As Congress continues to examine comprehensive tax reform, the nation’s investor-owned electric companies are working to educate lawmakers and the Administration about the impact that certain changes to the tax code—particularly changes affecting dividend tax rates and the deductibility of interest expense—could have on our industry’s ability to raise capital.
Today, the electric power industry is investing for the future. Our sector has both the highest capital-intensity and absolute capital spending levels of all U.S. industrial sectors, with the industry’s capital expenditures reaching a record $90.5 billion last year alone. Looking ahead, we plan an average annual investment of approximately $85 billion through 2015.
These investment dollars are creating a cleaner generation fleet and are enabling the industry to meet a wide variety of new environmental requirements. They are developing a smarter, more flexible, and more resilient grid to meet the growing demands of our digital society. They are also promoting increased electrification, particularly in the transportation sector to improve air quality and reduce our nation’s foreign oil imports. Importantly, these capital investment programs offer a critical source of much-needed, high-quality job creation in many states.
Dividend Tax Rates
Earlier this year Congress passed the “American Taxpayer Relief Act.” One of the key provisions prevented the top dividend tax rate from nearly tripling—from 15 percent to 43.4 percent. The legislation also ensured that dividend tax rates remain on par with the tax rates for capital gains.
Preventing a huge dividend tax hike and maintaining parity with capital gains are critical for investor-owned electric companies: For the 12 months ending March 31, 2013, the industry’s dividend payout ratio was 62.8 percent, leading all other business sectors.Raising dividend tax rates would harm all Americans who invest directly in dividend-paying stocks or who invest indirectly through mutual funds. Higher dividend tax rates also would have a negative effect on the value of dividend-paying stocks, which would adversely impact those who have an interest in employer or union pension plans, 401(k) plans, individual retirement accounts, and/or life insurance policies.
Keeping tax rates on dividends low and on par with those of capital gains in any reformed tax code is essential for keeping electric companies’ cost of equity down, which in turn will benefit electricity consumers. In addition, lower tax rates will continue to make dividend-paying stocks an attractive investment for investors, therefore providing companies with the necessary capital to fund major infrastructure projects.
Another critical tax issue for electric companies and other capital-intensive industries is the current federal income tax deduction for interest expense. Driven by the capital-intensive nature of our business and our regulatory framework controlled primarily by state public utility commissions, the investor-owned electric power industry has a capital structure comprised of about half equity and half debt. The capital needed by electric companies is used to invest in very long-life assets—the power plants, wires, and equipment needed to provide affordable, safe, and reliable electric service.
The rates that customers who are served by traditionally regulated electric companies pay reflect their company’s cost of service, including its after-tax cost of capital. Electric companies work hard to achieve the lowest cost of capital and rely upon the federal income tax deduction for interest costs to help minimize increases in customer rates—especially during times of major capital expansion.
The Internal Revenue Code has long recognized the deductibility of interest expense as an ordinary and necessary business expense. Any material change in how interest costs are deducted would hurt all investor-owned electric companies and their customers.
Investing Today for Tomorrow
Electricity is a product essential to all Americans. Indeed, electricity runs our economy—it powers our homes, businesses, industries, and the smart technologies and innovations that enhance our quality of life. Our industry is investing today to ensure that electricity has the potential to bring even more positive changes tomorrow.
Capital formation is a lynchpin to enabling the industry to achieve this goal. As Congress considers comprehensive tax reform, it is essential that a reformed tax code support, not hinder, the ability of our industry to raise capital.