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The Association of U S West Retirees
 

 

 

Telecoms Fight Dividend Tax Change

 

By Shayndi Raic

The Wall Street Journal

September 08, 2010

 

U.S. telecom companies are stepping up efforts to fight the expiration of Bush-era tax breaks on dividends, amid concerns the change will send the value of their stock tumbling and hurt their ability to raise capital.

The industry has historically attracted investors who see the companies as relatively safe investments that pay rich dividends, making it especially sensitive to the coming changes in tax rates.

Although some economists argue that the telecom industry is overstating its case, industry giants AT&T Inc. and Verizon Communications Inc. and smaller carriers such as Frontier Communications Corp. are lobbying to head off a big increase in the tax on dividend income next year.

"It's a huge issue for dividend payers," says Craig Moffett, a telecom and cable analyst at Sanford C. Bernstein. "That's no small appeal to the stocks from the investor base."

Half of the Top 10 highest-yielding stocks in the Standard & Poor's 500-stock index are telecommunications companies, including AT&T, Verizon, Frontier Communications, Windstream Corp. and CenturyLink. On Sept. 2, Verizon raised its annual dividend five cents to $1.95, giving it a yield of 6.5%. Frontier offers the highest yield on the S&P 500, at 9.6%.

If Congress doesn't act, tax cuts passed under former President George W. Bush will expire in January, and dividends would be taxed at the same rate as income, jumping to as much as 36.9% from the current rate of 15%.

"Our company does not think this is the right time to be doing this sort of thing," said Steven Crosby, senior vice president for government and regulatory affairs at Frontier Communications.

The disagreement reflects an increasingly wary relationship between the industry and the Obama administration. Telecom operators complain they are already suffering from regulatory uncertainty over issues like net neutrality and broadband regulation, as well as the administration's greater scrutiny of mergers and acquisitions.

President Obama says he wants dividends for wealthy Americans to be taxed at 20%, the same rate that would be in effect for capital gains, and some Democrats on Capitol Hill have called for a short-term extension of all the tax cuts, including those for the wealthy. The conventional wisdom in Washington is that Congress won't act on extending the tax cuts until after the November elections. But some political observers think Democrats may act sooner, especially if they want to counter Republican charges that they have irresponsibly raised taxes during a painful economic recession.

 

Telecom companies have coordinated their efforts to extend the tax breaks through the Alliance for Savings and Investment, a coalition of two dozen dividend-paying companies. Members include Altria Group Inc., MassMutual Financial Group and Xcel Energy Inc. Telecom companies are heavily represented, with AT&T, Verizon, CenturyLink, Qwest Communications International, Windstream Corp. and the communications trade group USTelecom Association on board.

 

The industry argues that a dividend tax spike would hurt the economic recovery by deterring investment as demand for their stocks subsides. Telecom is one of the country's most capital-intensive industries, with operators spending $47 billion last year upgrading and building communications networks, according to USTelecom.

 

"At a time when the administration is looking to stimulate the economy, what would not be wise policy would be to take the one sector that had continued to invest and continued to grow" and place additional taxes on it, said Walter McCormick Jr., president of USTelecom.

In a letter to the president in late July, the coalition argued that higher taxes on dividends would hurt "American investors of all incomes levels, especially seniors who rely on dividend income to supplement their fixed monthly income." More recently, the coalition has focused its efforts on lobbying conservative "Blue Dog" Democrats that it thinks will be more receptive to the issue.

Some economists argue higher taxes on dividends wouldn't reduce the appeal of telecom stocks, since a growing share of U.S. companies' stock is held by retirement funds and foreign investors that aren't affected by tax rates on individuals.

 

"If there is an effect, it will be modest," University of North Carolina Prof. Douglas Shackelford says. "Pension funds, 401(k)s, foreigners and corporations-all of these don't care" about the individual tax rate.

 

And some analysts say telecom stocks will remain an attractive option even after the tax break expires, given the low yields available on investments such as U.S. government debt.

-Martin Vaughan contributed to this article.

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