Some chief financial officers blitzing the U.S. Capitol on Wednesday to lobby for low dividend tax rates suggested they might be able to stomach a small increase to pre-empt a huge jump due to kick in at year's end if Congress does not act.
Finance chiefs from the biggest U.S. power companies — including Duke Energy Corp. and Southern Co. — were in Washington to meet top lawmakers looking for ways to avert a $600 billion fiscal cliff of taxes and spending cuts.
Without action from Congress, the tax rate on dividends will rise to the ordinary income tax rate, as high as 39.6 percent for the wealthiest Americans. Dividends are now taxed at 15 percent for the top four tax brackets and zero at the bottom.
Five energy company CFOs told Reuters they were lobbying for the lowest dividend rate possible but stressed parity with taxes on capital gains and the need for lawmakers to compromise to avoid going over the fiscal cliff.
"We would be supportive of some movement in the rate," said Art Beattie, chief financial officer of Southern, the second-biggest power company by market value.
His biggest concern was that the tax on dividends not be delinked from the tax on capital gains.
Capital gains are now taxed at 15 percent — the same rate as for dividends. If Congress fails to act, the capital gains rate will rise to 20 percent, making it much lower than the top, 39.6 percent rate for dividends.
Beattie, who with the other CFOs, was due to make the case to leaders in the House of Representatives on Wednesday, said raising dividend taxes above capital gains discriminates against companies like Southern.
"If you delink them you are penalizing dividend-paying companies as opposed to companies like Apple Inc, which is a growth company and doesn't pay out much in dividends," Beattie told Reuters.
Martin Lyons, CFO of Ameren Corp., an electric energy provider in the Middle Western part of the United States, said any increase in the tax rate would be detrimental to his company's stock price and cost of capital.
"To the extent that there needs to be some increase — that is where the parity becomes very important to us," he said.
President Barack Obama, in his most recent budget, has proposed raising dividend taxes back to ordinary income tax rates, but many Washington insiders believe Democrats will settle on a rate of 20 percent if a deal is struck. Republicans generally want the rate to remain at 15 percent.
All five energy companies CFOs who spoke with Reuters, including those from Public Service Enterprise Group Inc., Duke and Pinnacle West Capital Corp., said they were not considering declaring special dividends ahead of potential tax increases, in contrast to such big companies as Costco Wholesale Corp. and Wal-Mart Stores Inc.
"They (investors) are not investing in Duke to get a dividend in the fourth quarter. We are part of the income base of people who own our stock," said Lynn Good, the CFO of Duke, the biggest electric power company in the United States.
In 2003, President George W. Bush and Congress cut taxes on capital gains and dividends, which mostly affect high-income taxpayers. These cuts are set to expire at the end of 2012.
In addition, a new, 3.8 percent investment tax on households making more than $250,000 a year — part of Obama's healthcare law - kicks in next year.
Other big dividend-paying companies, including Altria Group Inc., AT&T Inc. and Verizon Communications Inc., are among those pressing lawmakers to avoid a tax increase, with executives and surrogates making frequent visits to Capitol Hill.
The visits come amid a separate blitz of CEOs meeting with lawmakers, including leaders of Aetna Inc and Honeywell International Inc., as the business community steps up its pressure on Congress to forge a deal.
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