By Tony Earley
Over the next several weeks, Congress is set to consider a critical issue for utility customers, working families and retirees. Unless Washington takes action, the current 15 percent tax rate on dividends will soar next year to as much as 43 percent for some taxpayers. This increase would hurt utility customers, employees and millions of ordinary utility investors.
Dividends are an important reason why many people — including millions of families saving for retirement and retirees on fixed incomes — choose to invest their money in companies like Pacific Gas and Electric. This is more true than ever now that interest rates are at record low levels.
Higher dividend tax rates would make these investments less attractive. This in turn would reduce the availability of a vital source of financing that we rely on for new gas and electric infrastructure and system improvements needed to provide customers with safe, reliable and affordable service.
Over the next few years, PG&E is planning to invest an average of more than $5 billion a year to enhance our system for the benefit of the 15 million people we serve in Northern and Central California. These projects will also support thousands of jobs at PG&E and the businesses we work with and provide an important tax base for local governments.
A threefold rise in the dividend tax rate is certain to make these projects harder and more expensive to finance, forcing us to pass on higher costs to customers, cut back on vital projects, or both.
The issue is much bigger than PG&E. In 2008, a study by The Brattle Group concluded that the electric utility industry nationwide will need to invest at least $1.5 trillion from 2010 to 2030 to maintain today’s high levels of reliable service in the face of rising demand and environmental challenges.
And just this year, James Hoecker, chairman of the Federal Energy Regulatory Commission during the Clinton administration, warned that “the investment gap that we’re facing is a little scary.” Without substantial modernization of the nation’s power system, he stated, “we’re headed for some serious financial and economic difficulties.”
One effect of the coming tax law change, if not modified by Congress, would be to create a huge tax advantage for capital gains relative to dividends. Investors will face a top rate of 23.8 percent on capital gains next year, versus 43.4 percent on dividends.
That gap would artificially disadvantage utilities. Since utilities are relatively stable income earners, they attract investors more by offering healthy cash dividends than by promising fast growth and share appreciation.
Faced with a wide tax wedge between capital gains and dividends, investors would likely flee utilities in favor of other, riskier stock investments. Prices of utility shares would drop, penalizing millions of savers who count on them as part of their retirement portfolio. Anyone with a pension or a diversified stock mutual fund would almost certainly feel the blow.
No doubt some sectors, like tech stocks, would welcome the extra investment sent their way by a skewed tax system. But how valuable will tech growth companies be if their data centers and manufacturing lines can’t get reliable electric power because of under investment in utility infrastructure?
America’s competitiveness depends on healthy, safe, and reliable energy utilities. The stakes are much too high to let an automatic rise in dividend tax rates put that competitiveness at risk after Jan. 1.
Tony Earley is chairman, CEO and president of PG&E Corp. This commentary originally appeared in the San Jose Mercury News.