Businesses warn of impact from tax increase on seniors

Businesses are trying to ward off a massive tax increase on investments by pressing the case that dividends are not just the province of the rich, but a source of financial security for seniors.

Companies that issue dividends acknowledge that they have a challenge in persuading the public that dividends are important for every income bracket.  

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And with Democrats having put the top rates on investment income in their sights in “fiscal cliff” talks, companies say a tax hike on dividends could hurt anyone investing in the stock market — including seniors looking to supplement their retirement income.

“This issue, while it is a high-level issue in our industry, it affects a lot of people,” said Brian Wolff, senior vice president of the Edison Electric Institute, which is spearheading a public campaign to lock in lower dividend tax rates. “The entire subject of our national ad campaign … is on seniors.”

Dividends are regular payments, often issued quarterly, that a company makes to shareholders. Companies say a hike on the tax rates paid for dividends would have a trickle-down effect.

Paul Farr, the chief financial officer for PPL Corp., said a higher dividend rate for some investors would drive down the value of stocks, hurting the millions of people who invest in the market each year.

“You’re going to negatively impact income for seniors, you’re going to negatively impact the portfolios of anyone that’s exposed to the stock market,” Farr warned. “That’s not going after billionaires; that’s going after everyone that has a portfolio.”

The Obama administration, as part of its tax-and-spending offer from last week, included a rate hike on dividends as part of $1.6 trillion in proposed new revenues. Thus far, Democrats have shown no signs of backing down from their demand that tax-rate increases be part of any fiscal-cliff deal.

In making their case against the rate hikes, companies that issue dividends — several of which made stops on Capitol Hill last week — note that taxpayers 65 and older made up roughly a third of the returns that included qualified dividends in 2009, according to a study by Ernst & Young commissioned by the Edison Electric Institute.

That analysis also found that around two-thirds of the returns with dividend income went to households making under $100,000 a year.

But figures from the IRS also suggest that households making more than six figures are more likely to rely on dividends. The IRS found that, according to 2009 returns, roughly 88 percent of households made under $100,000 a year.

Congressional Democrats have made clear that they have no interest in raising the tax burden on families making under $250,000 a year — no matter what their age or income stream. 

Rep. Sandy Levin (Mich.), the top Democrat on the House Ways and Means Committee, noted that his party’s top priority was to lock in tax rates for the middle class, with House Democrats having recently filed a discharge petition on that front.

“We’ve looked at the impact of the rates. I just want to reiterate to those groups who are concerned — everybody needs to pitch in and resolve this,” Levin told The Hill. “And there’s only one way to resolve it, and that is to end the tax breaks for the very wealthy.”

President Obama’s most recent budget would allow the top tax rates for dividends to more than double, from the current 15 percent to the potential top marginal rate for income, 39.6 percent.

But a Senate Democratic measure over the summer pushed the top dividend rate only as far as 20 percent, the same level Democrats want for capital gains. (High-income taxpayers will also be subject to an extra 3.8 percent surcharge on dividends and capital gains starting in 2013, to help pay for the Democratic healthcare overhaul.)

Some analysts have said that they expect at least some increase in investment income rates to be part of an upcoming deal, and dividend-issuing companies say they have no choice but to acknowledge that the possibility is on the table.

So as they fight to keep rates as low as possible, industry members are also working hard to ensure that whatever rate is applied to dividends is the same as the tax rate on capital gains. 

The taxes on dividends and capital gains reached parity in 2003. Dividend advocates warn that any discrepancy in the rates between the two would favor one type of investment over the other.

Farr, the CFO at PPL, said the paltry rates of return on a range of traditional financial products like CDs and savings accounts means that seniors or those closer to retirement are increasingly looking to dividend-paying stocks as a source of supplemental income.

“Really, the typical avenues that people look to for yield are gone, because we’re in such a low-interest-rate environment,” he said.

Republican tax-writers in both chambers say the companies are smart for engaging in that sort of messaging, and they have vowed to fight to keep capital gains and dividends from seeing a severe rate hike.

“People save all their lives and invest in companies that they hope that they can have regular income coming in,” said Sen. Orrin Hatch (Utah), the top Republican on the Finance Committee. “I’m a great believer that the capital gains rates ought to be low.”

“After Social Security itself, dividends are what seniors are counting on as the next source of income,” Rep. Kevin Brady (R-Texas) said.

But companies citing seniors’ use of dividends are doing so largely without the aid of the country’s most powerful seniors lobby, the AARP.

An AARP spokeswoman told The Hill in a statement that, with entitlement programs front-and-center in the deficit debate, the group is focusing its energy on Medicare and Social Security.

“AARP is fully focused on fighting for an open, thoughtful public discussion about how to strengthen these lifeline programs and against shortsighted changes that could harm all of us,” said the spokeswoman, Tiffany Lundquist.

Congressional liberals said the companies’ lobbying efforts amounted to little more than noise.

“You’re going to hear a whole lot from the CEOs of major corporations about how worried they are about low-income seniors, I have no doubt,” said Sen. Bernie Sanders (I-Vt.).