Bill to defer taxes on reinvested mutual fund dividends seeks traction

A bill to defer taxation on dividends that are reinvested in mutual funds has received support from the Investment Company Institute.
MAY 22, 2009
A bill to defer taxation on dividends that are reinvested in mutual funds has received support from the Investment Company Institute. The Generating Retirement Ownership Through Long-Term Holding Act, introduced this week by Sens. Mike Crapo, R.-Idaho, and Tim Johnson, D.-S.D., would defer the annual taxation of capital gains distributions that are automatically reinvested in mutual funds until the shareholder sells his or her investment. The bill “would allow investors to keep their money working instead of removing part of it each year because of capital gains taxes paid on growth in mutual funds,” according to a statement issued by Mr. Crapo. The ICI issued a statement of support yesterday. “The GROWTH Act would finally give equal tax treatment to mutual fund shareholders who decide to reinvest dividends and would allow them to let their money work longer towards building personal savings goals,” Paul Schott Stevens, president and chief executive of the Washington-based industry association, said in the statement. “Our research shows that most mutual fund investors are focused on retirement savings, but also invest in mutual funds to achieve other savings goals, including establishing a rainy-day fund for emergencies and helping pay for education.:” Current tax law is stacked against mutual fund investors, said Christopher Davis, a fund analyst at Morningstar Inc. of Chicago. “Mutual fund investors are taxed all along the way even if they don’t sell [the fund],” he said. “Stock investors are not taxed until they sell. This legislation would be giving mutual fund investors the same treatment as other investors get.” Mutual funds are seen as less tax-efficient than stocks, Mr. Davis said. “Stock investors can enjoy years of tax-free compounding and don’t have to pay until the end,” he said. “Fund investors who are holding onto their funds for the long haul are being punished for that. It’s penalizing them for being long-term investors.” Other observers agree. “It seems an unfair burden to be taxed on distributions that are not received at the time,” said Burt Greenwald, a Philadelphia-based mutual fund consultant. “It’s [the reform] is long overdue.” But it remains to be seen whether the bill will garner support on Capitol Hill. “Given the climate we are in now, a tax benefit for investors, which would likely be seen in the public’s interpretation as a break for Wall Street, is unlikely to see much traction in Congress,” Mr. Greenwald said. “There’s a bit of populist fervor that’s operating as well.” The bill was introduced May 20 and referred to the Senate Finance Committee. The cost of the proposal has not yet been calculated, said Susan Wheeler, a spokeswoman for Mr. Crapo’s office. “Over the long term, it’s likely to be a wash because it’s a deferral rather than a forgiveness,” she said. “When the investor sells the shares, a tax is imposed as it is with any other asset.” This is the third time that the legislation has been introduced.

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