would be reduced.
Lower tax rate for partnerships
Now, there’s some haziness. The framework limits the maximum tax rate for small businesses to 25%. It includes “businesses conducted as sole proprietorships, partnerships and S corporations.” The framework expects to “adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”
If the lower rate becomes applicable for MLPs, it will be positive. However, the impact will only be clear when a detailed and approved framework becomes available.
So far, the Alerian MLP ETF (AMLP) has fallen 11.5% in 2017. The energy sector, including MLPs, has been hit significantly by sustained weakness in crude oil prices. Enterprise Products Partners (EPD), Energy Transfer Partners (ETP), and Magellan Midstream Partners (MMP) have fallen 4%, 25%, and 6%, respectively, year-to-date. Interestingly, Williams Partners (WPZ) has risen 1% during the same period.
Read What Drove MLPs’ Performance in the Week Ended September 29? to learn how MLPs performed last week.
So far, we discussed the framework of the new tax plan proposal. The plan will likely have a very limited impact on MLPs. It isn’t clear yet if the plan will have a positive impact on MLPs.
In the next part, we’ll discuss one more proposal that should have a positive impact on MLPs.