As a state that is home to millions of seniors who depend on dividend income for their retirement security, Florida has a particular interest in the upcoming congressional debate over federal income taxes. At issue is whether the current 15 percent tax rate on dividends will be permitted to rise to as much as 39.6 percent at the beginning of next year.
Right now, a Floridian with an average of $1,000 a month in dividend income pays $150 of that to the federal government. But if Congress fails to act, the amount lost to federal taxes could rise to as much as $396. In my view, this would be bad for Florida and bad for the U.S. economy.
With more than 3 million residents over age 65, many of whom own dividendpaying stocks as a means of providing reliable income, Florida would pay a price if this large demographic suddenly lost a significant portion of its buying power.
This is not simply an issue affecting those in the higher tax brackets. Overall, Floridians filed 8.9 million tax returns in 2009. More than 20 percent of them reported income from dividends, and 44 percent of those were from Floridians who earn less than $50,000 a year. Next year, single people earning as little as $35,000 will be pushed into the 28 percent tax bracket, which means the tax rate they pay on dividends will almost double from 15 percent to 28 percent.
The total dividend income earned by Floridians of all income levels last year was $19.5 billion. That’s 50 percent more than the $12.9 billion Floridians received in taxable Social Security benefits. You simply cannot raise the top dividend tax rate by 164 percent and not expect it to have a ripple effect throughout the state’s economy.
And don’t think that just because you hold dividend-paying stocks in your retirement plan you are exempt from the impact of a dividend tax increase. The fact is that every dividend-paying stock will suffer a capital loss. Here’s why. Let’s say there’s a stock in your retirement plan that is valued at $50 a share with the dividend tax rate at 15 percent. If the top tax rate increases to 39.6 percent, investors will no longer be willing to pay $50 for that stock and its value will fall accordingly. That means a real reduction in wealth for those who hold dividend-paying stocks in their retirement portfolios.
As a company that has paid a dividend faithfully for more than 60 years, NextEra Energy is obviously concerned about the prospect of an increase in dividend taxes. A regular dividend is one of the factors that makes owning shares in electric power companies an attractive investment. In fact, the electric power industry pays out a higher percentage of its earnings in dividends to shareholders than any other sector of the economy.
The old axiom of economic policymaking is still true: If you tax something, you get less of it. If a large dividend tax increase goes through, the country will get less dividend income. The end result will be lower consumer spending in Florida and a reduction in retirement wealth for millions of Americans. As Congress revisits the nation’s tax laws this fall, it should pay heed to the law of unintended consequences. Any Floridian who wants to make his or her voice heard on this important issue can do so at DefendMyDividend.com