As Roger Conrad notes at the outset of this issue, unit prices for master limited partnerships (MLP) have struggled because of widespread fear of federal government-induced austerity in 2013 that will put a significant drag on economic growth.

Experts who’ve studied the problem, including economists at the non-partisan Congressional Budget Office, suggest strongly that allowing the so-called Bush tax cuts to expire for all income brackets and implementing “sequestered” spending cuts without revision would likely have resulted in a first-half recession.

Alas, a compromise bill passed in the US Senate early Tuesday morning and in the House of Representatives late Tuesday night. The legislation prevents hundreds of billions of dollars in tax increases set to kick in for the majority of Americans.  And it suspends the scheduled automatic spending cuts for two months.

But the drama will rebuild as we approach March, as there was no provision in the deal crafted by Senate Minority Leader Mitch McConnell (R-KY) and Vice President Joe Biden to increase the federal statutory debt limit, which President Barack Obama had included in his opening gambit after November’s election.

The next round of negotiations over the USD110 billion in automatic spending cuts set to go into effect in 2013 will undoubtedly be colored by the fact that the country officially hit its debt ceiling Monday. The Treasury Dept is undertaking “extraordinary measures” to put off default.

But if Congress doesn’t raise the ceiling by late February or early March, the Treasury won’t be able to pay all of its bills.

Fire-eating House Republicans, unhappy with the recent compromise bill crafted in the Senate that extended the Bush tax cuts for most of the country, could threaten to destroy the full faith and credit of the United States if they don’t get big cuts to various programs such as Medicare and Social Security.

What’s going on in that lovely town built on a swamp is murky as ever. Although the “fiscal cliff” scenario was averted, on the horizon looms another potentially catastrophic debate.

Here’s what the McConnell-Biden Compromise accomplished.

The bill passed by both houses of Congress maintains current rates on income below USD400,000 for singles and USD450,000 for couples. It permanently increases tax rates on income above that to 39.6 percent from 35 percent. It’s important to note that income up to these levels will be taxed at the now permanently lower rates.

As for dividends and capital gains rates, McConnell-Biden permanently increases tax rates to 20 percent from 15 percent for single people with income over USD400,000 and couples over USD450,000. The 15 percent rate for dividends and capital gains reported by individuals and couples with incomes below these levels remains in place, permanently.

It’s important to note here that distributions paid by MLPs are taxed at ordinary rates rather than the advantaged rates for dividends established in the 2003 version of the two pieces of legislation now collectively termed the “Bush tax cuts.”

The late-breaking bill also reinstates provisions that phase out personal exemptions and deductions for incomes over USD250,000 for singles and USD300,000 for couples. It permanently indexes the alternative minimum tax for inflation, preventing millions of taxpayers from being affected. It also permanently increases tax rates to 40 percent from 35 percent on the value of estates over USD5 million.

Included in the package as well is an extension of tax cuts written into the 2009 stimulus law for five years, including a child tax credit, an expanded earned income credit and a refundable credit for college tuition. It also extends some business tax credits for a year.

The bill allows payroll taxes to rise on Tuesday to 6.2 percent from 4.2 percent on workers’ first USD113,700 of income, but it also extends expanded unemployment insurance for one year.

The deal prevents a 27 percent reduction in payments to Medicare providers for one year and it extends for nine months portions of the current farm bill, including provisions that would prevent milk prices from increasing and continued direct payments to farmers. It does eliminate conservation programs and financing for fruit and vegetable growers and organic farmers.

Concern about the “fiscal cliff’s” impact on growth had weighed on sentiment toward the energy-focused MLP sector over the second half of 2012. Resolution of this issue, however imperfect, however short-term, has fueled strong rallies for the Alerian MLP Index on the last trading day of 2012 and the first of 2013, which is up more than 5 percent since Dec. 28, 2012.

Although the McConnell-Biden Compromise says nothing about MLPs’ tax status, there remains a remote possibility that it could be part of negotiations over a broader reform of US taxation. But it is still only a possibility, and there are good reasons to believe that not only will the benefits of such structures for infrastructure improvement be recognized and protected but also extended.

In fact the only active bill before Congress would do just that: expand the range of revenue-generating activity permitted for publicly traded partnerships to include renewable energy.

On Feb. 22, 2012, the Obama administration introduced what it called the “President’s Framework for Business Tax Reform,” which included proposals for reforming the federal income tax on business income.

The headline proposal was to reduce the statutory corporate tax rate to 28 percent. At the same time the White House and the Department of the Treasury proposed closing a number of loopholes and tax expenditures in order to broaden the tax base.

The Framework included language that, if codified, would expand the scope of the corporate income tax to potentially include MLPs.

This is clearly an existential threat to MLPs as tax-efficient, high-yield investments. But it is the merest of proposals, as there are precious few details provided in a document that has absolutely no legal significance and hasn’t even found its way into a Congressional bill.

If such a proposal were enacted, income that otherwise would be taxed at the top ordinary would instead be subject to a corporate income tax of 28 percent plus a dividend tax of approximately 44 percent on earnings distributed to partners or shareholders.

It’s not clear, however, whether exceptions would be provided for certain pass-through entities that would otherwise be subject to corporate income taxation under the Framework’s proposal. There simply isn’t enough detail yet. There’s not even a bill to consider.

The 2005 report of President George W. Bush’s Advisory Panel on Federal Tax Reform suggested that if large partnerships were subjected to an entity-level tax, exceptions should be provided for regulated investment companies such as mutual funds and REITs.

If exceptions are provided for mutual funds and REITs, it’s not hard to imagine a carve-out for MLPs as well given the effective role they’ve played in directing investment to domestic energy infrastructure.

At the same time, the Master Limited Partnerships Parity Act has been introduced as a bill before both houses of Congress. This bill would amend the Internal Revenue Code to expand the range of MLPs’ qualifying income from fossil fuel-based energy projects such as oil, natural gas, coal extraction and pipeline projects to also include renewable energy projects.

This bill essentially recognizes the MLP structure as a positive instrument for development of domestic energy resources. And it has bipartisan support.