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 38.6 percent to 15 percent. Taxpayers in the 10- or 15-percent tax brackets pay no taxes on their dividend income under current law.

  The dividend tax rate reduction is scheduled to expire on December 31, 2010, unless Congress takes action to extend it. This means the maximum tax rate on qualified dividends could increase to as high as 39.6 percent for some taxpayers.

• Does the dividend tax rate reduction work?
• Yes. Reducing the tax rate on dividends has been a success. Millions of Americans - including millions of senior citizens - are receiving more dividend income and are keeping a greater proportion of that income thanks to the lower tax rates on dividends.
• Who benefits from the reduced dividend tax rate?
• A 2010 Ernst & Young study - based on IRS data - found that 27.1 million households had dividends qualifying for the dividend tax rate reduction in 2007 (the latest year for which data were available), reporting a total of $155.9 billion in qualified dividends.

  Of these tax returns, 61 percent were from taxpayers age 50 and older; 30 percent were from taxpayers age 65 and older; 65 percent were from returns with incomes less than $100,000; 52 percent were from returns with incomes less than $75,000; and 36 percent were from returns with incomes less than $50,000.

• How do investors in energy utility stocks benefit from the dividend tax rate reduction?
• In 2009 alone, electric utilities and natural gas 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.

  Ernst & Young found that 86 percent of tax returns with qualified dividends from direct utility investments were from taxpayers age 50 and older; 59 percent were from taxpayers age 65 and older; 66 percent were from returns with incomes less than $100,000; 54 percent were from returns with incomes less than $75,000; and 38 percent were from returns with incomes less than $50,000.

• How does the dividend tax rate reduction benefit utility companies?
• The dividend tax rate reduction makes dividend-paying companies - like utilities - more attractive to investors. Since the dividend tax rate reduction took effect, utility dividend payments have jumped significantly more than other business sectors. 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 meet rising nationwide demands for more energy.

  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 have more favorable terms when borrowing money (issuing debt), which is critical for utilities at this time of soaring capital expenditures.

  • Natural gas utilities are projected to spend approximately $100 billion over the next 20 years solely for new pipeline infrastructure.
  • Shareholder-owned electric utilities also project a continued high level of capital expenditures—approximately $80 billion per year from 2009 to 2011, or about double the amount spent in 2004. Utilities will be investing in major transmission and distribution system upgrades, new generating capacity, and environmental and energy-efficiency improvements.

• How do high dividend taxes impact a company's decision to pay dividends to shareholders?
• High tax rates on dividends can reduce the perceived value of a company's stock and encourage it to raise capital through debt, since 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.

• Why should the dividend tax rate reduction be made permanent?
• Unless Congress acts to extend the dividend tax rate reduction, millions of seniors and working families will see their taxes on dividend income spike—more than double in some cases. For energy utilities, the continuation of the dividend tax rate reduction is necessary for effective long-term strategic planning—particularly in a world of growing energy demand and infrastructure requirements.

  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.