President Bush's tax plan may keep the tax on REIT dividends because they are only taxed once.
Corporate income is taxed, and when distributed, as dividends, is taxed again. REITs, however, don't pay taxes on their income. Tax law allows REITS to avoid being taxed as other corporations are, if they pay out 90% or more of their otherwise taxable income to their shareholders. The law created a special situation allowing REIT shareholders to avoid being taxed twice.
The question is whether you are better off with a dividend from a regular corporation, or from a REIT. The regular corporation must pay taxes on their income and distribute what is left to the share holders. If the Bush plan passes, the dividend from the regular corporation will be tax free. The dividend from the REIT will be taxed.
Which dividend, after taxes is more? To do determine this, start with the same net income for both a regular corporation and a REIT, and then net out the tax paid by the corporation and by the REIT on that income. Then,distribute this after-tax corporate income to the shareholders in the form of dividends. The dividend from the regular corporation will not be subject to tax, while the REIT dividend is. Calculate the dividend after personal income taxes for both. Now, which dividend, is larger?
You should rationally opt for the higher after-tax dividend.
Don't pick an option to avoid a tax. Look at what is left if you had paid a tax.
Reit income isn't taxed at the corporate level so the dividends would still be taxable to the individual. However, I don't see that this would make Reits less attractive, just other dividend paying stocks more attractive.