WASHINGTON — Although House and Senate conferees stripped a proposed bank tax from the regulatory reform bill at the last minute, the fight over the issue is far from over — and the price tag may end up much higher for large institutions.
President Obama has vowed to make a push for the tax after reform is enacted, and the total cost to banks could jump to $90 billion from $19 billion. Observers said that although lawmakers balked at the tax as part of the reform bill, it may have enough support to pass as a separate measure.
The bank tax in conference "just shocked people, and that's what got people upset, because it looked like a last-minute tax," said Ernest Patrikis, a lawyer at White & Case LLP. "I wouldn't read that as precedent."
The Obama administration first proposed the "financial crisis responsibility fee" in January, offering a proposal to assess a risk-based liabilities fee over 10 years on all financial institutions with assets of more than $50 billion that were eligible for emergency assistance during the financial crisis. The tax was designed to recoup the costs from an anticipated $90 billion loss from the Troubled Asset Relief Program.
But lawmakers unexpectedly added a tax to the regulatory reform bill in the final days of conference with a provision that called for large banks to pay $19 billion to the Federal Deposit Insurance Corp. over 10 years to recoup the estimated costs of the reform legislation.
That provision quickly drew fire from key Republicans, including Sen. Scott Brown of Massachusetts, whose support was considered crucial to passing the reform bill. As a result, lawmakers reopened the conference committee at the end of last month, removed the provision and instead added language to force banks to pay higher premiums. (The Senate passed the conference report Thursday, and the bill now goes to President Obama's desk.)
But banking lobbyists said the issue remains in play.
An industry lobbyist said even though it was not included in the final conference version, the White House likely will continue to push for some type of tax.
"I'm hard pressed to believe the administration will let this opportunity pass them by," said the lobbyist, who spoke on condition of anonymity.
Obama warned in his June 26 weekly address that the battle for the bank tax is not over, saying it was a priority after the financial services overhaul.
"Beyond these reforms, we also need to address another piece of unfinished business," President Obama said. "We need to impose a fee on the banks that were the biggest beneficiaries of taxpayer assistance at the height of our financial crisis — so we can recover every dime of taxpayer money."
Observers are split on whether the larger Tarp tax has much chance of being enacted. Karen Shaw Petrou, managing director at Federal Financial Analytics Inc., said the reform bill's smaller tax proposal likely was removed because it was added at the last minute.
"I think [the $90 billion tax] has a chance in any number of formats," she said. "As the industry experienced in the Dodd-Frank bill, underestimating Congress' vengeance is an easy mistake. That said, it won't be easy to pass."
David Min, associate director for financial markets policy at the Center for American Progress, said it might be politically difficult for Republicans to oppose the tax.
"I'd analogize this to the original reg reform debate to begin with, when it looked like the more stringent provisions wouldn't pass but people ended up supporting the bill because of the populist anger against Wall Street," he said. "I think you might have the same dynamic here. It could get passed if senators and representatives were forced to represent the will of their constituents."
But some industry representatives were more confident of their ability to defeat any tax.
"Given the changes envisioned by the regulatory reform bill and the problems for the $19 billion tax and the repayment of Tarp, the need for the $90 billion tax is rapidly decreasing," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable. "It will touch off a lobbying campaign, because it is pulling money directly off an institution's balance sheet."
Bill Longbrake, a former vice chairman of Washington Mutual who is now an executive-in-residence at the University of Maryland, agreed.
"It also seems anticlimactic after all that's been done to have a bank tax," Longbrake said. "If it was going to get done, the perfect vehicle was the Dodd-Frank bill and it didn't. … It's hard to see how there would be serious consideration paid to the bank tax."
Both sides, however, agree that the tax will be a tough fight. While big banks remain politically unpopular, others said that pushing for any new "tax" — regardless of its target — could sap support.
"It's a battle of the sound bites," said Raj Date, the chairman of the Cambridge Winter Center for Financial Institutions Policy.
Exactly how the fee will be assessed also remains unclear. The administration has not yet sent legislative language and remains vague about the structure of the tax.
"You can debate in theory how best to structure this thing to have fewest distortionary effects, but you end up having to create an entirely new revenue structure for what is ultimately a small amount of revenue each year," said Lou Crandall, chief economist for Wrightson ICAP.
The administration has been careful to call the tax a fee, but such a distinction is important to make, Petrou said.
"Will it be a tax or a fee? Because that determines jurisdiction," she said. "We don't know yet how it will be structured. … I think it's a liabilities-based fee, but what's a liability? Nothing is going to happen until the administration sends legislation, and that's a critical piece."
What few details are known about the tax have already been hammered by the industry.
"Politically it polls well, but the application and implementation create technical problems," Talbott said.
Bankers also complain that the tax unfairly targets them, rather than all companies that received help during the financial crisis. For example, the Treasury Department has said the tax should not apply to the auto companies or the government-sponsored enterprises.
The administration argues it is targeting large banks because they were the largest beneficiaries of Tarp, but the proposed tax would cover even firms that never sought or received government funds.
"The issue is what's the purpose of the tax?" Patrikis said. "If the purpose of the tax is to make up for Tarp losses and you presumably aren't going to cover GM … then there shouldn't be a tax."
But others said banks are the right target.
"The civic arguments ignore the fact that the financial institutions benefited the most from Tarp, benefited the most from guarantees and benefited the most from low rates," Date said. "So I think it's pretty clear they benefited and they are in a position to pay this back with their profits, and it's a really small tax."
The industry also continues to argue why the tax should not be assessed now. The law that created Tarp gave the president until 2013 to submit a plan to Congress about how to recoup losses from the program. Though Obama has said there is no reason to wait that long, industry observers said that estimated losses from Tarp continue to decrease. The Treasury has said it is even making a profit on its investments.
A recent report by Keefe, Bruyette & Woods Inc. concluded that Tarp will generate a profit for the government. It said Tarp has generated about 10% in annual returns on the investments.
"There's a huge debate how you calculate losses, too," said Kip Weissman, a partner at Luse Gorman. "Every day that Tarp preferred is outstanding the taxpayers receive additional income on their investment."
That's why, many contend, it would be better to wait.
"It's hard for them to keep saying there's a loss from Tarp when they keep coming out saying they are making money," said Doug Landy, a partner at Allen & Overy LLP. "Tarp isn't even done yet, and who knows if there is going to be a loss or not? Every time they send out a report, the loss seems to narrow. So they are drumming up support for a tax for a loss we don't know if we are going to have."
Another consideration is international coordination. Treasury Secretary Tim Geithner and Obama have been trying to sell other countries on a tax of their own, and while some are indicating they are moving toward consensus, there isn't agreement yet.
"The issue is caught up in the G-20 discussion process," Crandall said. "There's been no consensus there, with some nations still favoring a bank tax and others very much opposed."