The Looming 164% Dividend Tax Hike

From Investors Business Daily and The Audacity of Hypocrisy:

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The Looming 164% Dividend Tax Hike

By THOMAS R. KUHN

Posted 07/19/2010 06:10 PM ET





Today's reduced federal tax rates on dividend income are good for investors, consumers, American businesses and the recovering U.S. economy. But unless Congress acts now to stop a tax hike, the maximum tax rate on dividend income is set to skyrocket at the end of the year — leaping by 164% for some investors.



Twice during the past decade, Congress has voted to cap the federal tax rate on dividends at 15%. If Congress does not act again, taxpayers will see their tax rate on dividends jump from 15% to as high as 39.6% after Dec. 31, 2010.



Lower dividend tax rates are important to the more than 27 million Americans — from all income levels and age groups — who directly own dividend-paying stocks. In addition, tens of millions of Americans own stocks indirectly through mutual funds, life insurance policies, IRAs, pension funds and 401(k) plans. Today's lower dividend tax rates mean that these investors can keep more of the income they earn as dividends.



Keeping dividend tax rates low is important for shareholder-owned electric companies as well. Electric companies typically pay out a higher percentage of their earnings as dividends than other business sectors. And nearly every electric company pays regular dividends, with many having done so for more than 50 years.



By making dividend-paying companies like ours attractive to investors, the lower tax rates keep our cost of equity capital lower. And keeping our cost of capital down is vital now, when we are financing major new infrastructure investment projects.



The electric utility industry is among the most capital-intensive industries in the world. We're spending approximately $80 billion per year on infrastructure-related projects — about twice the amount that we spent in 2004.



This money is financing our transformation to a low-carbon future. It's building advanced power plants. It's constructing major transmission and distribution system upgrades, including Smart Grid technologies. And, it's funding further environmental and energy-efficiency improvements.



These capital investment programs also create an important source of much-needed, high-quality jobs in many states. And, these investments are helping to put America back in the lead of the global clean energy economy. In so doing, they are creating new industries for the future. Importantly, lower-cost financing also is essential for keeping electric rates down for the millions of homes and businesses the nation's electric power industry serves.



Should the dividend-tax rate-reduction expire, tax policy would revert to favoring debt over equity in order to raise capital — an outcome that could make investors hesitant to provide financing for major new projects, as well as disrupting many companies' long-term strategic plans.