Lawmakers sharply criticized the Obama administration's proposed bank tax on Tuesday, telling Treasury Secretary Tim Geithner it is unfair and counterproductive.

Sen. Jon Kyl, R-Ariz., asked why banks that did not get Troubled Asset Relief Program funds would be hit by the tax, which would apply to financial services companies with more than $50 billion of assets, and why banks that have repaid their Tarp funding would still be targeted.

"I think you're shooting at the wrong target," Kyl said.

Geithner defended the tax.

"What we designed … is targeted to people we thought that benefited most from the financial actions we took to rescue the economy," he said.

The administration has proposed a "financial crisis responsibility fee" of 15 basis points on a company's liabilities to recoup $90 billion in projected bailout losses.

Sen. Robert Menendez, D-N.J., said he is concerned the tax would be passed on to customers.

"The banks are objecting to this modest fee to pay back the taxpayers because of the supposed effects on lending, they claim, and the cost to consumers," he said.

Geithner responded that banks could make up for the cost of the tax by reducing compensation payments.

"I don't think there is any significant risk that this fee, as we designed it, would have a negative impact on lending," he said. "Banks don't have to pass this on. Modest reductions in compensation budget would absorb the cost of the fee," he said.

Sen. Bill Nelson, D-Fla., suggested tying a bank's tax rate to its compensation practices.

"The banks that adopt these responsible pay practices for their executives would therefore see no loss in benefits," he said, and banks that continue those irresponsible executive compensation practices would see their bank taxes rise. Is that something you can get behind?"

Geithner did not address the proposal directly but said he supported the objective of encouraging more prudent risk-taking.

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