Qualified Dividend Income - On the Table?

On the tape today (Bloomberg):

 President Barack Obama, offering a consolation prize to high-income Americans whose taxes he wants to raise next year, is proposing to scale back a scheduled tax increase on their dividends. A budget law Obama signed this year may keep the Democratic president from meeting that goal. A cut in the dividends rate to its current 15 percent, from rates as high as 39.6 percent, was among tax measures enacted under Republican President George W. Bush. All those cuts are scheduled to expire Dec. 31, and unless Congress acts, the previous higher rates would return next year.

While Obama’s proposed 20 percent dividend rate is an increase from this year’s levy, it qualifies as a tax cut because it’s less than the rate scheduled to take effect for 2011. Under the budget rules, any tax cuts benefitting individuals earning more than $200,000, or couples earning more than $250,000, must be offset with new tax revenue or spending cuts elsewhere.

Passing Obama’s plan under the so-called paygo rules would require lawmakers to find a combination of revenue and spending cuts of about $100 billion over 10 years. This would be difficult to achieve in an election year, tax experts said. The alternative -- finding the 60 senators required to vote for waiving the budget rule -- would be equally challenging in the 100-seat chamber, they said.

Due to paygo, and a republican minority, I do not expect that QDI will continue to receive a favorable tax treatment.  As a result, dividend paying securities - primarily equity and preferred - will not have a relative advantage to their non-dividend paying peers.  While this reduces the relative attractiveness, I would not anticipate that it will materially reduce demand for these securities.  This is not to say I have lost hope that QDI will retain favorable treatment, just that it will be difficult.

Disclosure:  long various preferred stocks and dividend paying equities