President Barack Obama unveiled plans to propose a financial crisis responsibility tax that would be levied on the largest financial institutions in terms of assets for at least the next ten years and which would last, in the words of the President, “until the American people are fully compensated for the extraordinary assistance they provided to Wall Street.” The shortfall from the Troubled Asset Relief Program (“TARP”) is now estimated by the Administration to be $117 billion. The Administration also released a Fact Sheet in connection with its announcement, and further information will be available when the formal proposal is released in conjunction with the 2011 budget. In the meantime, there are ambiguities in the Fact Sheet about the scope of application, and it is possible that elements of the tax will change.
Who would be subject to the tax?
According to the Fact Sheet, the tax would apply only to certain financial firms with more than $50 billion in consolidated assets. The Administration estimates that the tax would apply to 20 to 27 U.S. banking institutions, with the 10 largest accounting for approximately 60% of the revenue.
The financial institutions covered would include firms that as of or after January 14, 2010 are:
- insured depository institutions;
- bank holding companies;
- thrift holding companies;
- insurance and other companies that own insured depository institutions; and
- securities broker-dealers.
The Administration’s underlying principle for the tax is that it would apply whether or not such firms either directly received funds from the various emergency programs, including capital injections by the government, the guarantee on deposits and other emergency programs, or were indirect beneficiaries of government support. Thus, the tax would apply regardless of whether the firm received any direct emergency assistance during the financial crisis or repaid any such money.
At the same time, under the terms of the Fact Sheet, many of the firms that received emergency assistance, such as Fannie Mae, Freddie Mac, the automobile companies and smaller banks, would not be subject to the tax.
For domestic firms, assets would be computed on a global basis, and apparently would include non-financial activities, to the extent any are conducted. The U.S. subsidiaries of foreign firms would be subject to the tax only to the extent they have U.S. subsidiaries engaged in the businesses listed above with consolidated assets in the United States of more than $50 billion. The Fact Sheet does not specify that the U.S. branches of foreign firms would be subject to the tax, although it is possible that U.S. branches could be included when the proposal is clarified in the legislation.
How would the tax be calculated and assessed?
The tax would be assessed at approximately 0.15% of “covered liabilities” per year. Covered liabilities would be defined as follows:
Covered Liabilities = Assets – Tier 1 capital – FDIC-assessed deposits (and/or insurance policy reserves, as appropriate)
FDIC-assessed deposits and insurance policy reserves would be exempt from the tax because they are considered to be stable sources of funding and are already subject to an assessment by the FDIC and insurance regulators. There is no similar exemption or credit for insurance premiums paid to the Securities Investor Protection Corporation, however. These exemptions would result in a relatively lower tax levied on firms with larger deposit bases than on financial institutions with smaller deposit-taking activities. In addition, the deduction for Tier 1 capital may give firms the incentive to increase their Tier 1 capital levels relative to other funding. The formula is also very bank-centric in that it assumes most of the financial institutions subject to the tax will be banks and thus it does not yet account for how insurance companies, asset management firms and others might be levied, if at all.
For firms headquartered in the United States, all liabilities globally would be subject to the tax, whereas for foreign firms, only the consolidated liabilities of their applicable U.S. subsidiaries would be used to calculate the tax. Because foreign firms’ non-U.S. operations would be excluded from the tax and it is not difficult to move most financial assets and liabilities from one unit to another, these firms could, over time, avoid the tax by moving enough assets and liabilities out of the United States to fall below the $50 billion threshold. As a result, the Administration states that it will work with the G-20 and the Financial Stability Board to encourage other major financial jurisdictions to impose similar taxes on financial institutions.
The Fact Sheet states that regulators would be required to report the covered liabilities of firms, but it does not specify to whom they would report this information. The IRS would collect the taxes and contribute revenues to the general fund to reduce the deficit. Mechanisms to prevent avoidance by covered firms would be developed by the Administration, Congress and regulatory agencies.
How long would the tax last?
The Administration anticipates that, if Congress enacted it, the tax would go into effect on June 30, 2010 and would last for at least ten years. This is a more accelerated timeline than is required by the Emergency Economic Stabilization Act that created TARP, which states that the President must put forth a plan for recouping the costs of TARP by 2013. The Fact Sheet states that the tax could remain in place for more than ten years if the costs of TARP have not been recouped by that time; conversely, it does not contemplate termination of the tax earlier than ten years in the event that the costs are recouped early.
How would the tax become law?
The proposal reportedly will be introduced in Congress in the coming weeks and be considered by the House Ways and Means and the Senate Finance Committees.
Even if the tax were not included in the budget, Congress’s financial reform legislation could provide for a similar tax. The Senate is expected to consider its version of financial reform legislation in the coming weeks as well.