Financial, business communities fear tax hike on investment income

The business and financial communities are on high alert that preferential tax rates on investment income could be on the chopping block during end-of-year talks on taxes and spending.

Concern over increasing taxes on capital gains and dividends is leading some groups to mobilize and make their case on Capitol Hill, while some businesses are making moves now in anticipation of higher tax bills down the road.

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The Alliance for Savings and Investment, a coalition of dividend-paying companies, is making its case to protect lower rates on capital gains and dividends. A group of chief financial officers is set to meet with lawmakers Wednesday, urging them to hold firm on lower tax rates on investments.

“We ought to continue to favor investment income in the tax code to encourage people with money to invest that money in productive endeavors,” said Jim McCrery, the former GOP lawmaker leading lobbying efforts for the alliance.

Republicans have opened the door to increased revenue as part of fiscal-cliff talks, and Democrats are adamant that the rich need to contribute more to the government. Those goals, coupled with the critiques Mitt Romney faced on the campaign trail for taking advantage of lower capital gains rates, leave many thinking the taxes on investment income could be in the cross hairs.

Clint Stretch, a former staffer at the Joint Committee on Taxation, said capital gains and dividends could play a role in a fiscal-cliff compromise, given that Republicans are saying they are open to revenue but not individual rate increases.

“Clearly, folks are motoring around, trying to find a way to raise taxes on high-income individuals without raising the top individual rate,” Stretch, most recently at Deloitte Tax, told The Hill. “There seems to be some softness on the treatment of capital gains.”

During the presidential campaign, Romney’s low tax rate received front-page coverage. The GOP nominee paid tax rates of roughly 14 percent on millions of dollars in income in recent years, in large part because of the preferential rate on capital gains.

“Mitt Romney’s personal situation didn’t do capital gains any favors,” Stretch said.

“The message that came across during the campaign became one of, ‘It’s not fair for somebody to make that much money and only pay that much tax,’ ” McCrery said.

“The message should have been, ‘How do we create jobs?’ And one tried and proven way to create jobs is to encourage people who make money to invest that money.”

GOP lawmakers said Tuesday that they have no interest in boosting capital gains rates as part of a fiscal-cliff package, even if it were to protect lower income tax rates.

“It’s penny-wise and pound-foolish to raise capital gains rates,” said Sen. Orrin Hatch (R-Utah), the ranking member on the Finance Committee.

Sen. John Thune (S.D.), another tax-writing panel member and head of the Senate Republican Conference, drew no distinction between higher rates on income and investment, saying he does not want to see the rates go up on either.

“I just think it’d be a big mistake, in the middle of a bad economy, to raise taxes on investment,” he said. “These things kind of move together.”

Meanwhile, Senate Democrats struck a confident tone on taxes, arguing that President Obama’s reelection win sends a clear message that higher taxes on the wealthy need to be part of the puzzle.

“They [Republicans] are doing everything they can to protect the wealthiest in this country from paying their fair share of taxes,” said Sen. Tom Harkin (D-Iowa). “The people spoke, and the people said, ‘We want to do what the Democrats propose.’ ”

McCrery said the Alliance would ideally like to see current lower rates on investment income made permanent, but said it is essential that capital gains and dividends offer lower rates than income taxes to encourage investment.

“If policymakers want to discus some middle ground that could be seen as reasonable, then we’re not just going to sit on our hands and say, ‘No, no, no,’ ” he said.

Under current law, the top rate on capital gains is scheduled to rise from 15 percent to 20 percent at the end of the year. An additional 3.8 percent surtax on high earners’ investment income, which will help pay for the Democratic healthcare overhaul, is set to go into effect next year.

Meanwhile, the top tax rate on dividends is set to skyrocket next year, from the current 15 percent to the potential top individual rate of 39.6 percent. The surtax from the healthcare law and other provisions could also push that rate closer to 45 percent.

Some businesses are already making moves in preparation for a potential spike in investment tax rates. A number of companies have announced in the wake of the election that they plan to dole out special year-end dividends to shareholders, in an effort to distribute value before the tax bill might go up. For example, the Las Vegas Sands Corp. announced Tuesday it would be paying out $2.26 billion in special dividends in December.

The casino company is headed by Sheldon Adelson, who donated millions to GOP causes in the 2012 election cycle. As the company’s primary shareholder, Adelson stands to make over $1 billion from the new dividend, according to Bloomberg.