The mutual fund industry is lauding proposed legislation that would allow fund investors to defer tax payments on reinvested capital gain dividends until they sell fund shares.

A House version of the bill was submitted late Tuesday by Rep. Paul Ryan (R., Wis.), who serves on the tax writing Ways and Means Committee. If approved, the legislation would enable fund investors to defer payment of capital gains taxes until selling their investment, which would bring the tax treatment of fund investors in line with stock investors.

The proposal “will benefit tens of millions of mutual fund investors and fuel more long-term investment for the economy,” said Matthew Fink, president of the Investment Company Institute, the primary lobbying group for the fund industry. He said the measure would extend to fund investors the “commonly understood principle” that investors pay capital gains taxes only when they sell their winning investments and lock in their gains.

Under the current tax code, mutual fund investors must pay long-term capital gains taxes on dividend distributions even when they leave the dividends in the fund. The proposal would apply to taxable years ending after the bill’s enactment.

The Ryan bill isn’t the first to seek deferral on mutual fund capital gains taxes. Rep. Jim Sexton (R., N.J.), has introduced two bills in recent years, including one submitted this year that proposes tax deferral on distributions of as much as $3,000 for individuals and $6,000 for joint filers. He is a co-sponsor of the Ryan bill.

The fund industry said it is happier with the Ryan proposal, which has no caps on the amounts of distributions subject to deferral. “It’s a cleaner bill,” said ICI spokesman John Collins. He added the Saxton plan would have “created some difficulties in record keeping.”

In 2002, mutual funds distributed $16 billion in capital gains. Of that amount, $5 billion was paid out to taxable accounts of individual investors, while the rest went to tax-deferred accounts such as 401(k) retirement plans or institutional investors, according to ICI data.