Obama and Democrats struggle with details of proposed tax on banks

President Barack Obama and congressional Democrats want to tax big banks for the $700 billion bailout, but they have been unable to agree on the details of the policy.

Treasury Secretary Timothy Geithner is set to testify Tuesday on the tax proposal before the Senate Finance Committee, while lawmakers and their aides continue to wrestle with how the tax should be structured.

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“We have not been able to make a decision because we don’t have all the facts,” said Rep. Charles Rangel (D-N.Y.), who recently stepped aside as chairman of the House Ways and Means Committee.

“We don’t know whether the president has decided on how he wants to use it,” Rangel told The Hill.

Rep. Bill Pascrell (D-N.J.), a member of the Ways and Means Committee, said lawmakers remain unsure of which firms should be taxed for the costs of the Troubled Asset Relief Program (TARP), the formal name of the $700 billion bailout.

“Will it go to the good banks, the bad banks, the big banks?” Pascrell asked. “Those banks that really did not take participation in the TARP, why should they have a tax? I [hope] we’re heading toward some kind of resolution with these problems next week with Geithner.”

The hearing comes the same day the Senate begins debate on what could be hundreds of
amendments to a broad package of new regulations on Wall Street. The administration proposed the tax on big banks earlier this year as a separate push from its efforts to revamp financial regulations.

It is unclear if the tax will eventually become part of the regulatory overhaul. Senators
are looking to quickly pass the new Wall Street regulations and then have a conference agreement with the House, which passed its version in December. The uncertainties over the tax policy could force Congress to take it up after the Wall Street overhaul.

Obama urged lawmakers in January to levy a “Financial Crisis Responsibility Fee” on the largest financial institutions to recoup potential losses from the bailout. The tax was originally pitched as a 10-year plan to raise roughly $90 billion.

The administration outlined a tax that would fall on large institutions with at least $50 billion in assets. The 0.15 percent fee would fall on assets, not including core capital and deposits insured by the Federal Deposit Insurance Corporation (FDIC).

When it was first announced, the administration said the tax would not fall on General Motors, Chrysler, Fannie Mae and Freddie Mac. AIG, the crippled insurer, would be subject to the fee as outlined by the administration in January.

Since then, lawmakers, aides and the financial industry have struggled to work through the specifics.

In March, the nonpartisan Congressional Budget Office (CBO) sent a letter to Sen. Chuck Grassley (R-Iowa), the ranking member on the Senate Finance Committee, that said the White House’s policy left the tax murky.

“Although the administration has laid out the broad outlines of the proposal, it has not specified how comprehensive the definition of assets and liabilities would be for the purpose of assessing the fee,” CBO said.

One option is for the tax to be based on liabilities, but some caution that could have unintended consequences because most taxes are based on income.

“Is it going to reinvent the wheel? No,” Pascrell said. “It won’t be as bad as what it started out to be.”

Pascrell expects lawmakers will whittle the $90 billion figure down to between $50 billion and $70 billion.

The financial industry has strongly opposed the tax and argues it could dampen the recovery of the broader economy.

“Politically, it’s attractive,” said Scott Talbott, senior vice president at the Financial Services Roundtable. “But economically and legally it’s premature.”

Critics have also said the tax would ultimately be passed on to consumers in the form of higher rates. The CBO came to a similar conclusion.

“[The] ultimate cost of a tax or fee is not necessarily borne by the entity that writes the check to the government,” states the CBO letter to Grassley. “The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees and investors, but the precise incidence among those groups is uncertain.”

At Tuesday’s hearing, Grassley is expected to question Geithner about who will ultimately pay the tax.