For the tens of millions of Americans who own dividend-paying stocks – either directly, or indirectly through mutual funds, pension funds, life insurance policies, and 401(k) plans – it’s time to take notice of an important tax law that’s set to expire at the end of this year. Unless Congress acts, the maximum tax rate on dividend income is set to skyrocket from 15 percent to as high as 43.4 percent – a nearly 190 – percent increase. The top tax rate on capital gains, meanwhile, will rise from 15 percent to a maximum of 23.8 percent.
Keeping tax rates on dividend income low and on par with the tax rates on capital gains is important for all Americans. With time quickly running out on today’s tax rates, we encourage you to join a national grassroots advocacy campaign dedicated to stopping a dividend tax hike-Defend My Dividend (www.DefendMyDividend.org). The campaign is sponsored by Edison Electric Institute and a wide variety of associations, organizations, and companies who have a stake in this issue, along with the support of their members, employees, retirees, and shareholders.
Seniors and retirees in particular will be hard hit if Congress doesn’t stop dividend tax rates from leaping skyward. 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.
Raising taxes on dividend income and taxing dividends at a higher rate 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. As a result, Americans who own dividend-paying stocks will take a double hit-they’ll not only be paying higher taxes on their quarterly dividend checks, but they’ll also likely see the value of their stocks fall.
The nation’s economy will feel the effects of higher tax rates on dividend income too. The businesses that pay out dividends do so because it makes their stocks more attractive to investors. And through their stock sales, these companies can get the investment capital they need at a lower cost than if they had to borrow the money or issue bonds.
Electric utilities in particular pay out more of their earnings in dividends than any other sector of the economy. Last year, electric utility companies paid out 59.2 percent of their earnings in the form of dividends. The next highest payout ratios were the S&P’s Consumer Staples sector at 44.6 percent, and Industrials at 31.3 percent.
Shareholder-owned electric utilities are one of the country’s most capital-intensive industries. Since the dividend tax rate reduction took effect, electric utility capital expenditures have increased 84 percent-from $43.0 billion in 2003 to $79.0 billion in 2011. And since the dividend tax rate reduction took effect, electric utility dividend payments surged by 55 percent, from $12.3 billion in 2003 to $19.1 billion in 2011. Should the current low tax rates expire, the rate of dividend increases likely would decline.
Electric utilities are reinvesting the income they receive from their stock sales to build cleaner, advanced power plants, and replacing old analog electric meters with digital ‘smart’ meters, along with a wide variety of other projects essential for keeping the nation’s electricity supply reliable and affordable. Importantly, these investments by electric utilities also are creating high-quality jobs and boosting the country’s economic growth.
Keeping tax rates on dividend income low and in line with the rates on capital gains is good for consumers and retirees, good for the economy, and good for American businesses. Please visit the Defend My Dividend’s website – www.DefendMyDividend.org – today to learn more about this important economic issue and join the millions of Americans from all walks of life who are telling Congress to stop a dividend tax hike.
Brian Wolff is Senior Vice President, External Affairs at the Edison Electric Institute.