STOP DIVIDEND TAX HIKE
The electric utility industry, known for its history of paying a strong dividend, is working alongside a wide variety of associations, organizations, and companies in a national grassroots advocacy coalition -Defend My Dividend - to stop a dividend tax hike. We encourage you to join.
Current tax rates on dividend income and longterm capital gains, which now are capped at 15 percent, are set to expire on December 31. The tax rates were temporarily reduced in 2003, when Congress passed the Jobs and Growth Tax Reconciliation Act. The maximum tax rate on dividend income was cut from almost 40 percent to 15 percent, and taxpayers in the 10 and 15 percent tax brackets had their tax rates on dividend income lowered to zero. The 2003 law also cut the maximum tax rate on capital gains from 20 percent to 15 percent. The tax rates were extended in 2006 and again in 2010.
If left to expire, the maximum tax rate on dividend income will skyrocket from 15 percent to as high as 43.4 percent. The top tax rate on capital gains, meanwhile, will rise from 15 percent to a maximum of 23.8 percent.Keeping tax rates on dividends low and on par with those on capital gains is particularly important for the electric
David Owens, Executive Vice President,
Edison Electric Institute
The dividends that utilities pay help to make their stocks more attractive to investors. And through their stock sales, utilities can get the investment capital they need at a lower cost.
Higher dividend tax rates also can reduce the perceived value of a company’s stock and reduce the incentive for new investors to become shareholders. Because corporate interest expenses are tax deductible, but dividend payments are not, increasing taxes on dividends will encourage more corporations to favor debt financing over equity financing.
As you know, the electric utility industry is one of the most capital-intensive industries in the country. We face enormous capital requirements to fund a wide variety of the initiatives.
These investments are building clean energy facilities that range from large nuclear plants to small renewable-energy projects, as well as state-of-the-art, coal-based generating units and high-efficiency combined-cycle natural gas plants.
They are automating distribution networks, and replacing analog electric meters with advanced digital meters. And they are preparing for the advent of mass-produced electric vehicles that are just now entering the U.S. market.
Today, these investments by our industry total approximately $80 billion per year on infrastructure - about twice the amount that we were spending a decade ago. Transmission investment accounts for a growing percentage of our capital expenditures.
In 2010, shareholder-owned electric utilities and stand-alone transmission companies eclipsed the $10-billion mark for the first time.
Distribution investment held steady at $16.9 billion. This transmission investment represents almost a 10.0 percent increase over 2009 investment levels (nominal $), and a leap of about 90 percent from a decade earlier (after adjusting for cost increases).
Since the beginning of 2000, the industry has made a cumulative investment of $82.5 billion in transmission in real 2010 dollars. Looking ahead, we expect the annual level of transmission investment to rise to more than $13 billion by 2014.
Given our huge capital expenditures to build an industry that is cleaner, smarter and more efficient than ever, maintaining access to capital on reasonable terms is vital.
CAPITAL INVESTMENT PROGRAMS
Importantly, these capital investment programs also are a source of high-quality jobs and they are often among the largest employers in a given state.
In a weak economy with concerns about unemployment, state utility regulators, utility management, company employees and local communities all agree that financially healthy utilities and the good jobs they offer serve everyone’s best interest.
Keeping tax rates on dividend income low - even for high-income taxpayers only - and taxing dividends at the same rates as those for capital gains also will benefit the tens of millions of Americans who own dividend-paying stocks either directly, or indirectly through mutual funds.
The lower rates also support the value of stocks held in life insurance policies, pension funds, 401(k) plans, or individual retirement accounts.
Seniors and retirees in particular will benefit. In fact, taxpayers age 50 and older file almost two-thirds of all tax returns with qualified dividend income, according to data from the U.S. Internal Revenue Service. And taxpayers age 65 and older file close to a third of these returns.
With interest rates at record low levels - a policy the Federal Reserve is likely to keep in place through 2014 - many of these seniors and other investors are looking at dividend-paying stocks as a safer alternative to other investments.
STUDY BY JP MORGAN
According to a February 2012 study by J.P. Morgan, total dividend distributions jumped from $340 billion in 2008 to about $680 billion in 2011; another big jump is expected in 2012. The study cautions that "the current premium that investors are placing on dividend-paying stocks may be negatively impacted by a change in tax rates."
Raising tax rates on dividend income and taxing dividends at higher rates than capital gains will hurt investors and businesses in another way as well.
Stock market investors will face lower tax rates if they move from investing in companies that pay dividends to buying growth stocks that typically don’t pay dividends, or to investing in debt investments such as corporate bonds.
This has the potential to lower the dollar amount (percentage rate) by which companies ordinarily increase their dividends and could reduce the stock value for all shareholders.
As a result, Americans who own dividend-paying stocks will take a double hit - not only will they be paying higher taxes on their quarterly dividend checks, but they will also likely see the value of their stocks fall.
And because the market is forward-looking, the fear is that their stock prices will fall sooner rather than later.
If this happens, all taxpayers who receive dividend income would be affected, regardless of their income level.
Another factor that Congress needs to consider is that shareholder income is already essentially taxed twice. The company pays a corporate income tax on its earnings, which reduces the amount of net income that can be paid out to shareholders in the form of dividends.
The top U.S. integrated dividend tax rate is currently 50.8 percent (when both corporate and individual tax levels, as well as state taxes, are factored in), according to a February 2012 study prepared for the Alliance for Savings and Investment by Ernst & Young.
If Congress and the President don’t act to stop a dividend tax hike, the top U.S. integrated dividend tax rate will rise to 68.6 percent - the highest level among developed nations.
A recent Bloomberg Government report looked at studies conducted in 1992 by the Treasury Department.
The Bloomberg Government report looked specifically at what would happen if individuals excluded dividends from their taxable income, eliminating the double taxation of dividends.
Bloomberg contends in their analysis that the exclusion of dividends, "may help to encourage companies to increase dividends, giving them more financing, and reduce borrowing, which reduces their debt financing." Additionally, Bloomberg notes that, "If the tax on dividends is reduced, companies that already pay high dividends per share...may see an increase in investment in their shares without having to change their current dividend payout structure.
Finally, raising dividend tax rates will likely slow down the economic growth that has begun. Companies and shareholders make their investment decisions with an eye toward the long-term future.
They know that Congress has acted in recent years to keep the tax rates on dividends low for all investors, so a future tax increase may not be reflected in current stock valuations.
This raises the likelihood that financial markets and our nation’s economy will suffer further if Congress and the President don’t act to stop a dividend tax hike.
A study by the Small Business & Entrepreneurship Council also found that over the past century, there have been five instances of substantive cuts in the capital gains tax. In each case, the economy benefited. In contrast, there have been two instances where an increase in the capital gains tax clearly had a negative impact on the economy:
• The capital gains tax rate steadily rose from 25 percent to 49.1 percent over the period from 1968 to 1976, and over that time, average annual real economic growth underperformed the post World War II average (3.0 percent vs. 3.5 percent).
• With the capital gains tax hike in 1987 came slower economic growth. From 1987 to 1996, real annual GDP growth again under-performed - averaging only 2.9 percent compared to the post-World War II average of 3.5 percent.
Time is quickly running out on today’s dividend tax rates. With the still fragile economy finally starting to show signs of recovery, now is not the time to reduce dividend income through higher taxes and punish Americans who invest in our nation’s future.
Edison Electric Institute and its member electric utility companies urge you to visit the Defend My Dividend web- site - www.DefendMyDividend.org - to learn more about this important economic issue and join millions of other Americans in telling Congress to stop a dividend tax hike.
ABOUT THE AUTHOR
David K. Owens is Executive Vice President of Business Operations at the Edison Electric Institute. Mr. Owens has responsibility over the strategic areas of energy supply and the environment, energy delivery, energy services, and international affairs.
Mr. Owens previously served as EEI's Senior Vice President of Finance, Regulation, and Power Supply Policy. He also represented the industry in the areas of finance, ratemaking, regulation, accounting, and taxes.Prior to EEI, Mr. Owens served as Chief Engineer of the Division of Corporate Regulation of the Securities and Exchange Commission.
Mr. Owens holds a BS and Masters Degree from Howard University and a Masters in Engineering Administration from George Washington University.