Why the Bank Tax Proposal Matters (Even If It Won't Pass)

WASHINGTON — Congress is unlikely to pass a big bank tax into law this year, but House Republicans' surprising embrace of the idea suggests it is likely to return later to haunt the industry.

Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, released a wide-ranging plan to reform the tax code on Wednesday, which includes a key provision charging a small quarterly tax on the largest financial institutions.

The move was a reversal from the GOP posture toward President Obama's own bank tax plan, laid out in his annual budget proposals dating back to 2010, which has been heavily criticized by Republican lawmakers and some Democrats.

While Republican leaders in both the House and Senate have indicated they will not take up broader tax reform in the near term, the bank tax provision could prove to be another political whack-a-mole for bank lobbyists in the years to come, as the debate over "too big to fail" rages on.

"This proposal is here to stay," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. "It's either going to come up in a moment where Congress needs funds or during the next round of anti-big-bank sentiment on the Hill — so pick your poison. Either one of those events will cause Congress to revisit this proposal."

Analysts suggested that the proposal largely reflects budgetary realities — the need to find new sources of revenue to offset increased costs in other areas while keeping the overall tax overhaul deficit neutral. The proposed quarterly bank tax of 3.5 basis points (14 basis points annually) would increase revenue from 2014-2023 by an estimated $86.4 billion, according to the Joint Committee on Taxation. It would be levied on the biggest financial institutions, those with assets of $500 billion or more.

The Camp plan would also shrink the mortgage interest deduction and makes changes to the treatment of derivatives and carried interest.

Additionally, Camp's plan would eliminate tax deductions for assessments paid to the Federal Deposit Insurance Corporation for institutions with more than $50 billion in assets, and reduce the percentage of deductible assessments for banks with more than $10 billion in assets. Under current law, money paid to the FDIC can be written off as a trade or business expense.

"Camp had to slay some sacred cows, and a logical one is big banks, especially compared to other sectors that are even more core constituencies of the Republican Party," said Brandon Barford, a partner at Beacon Policy Advisors. "He is forcing entities that can create large social costs to internalize some of those costs and then redistributes the revenue in ways that he deems more socially and economically beneficial. Camp wants to encourage more work and more investment — he doesn't necessarily want to encourage banks to become enormous or stay enormous."

At the same time, the Camp plan doesn't shy away from the politics of "too big to fail" or lingering concerns about the efficacy of the Dodd-Frank Act in preventing future bailouts.

"The provision would address the significant implicit subsidy bestowed on big Wall Street banks and other financial institutions under Dodd-Frank," the proposal says. "By deeming SIFIs [systemically important financial institutions] to be ‘too big to fail,' Dodd-Frank effectively subsidizes these big banks and financial institutions, providing them lower borrowing costs than they would face without that special designation. While tax reform cannot undo Dodd-Frank, it can and should help recapture a portion of that implicit subsidy."

Inclusion of the tax has already garnered big headlines in the media, thrusting the largest institutions back into the spotlight.

"I think this is something that the bigger banks are going to worry about — certainly they're going to spend lobbying time and money on it, even in if the odds don't seem great for it," said Mark Calabria, director of financial regulation studies at the Cato Institute.

Nevertheless, observers noted that some of Camp's plan, including big cuts to corporate tax rates, would ultimately benefit the financial sector despite the added tax for large banks. The proposal would phase down the corporate tax rate to 25%, potentially offsetting any losses felt by the bank-specific tax.

"Even with a bank tax, tax reform is still a net positive for the largest banks, just less so than it would have been otherwise," said Brian Gardner, a policy analyst at Keefe, Bruyette & Woods.

The plan differs from that unveiled by Obama in 2010 in several ways. The "Financial Crisis Responsibility Fee," as the White House proposal has been called, would apply to a much wider set of banks — those with more than $50 billion in assets. The tax was designed to pay back funds to the Troubled Asset Relief Program and would be phased out after ten or more years when the money was recouped. It also focused on taxing short-term, wholesale funding. It started out in the 2011 budget as an annual fee of 15 basis points, though the size of the fee has varied in budget proposals since then. The President is scheduled to release his 2015 budget on March 4.

While design elements differ, observers said it's significant that a bank tax has now been proposed by members of both parties.

"It certainly illustrates that concerns about ‘too big to fail' cut across the aisle," said Calabria.

Still, it's unclear how many, if any, House Republicans will fall in line behind Camp, despite ongoing concerns about the Dodd-Frank law among members of the caucus.

"There is nobody's name on this but Camp, and everybody gets that," Calabria added.

That is particularly true given that Camp will reach his term limit as chairman of the tax panel at the end of the year, and would have to step down unless he wins a waiver to stay on from House leadership. As such, there's less incentive for lawmakers to stake out a position one way or another at this time, particularly given the very low odds that either chamber will take up broader tax reform ahead of the midterm elections.

That did not stop the banking industry, however, from pushing back hard against Camp's proposal immediately following its release.

"This tax will cause investors to turn away from the banking industry, making it harder to meet the stringent capital standards demanded by regulators and dramatically reducing resources that underpin every loan," said Frank Keating, president and chief executive of the American Bankers Association, in a press release.

Rob Nichols, president and chief executive of the Financial Services Forum, added that a tax singling out the industry "is utterly inconsistent with the fundamental goals of tax reform to lower rates, broaden the base, and remove industry specific treatments."

"We strongly urge policymakers to reject this arbitrary lending tax and instead place their focus on achieving pro-growth tax reform with policies that increase economic growth and expand access to sound lending and credit," Nichols added in a press release.

Even the Independent Community Bankers of America, which represents smaller institutions not affected by the bank tax proposal, warned that the financial tax could set a "dangerous precedent" for the industry and could "inappropriately sweep in community banks and inhibit economic growth," said Camden Fine, president and chief executive of the group, in a statement.

A group of 11 banking and business trade groups, including the ABA, the Forum and ICBA, penned a letter to Camp Wednesday evening expressing further concern with the bank tax. 

Industry groups were also upset with other parts of the Camp plan. The National Association of Realtors unsurprisingly objected to any proposed reduction in the mortgage interest deduction. Under Camp's plan, the deduction would be limited to $500,000, down from its current level of $1.1 million.

Banking industry representatives also raised concerns with Camp's proposal to disallow treatment of FDIC premiums as a business expense.

"ABA opposes using the FDIC insurance fund as a mechanism to raise revenues, "said Jim Chessen, the group's chief economist. "Premiums paid to the FDIC are a legitimate business expense, no different than any other insurance premium or other expenses such as salaries and benefits. The fund — which is a dedicated insurance fund protecting hundreds of millions of depositors — should never be used for political purposes."