Telecoms Fight Dividend Tax Change
By Shayndi Raic
The Wall Street Journal
September 08, 2010
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
have coordinated their efforts to extend the tax breaks through
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
"If there is an
effect, it will be modest,"
And some analysts say
telecom stocks will remain an attractive option even after the
tax break expires, given the low yields available on investments
-Martin Vaughan contributed to this article.
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