As Democrats regain power in Washington, a tax that banks successfully opposed throughout the Obama administration is poised to get another look.
The tax, which President Biden endorsed during last year’s campaign, would be paid by financial firms with more than $50 billion of assets, and the proceeds would be used to help close gaps in the federal budget. The amount that specific banks owe would likely be calculated using a formula meant to discourage them from becoming overleveraged.
The outlines of this idea first emerged 12 years ago as a way to pay for the costs of the massive federal bank bailout. In the years since, its rationale has morphed, but it has never gained traction in Congress thanks in part to fierce opposition from industry lobbyists.
This time could be different, largely because Democrats control both houses of Congress and may be able to pass key legislation with a bare majority in the Senate. They could use a tax on large banks to help pay for Biden’s ambitious government response to curb the spread of the coronavirus and stimulate an economic recovery.
“Given the historic profits that the largest financial institutions in the country are pocketing in the middle of a pandemic that is wiping out Main Street Americans, the politics of a leverage tax are going to change pretty substantially,” predicted Dennis Kelleher, president and CEO of the advocacy group Better Markets.
Several financial industry lobbying groups declined to comment for this article, perhaps wary of antagonizing the Biden administration at a time when the tax proposal remains little more than a vague campaign pledge.
Tax plans that specifically target large financial institutions date back to the federal law that authorized the 2008 bank bailouts. That statute required the president to submit a legislative proposal that would recoup from the financial industry an amount equal to the program’s budgetary shortfall.
This provision was intended to bolster political support for an unpopular bailout fund. But President Barack Obama’s proposed fee, which would have applied to firms with at least $50 billion of assets, failed to attract enough support on Capitol Hill to be included in the Dodd-Frank Act. Dodd-Frank ultimately passed the Senate by a 60-39 vote that went largely along party lines.
In 2014, House Ways and Means Committee Chairman Dave Camp, R-Mich., proposed a tax on banks with at least $500 billion of assets as part of a larger tax reform package. By this time, it was clear that the U.S. government would record a profit from the 2008 bank bailouts. Camp’s proposal was seen as a way to find new revenue to offset proposed tax cuts.
Financial industry lobbyists fought the proposal, and it never advanced in Congress. “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,” Frank Keating, who was then president of the American Bankers Association,
In later years, Obama’s budget proposals included a fee on the approximately 100 financial companies with over $50 billion of assets. One goal was to discourage firms from becoming excessively leveraged, since it would allow them to reduce their tax bills if equity became a larger share of their total liabilities. The tax would have amounted to seven basis points, or seven-hundredths of a percent, on covered liabilities at both banks and nonbanks. Covered liabilities were generally calculated as assets minus equity.
Biden has not published details of his proposal, though he has expressed support for imposing a fee on certain liabilities of firms with over $50 billion of assets. In the absence of more specific information, policy analysts are using the most recent Obama proposal as a starting point for discussions about what might be considered in 2021.
The financial institution tax is one of more than 30 specific tax proposals that Biden has endorsed. It would raise an estimated $84.4 billion between 2021 and 2030, according to an analysis by the Tax Policy Center. Another study by the Congressional Budget Office in 2018 found that imposing a fee on financial institutions with more than $50 billion of assets could raise $103.1 billion over 10 years.
“It’s a sizable amount of money,” said Steve Rosenthal, a senior fellow at the Tax Policy Center. “Sizable amounts of money are useful as offsets.”
Still, some observers believe that a tax on large financial institutions faces long odds.
“It wouldn’t be very high on my list of things that they’re likely to do on the tax side at this point,” Ray Beeman, a former congressional tax staffer who is now at Ernst & Young. “I think sector-specific taxes are always particularly difficult.”
Opponents of a tax on large financial institutions are expected to argue that the cost will be passed along to consumers. Meanwhile, industry lobbyists may be better positioned to fend off new taxes than they were a decade ago, given the financial strength that banks have shown during the pandemic.
But there are also reasons to think that a big-bank tax could get a more favorable reception during the Biden administration than it did during the Obama years.
Sen. Elizabeth Warren, D-Mass.,
Also endorsing the big-bank tax back in 2010 was Sen. Chuck Schumer, D-N.Y., now the Senate majority leader, whose constituents include many Wall Street banks. The context was of course different 11 years ago, because the tax was being proposed as a way to recoup bailout funds.
Some observers who believe that the U.S. tax system incentivizes banks to carry too much debt argue that recent legislative proposals have not gone far enough in addressing the problem. The Congressional Budget Office found that even a fee roughly twice as large as the one proposed by Obama would not be big enough to cause financial institutions to significantly change their financial structure or activities.
Mark Roe, a professor at Harvard Law School, co-wrote a 2018 journal article that argued proper taxation can make banks safer. He said that leverage tax proposals have been large enough to sting banks, but not big enough to have a substantial impact on how much debt and equity they would decide to use.
“So we’ll have a moderate tax. We’ll get a headline. We’ll think we’re doing something useful for financial stability,” Roe said.
One key question is whether Biden will push for tax increases as part of a budget reconciliation bill, which could potentially be passed without the support of any Senate Republicans. Many observers expect the reconciliation process to start unfolding later this year, at which point a wide range of tax proposals, including a fee on big banks, could be considered.
Proposals will be evaluated based on how much money they would raise and how many votes they can attract, said John Gimigliano, who heads federal legislative tax and regulatory services at KPMG. “In the end, paying for anything in the Biden plan will require multiple offsets,” he noted.
