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My View: Failure to Extend Dividend Tax Cut Will Hurt Arizona
My View: Failure to extend dividend tax cut will hurt Arizona

Phoenix Business Journal  dated 8/6/2010- by Gary Yaquinto

The Wall Street Journal’s economics editor has called it a “ticking time bomb”: the expiration of the “Bush era” tax cuts. As the nation attempts to crawl out from under the longest recession since World War II, the last thing we need is a tax hike that forces a stall in the recovery. Yet that’s exactly what will happen if Congress fails to extend the 15 percent cap on the dividend income tax. The cap, enacted in 2003 and extended in 2006, will reset to 39.6 percent (dividends would be taxed as ordinary income) at the end of this year. That’s a 164 percent increase.

The tax increase would affect everyone receiving income from dividends, but it would most affect middle- and low-income families, including seniors and others living on relatively low fixed incomes.

That’s because dividend-paying stocks, particularly utility stocks, have long been considered “fit for orphans and widows” — in other words, safe enough for even the most cautious investor looking for a steady income return.

In fact, 89 percent of shareholders with qualified dividends from direct utility investments are over the age of 50, and 68 percent have annual household incomes of less than $75,000. Forty-two percent of utility shareholders have annual household incomes of less than $25,000.

Failure to extend the 15 percent cap on dividend taxes also will affect utility companies’ investment decisions. Lower tax rates on dividends have driven demand for utility stocks, which increased the value of those stocks and lowered the cost of capital for utility companies — critical today as many companies are replacing outdated infrastructure and investing in capital-intensive renewable energy technologies, such as solar energy.

A dividend tax increase, then, could force utilities to finance a greater percentage of capital projects with debt. An increased demand for debt raises its cost, and higher debt levels increase a utility’s financial risk, further raising the cost of new debt and perhaps even leading to bond rating downgrades.

But lest we think an increase in the dividend tax will affect only people holding dividend-paying stock and utility companies, consider this: If capital becomes more expensive for utilities, those cost increases will be passed on to utility customers. If capital becomes harder to secure, a utility may forgo an important infrastructure enhancement or transition to renewable energy source. And that would affect each and every one of us.

Congress must act to keep the maximum tax rate on dividends at 15 percent. It’s about maintaining the dividend income many hard-working Americans depend on, and encouraging investment in the energy infrastructure this country needs to remain competitive in an increasingly global economy.

Gary Yaquinto is president of the Arizona Investment Council. He can be reached at 602-257-9200 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it .