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Looming Dividend Tax Hike a Threat to Utility Investment

from EEI Daily Energy News

U.S. utility stocks, long a safe haven for many investors in the midst of worldwide economic unrest, may struggle to attract shareholders if a looming hike in federal taxes on dividend income becomes a reality, Dow Jones Newswires reported Friday. Twice during the past decade, Congress has voted to cap the federal levy on dividends at 15 percent for most taxpayers. But on December 31, that rate, along with a host of other tax provisions enacted during the Bush presidency, will sunset, and the highest tax rate on dividends would become 39.6 percent, the same as ordinary income. A dividend tax hike of that magnitude could deal a heavy blow to utilities, which saw earnings slide during the recession as industrial users and other consumers cut back on power use. And it could deter new capital investments in electricity infrastructure, such as transmission lines, renewable energy projects and new nuclear reactors, the newswire reported.

"A low rate on dividends helps attract capital to our sector, lowers our cost of capital and creates a healthy balance sheet," said Jim Owen, a spokesman for the Edison Electric Institute, a Washington, D.C., lobbying group. "If the dividend law reverts to what it was previously, it would put additional pressure on some of these capital projects and create a more difficult financing environment." A boost in dividend taxes could also prompt higher-income retirees, many of whom invest in dividend-bearing stocks like utilities to supplement pensions and other income, to reassess their portfolios, Dow Jones wrote.

"The longer you hold a stock, the lower the tax rate should be on the dividend," said Duke Energy Chairman, President and CEO Jim Rogers. "That would create incentives for people to hold dividend-paying stocks such as utilities for longer, which over time would allow us to attract capital at a lower cost. That's good for consumers and good for us in terms of modernizing our aging fleet." Duke is planning to invest $15 billion toward new power plants and grid upgrades over the next three years, the newswire reported.

Dow Jones Newswires, May 28.