In 2003, the federal tax rate on dividends and capital gains paid to individual taxpayers was reduced to a maximum of 15 percent. This lower tax rate will expire on December 31, 2010. 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. The lower tax rate makes 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 maintain and expand their pipelines and other infrastructure to meet the growing demand for natural gas.
President Obama has expressed support for keeping the 15 percent maximum tax rate in place for households with incomes up to $250,000 (joint filers) and $200,000 (single) and increasing the rate to 20 percent for those above $250,000 beyond 2010. The administration’s budget proposals for 2010, and again for 2011, are consistent with that position. Senate Finance Committee Chairman Max Baucus (D-MT) has introduced S. 722 that tracks the Obama recommendation regarding the treatment of dividends and capital gains.
While AGA supports the retention of the 15 percent maximum rate for all taxpayers, the income level at which the 20 percent rate takes effect protects a significant percentage of utility shareholders. Additionally, the fact that the dividend tax rate is capped at 20 percent is very important because it recognizes that both dividends and capital gains should be taxed at rates that are lower than the maximum individual rates. Should Congress fail to act on this matter, dividends would be taxed as ordinary income, and the maximum tax rate on dividends could be as high as 39.6 percent.
In addition to the concern that the tax rate on dividends could revert to 39.6 percent for taxpayers in the top brackets, the Health Care Reform legislation proposes to subject unearned income (dividends, capital gains, interest, passive income) to a tax of 3.8 percent for taxpayers who have income levels of over $200,000 single / $250,000 joint. The maximum tax rate on dividends would increase to 43.4 percent.
At the May 2, 2009 AGA Board of Directors meeting, AGA amended its position to support the Obama proposal.