Double Taxation Repeal: Fire or Ice?

 

 

Energy experts debate the pros and cons of the Bush administration's proposal to eliminate the double taxation of dividends.

The repeal of the double taxation of the dividend has been argued unsuccessfully for years in Washington. But with a Republican-controlled Congress and an economy in need of a stimulus, it's an idea whose time may have come. [Editor's note: At press time, the Bush administration had not issued its policy on repeal of the double taxation of the dividend.]

Certainly, one might think that this is cause for celebration for electric utilities, which pay the biggest dividends. But there are potential pitfalls. Experts say repeal is not a slam-dunk for the industry.

Paul Donahue describes a "fire and ice" debate that's brewing throughout the industry. Donahue, a managing director of Global Power & Utility Capital Markets at investment bank Morgan Stanley, says, "Utilities and real estate investment trusts [REITs] might find that they have more competition, instead of rising to the top." A bigger question, Donahue says, is what might happen if tax relief leads big industrials or cyclical tech companies like Microsoft to start paying out larger dividends. Some believe utilities could lose their staple as the go-to income investment for widows, orphans, and the upcoming wave of retiring baby boomers looking for safe stocks, he says.

But Donahue says others argue that a change to the dividend tax policy that favors investors would probably benefit those companies that already pay dividends, and that it would probably take years for companies that don't pay dividends to feel enough pressure from shareholders to alter their dividend policies.