WASHINGTON — Congress should enact a tax on banks to help the government recoup financial crisis bailout funds alongside a financial regulatory bill now pending in the Senate, Treasury Secretary Tim Geithner told a Senate panel Tuesday.

Geithner told the Senate Finance Committee that the proposal from the administration of President Obama for a tax on the liabilities of large financial firms is better than alternatives — such as a tax based on profits.

House Democrats are likely to take a different approach by taxing bank profits rather than the liabilities on the banks' balance sheets. But Geithner said the advantage of a tax on liabilities is that it would discourage risky activities, such as trading in derivatives.

Geithner also argued there is a greater likelihood that other countries will embrace the administration's approach, rather than a profits tax.

"We did look at a profits tax, and a financial transaction tax, but we thought this was a better design," Geithner told the panel.

The Senate will begin voting Tuesday on amendments to the financial regulation bill. The bill doesn't include a tax on banks to recoup bailout funds. Leading Senate Democrats have said they want to pursue the bank tax as part of separate legislation.

The administration proposal would hit financial institutions with assets over $50 billion, and aims to collect at least $90 billion over the next 10 years.

Geithner told the panel Tuesday that the administration was open to adjusting the $50 billion threshold, to minimize the impact on smaller banks and lending to small businesses. He said he believes the fee is structured in such a way that regional or community banks not engaging in risky transactions wouldn't be substantially affected.

The levy would apply not only to banks that accepted money from the Treasury Department's Troubled Asset Relief Program, but to financial firms that were eligible for federal assistance from Tarp or other sources — including Treasury's Capital Purchase Program, the Federal Reserve and the Federal Deposit Insurance Corp.

That aspect of the plan drew criticism from Republicans on the Senate Finance panel. "There are a lot of banks out there that didn't cause the problem but that would be stung by this fee," said Sen. Orrin Hatch, R-Utah.

Hatch also criticized the plan because the tax would apply neither to auto makers General Motors and Chrysler, nor to Fannie Mae and Freddie Mac.

Geithner told the panel that the administration prefers that the $90 billion collected from the bank tax should be used to pay down the deficit, and not to offset other spending or tax cuts.

But under questioning from Sen. Charles Grassley, R-Iowa, Geithner declined to promise that Obama will veto legislation that uses revenue from the bank tax to pay for new spending. Senate Finance Committee Chairman Max Baucus, D-Mont., has said he may want to pair the bank tax provision with legislation extending existing tax cuts.

Geithner also signaled that it is unlikely the administration would propose terminating collection of the tax early if losses from the Tarp program are ultimately estimated at less than $90 billion.

That is because the benefits of the bailout to the financial sector exceed the direct payments that were made from Tarp, he said. "Because Tarp didn't capture the full cost, it makes sense to propose this" at $90 billion over 10 years, Geithner said.

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