Coalition seeks freeze on dividend tax

More than 40 utility companies and associations will join forces next week to storm Capitol Hill to fight for the preservation of dividend income tax rates that are set to expire on Dec. 31.
Absent congressional action, the 15 percent tax on dividends resets in January 2011 to pre-2001 levels when most dividends were taxed as income, with rates that topped out at 39.6 percent.

The rate hike presents a political dilemma for congressional Democrats who argue tax increases are needed to rein in the expanding deficit. But upping levies on dividends would predominantly hit middle-income families already struggling to survive the current economic downturn.

“As the country is trying to come out of the worst economic period since the Depression, we’re saying this is not a great time to essentially create a federal tax hike on dividend income,” said Jim Owen, Director of Media Relations at the utility advocacy group Edison Electric Institute (EEI). “There are tens of millions of people that receive dividend income and a great many of them are retired, or teachers, and don’t make a lot of money.”

EEI is a part of a national grassroots advocacy campaign called Defend My Dividend, which will present lawmakers with a study that shows a dividend tax increase will affect 27 million people. Over half of them earn under $75,000 in adjusted gross income.

“If it goes back to [income tax rates] that would take a pretty big bite out of their income stream,” Owen said, adding, “They invest in utility companies expecting to get a good revenue stream.”

All dividends would be affected by this change in law, not just ones from utility companies. Owen’s group seeks to educate lawmakers that a tax increase not only hurts working families, but forces utilities to take on debt, instead of issuing stock that offers a dividend, when raising needed capital.

Interest on debt is a deductible corporate expense for tax purposes; dividends are not.

Companies that require investor capital, like utilities, generally raise capital through a balanced approach that employs both debt and equity. A high dividend tax rate can make it harder to keep the appropriate balance in place, according to Defend My Dividend.

“You most certainly would see a situation where utility companies would have to start using more debt financing rather than equity financing,” Owen said.  “They would have to borrow more and that could definitely become a damaging scenario for jobs.”

The Defend My Dividend campaign will use every tool in its arsenal beginning next week – from grassroots efforts to paid advertising – to take its message to lawmakers on the tax-writing committees, as well as the fiscally conservative Blue Dogs and the New Democrats.

A focus on liberal members is warranted since most of them oppose tax break extensions. However, buy in on this issue may not be a tough sell. Rep. Richard Neal (D-Mass.), who chairs the Ways and Means Select Revenue Measures Subcommittee, expects little pushback.

“There seems to be a consensus that you can raise cap gains, at some point, but on the dividend measure I think we need to be more circumspect,” Neal told The Hill. “I don’t think there has been a lot of drilling down on the dividend issue. The conversation has been really focused on cap gains.”

Most capital gains incur a 15 percent tax. Next year, the rate jumps to 20 percent if Congress fails to extend current law.  

Rep. Chris Van Hollen (D-Md.), who chairs the Democratic Congressional Campaign Committee and is the assist to Speaker Nancy Pelosi (D-Calif.), also predicts little resistance, assuming Owen’s group supports President Barack Obama’s budget proposal that doesn’t raise dividend taxes on filers earning less $250,000 but increases rates for taxpayers earning more than this figure.

“We would be comfortable with the president’s approach,” Owen said.

Broadening dividend tax relief to wealthier filers would encounter stiff headwinds from Democrats.

“We’d have a problem,” said Rep. Raul Grijaiva (D-Ariz.), co-chair of the Progressive Caucus, who supports Obama’s proposal on dividends.

“I think we need to keep [current law],” he told The Hill. “I agree with Obama that we have to rollback some of the Bush tax cuts, but the [dividend tax] has produced real support for families.”

Owen’s group will also call on Congress to make the 15 percent dividend tax permanent.

“Should the reduced tax rate on dividends expire, investors may become more hesitant to provide financing for major new projects, disrupting a utility's ability to implement long-term, strategic plans to meet customer demand,” stated the group’s website.