22. INCOME TAXES

We are not a taxable entity for United States federal income tax purposes or for the majority of states that impose an income tax. Taxes on our net income generally are borne by our unitholders through the allocation of taxable income. Our income tax expense results from the enactment of franchise tax laws by the State of Texas that apply to entities organized as partnerships, and which is based upon many but not all items included in net income.

We compute our income tax expense by applying a Texas state franchise tax rate to modified gross margin. For the years ended December 31, 2016, 2015 and 2014, our Texas state franchise tax rate was 0.4%. Our income tax expense is summarized below:

	2016		2015		2014
	(in millions)
Current state	$	1.8	$	5.6	$	5.5
Deferred state		(0.9)		(0.7)		4.1
Total income tax expense	$	0.9	$	4.9	$	9.6

Our effective tax rate is calculated by dividing the income tax expense by the pretax net book income or loss. The income base for calculating our income tax expense is modified gross margin for Texas rather than pretax net book income or loss. As a result, this difference is the only reconciling item between the statutory and effective income tax rate. Our effective tax rate for the years ended December 31, 2016, 2015 and 2014, is as follows:

	2016			2015			2014

	(in millions)
Income (loss) before income tax expense	$	(40.4)		$	459.2		$	749.6
State income tax expense	$	0.9		$	4.9		$	9.6
Effective income tax rate		(2.2)	%		1.1	%		1.3	%

The Texas Franchise Tax Reduction Act of 2015 was signed into law on June 15, 2015. The law applies to original reports filed on or after January 1, 2016, and permanently reduces Texas franchise tax rates. Specifically, the general 1.0% rate will be reduced to 0.75%. As a result of this change, we recorded a reduction in our deferred income tax payable reflected in “Other long-term liabilities” on our consolidated statement of financial position of approximately $5.4 million at December 31, 2015.

At December 31, 2016 and 2015, we have a current income tax refund receivable of $1.0 million and a current income tax payable of $1.1 million, respectively. In addition, at December 31, 2016 and 2015, we included a deferred income tax payable of $20.0 million and $20.9 million, respectively, in “Other long-term liabilities,” on our consolidated statements of financial position to reflect the tax associated with the difference between the net basis in assets and liabilities for financial and state tax reporting. We recognize deferred income tax assets and liabilities for temporary differences between the relevant basis of our assets and liabilities for financial reporting and tax purposes. The impact of changes in tax legislation on deferred income tax liabilities and assets is recorded in the period of enactment.

Accounting for Uncertainty in Income Taxes

The following is a reconciliation of our beginning and ending balance of unrecognized tax benefits in millions:

	2016		2015		2014

	(in millions)
Unrecognized tax benefits at January 1	$	36.5	$	33.2	$	29.8
Additions for tax positions taken in current period		2.3		3.3		3.4
Unrecognized tax benefits at December 31	$	38.8	$	36.5	$	33.2

As of December 31, 2016, 2015 and 2014, the entire balance of unrecognized tax benefits would favorably affect our effective tax rate in future periods if recognized. It is reasonably possible that our liability for unrecognized tax benefits will decrease by $2.8 million during the next twelve months. We also recognized interest accrued related to unrecognized tax benefits and penalties as income tax expense. As of December 31, 2016, we accrued penalties of $1.5 million and interest of $1.3 million. As of December 31, 2015, we accrued penalties of $1.2 million and interest of $0.8 million. Furthermore, we recognize accrued interest income related to unrecognized tax benefits in interest income when the related unrecognized tax benefits are recognized. As such, at December 31, 2016 and 2015, $1.0 million and $0.8 million of accrued interest income, respectively, has not been included in the balance of unrecognized tax benefits.

Our tax years are generally open to examination by the Internal Revenue Service and state revenue authorities for calendar years ended December 2015, 2014 and 2013.