Please support the dividend tax cut extension

(Story by Chris Amatos)

AEP is asking employees and retirees to contact their representatives in Congress to support an extension of the corporate dividend tax reduction that was first enacted in 2003. 

“The corporate dividend tax reduction has strengthened the price of our stock and made it easier for us to raise capital. It’s also saved our shareholders untold dollars in income taxes during the last nine years,” said Nick Akins, AEP president and chief executive officer. “This is a tax break that benefits millions of Americans across all income levels.”

Akins sent an e-mail to all employees asking them to participate in the Defend My Dividend campaign, which is being coordinated by the Edison Electric Institute. A website at Defend My Dividend provides more information about the campaign and facilitates e-mails to members of Congress.

Before the reduction to 15 percent in 2003, corporate dividends were taxed as ordinary income. Congress passed the reduction as one of a series of tax breaks to encourage investment in the economy. AEP and many other utilities strongly supported that effort with letters and e-mails to Congress. The temporary reduction has since been extended two times, in 2006 and 2010.

One of the arguments supporting the reduction was that corporate dividends were actually taxed twice – once as income to the corporation and then again when they were paid to shareholders. Advocates were unable to eliminate taxes on dividends entirely but did win a reduction to 15 percent.

A common argument against extending the reduction is that a lower dividend tax benefits primarily the wealthy. The facts say otherwise. According to an Ernst & Young study of recent tax returns, 40 percent of tax returns with qualified dividends had incomes of less than $50,000 and 68 percent had incomes of less than $100,000.

Even so, the 2003 reduction was only temporary and will expire at the end of 2012. If not extended, dividends again will be taxed at a shareholder’s marginal tax rate, which could be as high as 43.4 percent, depending on an individual’s income.

“A lower dividend tax really does make the stocks of dividend-paying companies more attractive to investors,” Akins said. “If investors suddenly have to pay higher taxes on their dividends, the market may put a lower value on all stocks that pay dividends, including AEP’s.”

Lower dividend taxes also benefit 401(k) investments, pensions and mutual funds, so even investors who don’t hold individual stocks have a stake in this issue. Also, because the lower tax reduces the cost of capital to the company, it also results in lower rates for ratepayers.

Employees and other advocates can visit http://www.defendmydividend.org/aep/Pages/default.aspx to contact their representatives.