In 2003, the federal tax rate on dividends and capital gains paid to individual taxpayers was reduced to a maximum of 15 percent. This reduction was effective through December 31, 2008. On May 17, 2006, the President signed HR 4297 into law, providing for a two-year extension (until 12/31/10) of the lower tax rate on dividends and capital gains. Most energy utilities that deliver natural gas have a history of paying regular dividends, many without interruption for decades or even longer. Thus, this reduced tax rate is a significant benefit to natural gas utility shareholders.
Dividends are taxed twice, once at the corporate level and then again at the individual taxpayer level. Dividend-paying companies and their shareholders are, therefore, penalized in relation to other types of investments. Reducing the tax on dividends was intended in part to address this inequitable double taxation.
Reducing the tax rate on dividends has been a benefit for energy consumers by making energy utilities a more attractive investment. These investments have helped provide utilities with part of the estimated $100 billion they will need during the next 20 years to expand their pipelines and other infrastructure to meet the growing demand for natural gas.
The November 2007 elections and the decision to enforce the "Pay as you go" standard for tax legislation will make extending any tax break such as this one much more difficult. The "Pay as you go" standard requires that any tax provision that costs the federal government revenues must be offset with other provisions that raise an equal amount of revenue.
The lowering of the tax on dividends has been one of AGA's top priorities for years. We will continue to work to make this provision permanent.
Resources and Updates
Legislative Update - Dividend and Capitol Gains Taxation (March 2006)