FAQs

• What is the dividend tax rate reduction?
• In 2003, Congress passed an important law - the Jobs and Growth Tax Reconciliation Act of 2003 - that temporarily reduced the maximum tax rate on dividend income from almost 40 percent to 15 percent. Taxpayers in the 10- or 15-percent tax brackets currently pay no taxes on their dividend income. The 2003 law also reduced the maximum tax rate on capital gains from 20 percent to 15 percent.

  The lower tax rates on dividends and capital gains are scheduled to expire on December 31, 2010. This means the maximum tax rate on qualified dividends could increase to as high as 39.6 percent for some taxpayers—surging 164 percent above current levels. The maximum tax rate on capital gains will revert to 20 percent. In addition, the recently passed health care legislation imposes an additional 3.8 percent Medicare tax on all investment income beginning in 2013 for households earning more than $200,000 (single)/$250,000 (married).

• Does the dividend tax rate reduction work?
• Yes. Lower dividend tax rates are good for investors, consumers, American businesses, and the recovering U.S. economy. They make dividend-paying companies—like electric and natural gas companies—more attractive to investors. And by attracting new investment in their shares, electric and natural gas companies are able to raise the capital they need to fund major infrastructure investment projects. These capital investment programs offer an important source of much-needed, high-quality job creation in many states.
• Who benefits from lower dividend tax rates?
• Millions of Americans, from all income levels and age groups, own stocks that pay dividends. Seniors and people reaching retirement age, in particular, represent a large portion of investors who own dividend-paying stocks. In fact, many seniors rely on dividends as a way to supplement their retirement income. According to a January 2010 study by Ernst & Young, 27.1 million tax returns had dividends qualifying for the dividend tax rate reduction in 2007 (the latest year for which complete IRS data are available). Of these tax returns, 61 percent were from taxpayers age 50 and older and 30 percent were from taxpayers age 65 and older.

  Lower dividend tax rates don't just benefit direct shareholders. They also benefit the tens of millions of Americans who own stock indirectly through mutual funds, and they support the value of stock held through or in life insurance policies, IRAs, pension funds, or 401(k) plans. Additionally, lower dividend tax rates benefit Americans who own no stock or mutual funds by helping to spur the growth that is needed to create new jobs and to strengthen the economy.

• How do investors in energy utility stocks benefit from lower dividend tax rates?
• In 2009 alone, shareholder-owned electric and natural gas companies paid out $18.5 billion in dividends to investors.

  According to the Ernst & Young study, taxpayers with investments directly and indirectly (through taxable mutual funds) in utility company stocks accounted for 60 percent of tax returns with qualified dividends. What's more, Ernst & Young analyzed shareholders who directly own stocks in electric and natural gas companies and found that 86 percent of tax returns with qualified dividends were from taxpayers age 50 and older and 59 percent were from taxpayers age 65 and older.

• How do lower dividend tax rates benefit electric and natural gas companies?
• Lower dividend tax rates make dividend-paying companies—like electric and natural gas companies—more attractive to investors. In the utility sector, lower dividend tax rates helped to reverse an overall decline in the percentage of companies that pay a dividend. Between 2005 and 2009, U.S. energy utilities increased total dividend payments by $2.5 billion, or 15.6 percent. Millions of dividend-income investors are already benefitting from this above-average growth. By attracting new investment in utility shares, utilities are able to raise the investment capital needed to finance major infrastructure projects that offer an important source of much-needed, high-quality job creation in many states.

  Lower dividend tax rates also have helped to raise utility share values. A higher stock price tends to lower a company's cost of equity capital (the raising of capital through issuing common stock) and helps the company maintain a stronger financial condition.

  A financially healthy utility is also likely to get more favorable terms when borrowing money (issuing debt), which is critical for utilities at this time of soaring capital expenditures.

  • Shareholder-owned electric companies are spending approximately $80 billion per year to build new, cleaner generating capacity, including renewable projects; to invest in major transmission and distribution system upgrades, including Smart Grid technologies; and to make additional environmental and energy-efficiency improvements.
  • Natural gas companies are projected to spend approximately $100 billion over the next 20 years solely for new pipeline infrastructure.

• How will higher dividend taxes disadvantage dividend-paying companies?
• Raising taxes on dividend income—even for high-income taxpayers only—would create a disadvantage for dividend-paying companies and may cause companies to alter their current dividend strategies. This has the potential to lower the dollar amount (percentage rate) by which companies ordinarily increase their dividends and could reduce the stock value for all shareholders. If this happens, all taxpayers who receive dividend income would be affected, regardless of their income level, by discouraging investment in dividend-paying companies and potentially lowering dividend payouts.
• Why is it important that the tax rates for capital gains and dividends be equal?
• Should the provisions in the 2003 law expire, the maximum tax rate on dividend income will skyrocket—almost tripling for certain investors. The maximum tax rate on capital gains will increase only from 15 percent to 20 percent. This will create a tax policy that favors growth stocks and debt investments over dividend-paying investments. That's because more affluent investors likely would retreat from stocks that pay dividends in favor of other investments with a lower tax burden. Such a trend invariably would erode the share prices of many dividend-paying companies, whose stocks are held by working families, retirees, and others who rely on those investments for steady dividend income. That's why maintaining parity between the tax rates for dividends and capital gains is essential.
• Why should Congress act to stop a dividend tax hike?
• Raising dividend tax rates will cause unintended consequences. Companies and shareholders make their investment decisions with an eye toward the future. They know that Congress has acted twice in recent years to keep the tax rates on dividends at their current levels, so a tax increase may not be reflected in current stock valuations. This raises the likelihood that financial markets and our nation's economy will suffer further if Congress raises tax rates on dividend income.