On Hill, Geithner Makes the Case for a Bank Tax

WASHINGTON — Timothy F. Geithner, the Treasury secretary, urged Congress on Tuesday to impose a 10-year, $90 billion tax on the largest financial institutions to recoup the costs of the 2008 bailouts. But he faced skeptical questions from lawmakers on the structure and purpose of the fee.

The Obama administration proposed the tax, which it calls the Financial Crisis Responsibility Fee, in January, amid public anger over the bank bailouts. The tax is not part of the overhaul of financial regulations being debated by the Senate.

At a Senate Finance Committee hearing on Tuesday, officials from the American Bankers Association and the Financial Services Roundtable sharply criticized the proposal. While lawmakers did not reject the idea outright, some questioned its impact on consumers and small businesses, as well as the timing.

“This is a simple and fair principle: banks, not the taxpayer, should pay for bank failures,” Mr. Geithner said. “And this is a principle with ample historical precedent.”

After the savings-and-loan crisis in the 1980s, Congress required the Federal Deposit Insurance Corporation to recoup the costs of closing failed banks through assessments on other banks. And the Democratic regulatory bill in the Senate would require the largest financial institutions to finance government-sponsored dissolution if one of them failed.

Even so, the math of the new tax proposal is complicated. Banks have largely repaid their share of the bailouts, known as the Troubled Asset Relief Program, and taxpayers are expected to actually make a profit from the federal rescue. In contrast, other recipients of aid from the program — notably General Motors, Chrysler, Fannie Mae and Freddie Mac — might never be able to repay and would not be affected by the fee.

“It’s no surprise that bank institutions are not enthusiastic about the proposal,” said Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee.

“We need to understand the best way to design the tax so that it’s fair and achieves its purpose,” Mr. Baucus said. “We need to understand who should pay the tax, and we need to understand the impact the tax would have on small businesses and the economy.”

Senator Charles E. Grassley of Iowa, the top Republican on the committee, called the fee an excise tax, as he did in a previous hearing, and urged that the proceeds from a tax be used to reduce the deficit, suggesting that he was open to the notion.

“I completely agree that taxpayers should be paid back every penny of TARP losses,” Mr. Grassley said, while adding that the bailout legislation called for calculating those losses in 2013, not now.

Mr. Grassley added: “If a TARP tax is imposed and the money is simply spent, that doesn’t repay taxpayers one cent for TARP losses. It’s just more tax-and-spend big government, while taxpayers foot the bill for Washington’s out-of-control spending.”

As proposed, the fee would apply to financial institutions with more than $50 billion in assets and that were eligible for an array of emerging assistance programs, including the TARP and lending programs set up by the F.D.I.C. and the Federal Reserve. American subsidiaries of foreign-owned banks would also be covered.

The fee would be highest on those institutions that engage in risky activities and have less stable sources of financing. Companies would pay a fixed percentage of their risk-weighted assets, minus capital, insured deposits and certain insurance policy reserves. Derivatives and off-balance-sheet items not otherwise reflected in conventional accounting would be included.

Mr. Geithner said that more than 99 percent of American banks, which he said provide most small loans to businesses and farms, would not be covered by the tax. Indeed, he said that the Congressional Budget Office had noted that the proposal “would improve the competitive position of small- and medium-size banks, probably leading to some increase in their share of the loan market.”

Under questioning, Mr. Geithner said of the fee: “You can think of it as a ‘too big to fail’ tax, a leverage tax, a tax on risk. But its purpose, of course, primary purpose, is to meet the legal obligation of law to cover the fiscal cost of TARP.”

Last month, the International Monetary Fund called for the world’s wealthiest nations to impose taxes on giant banks to recoup the costs of bailouts and to curb systemic risks. But at a meeting of finance ministers from the G-20 nations, there was no consensus on the taxes.

The Senate hearing elicited much suspicion of Wall Street, from both sides of the aisle.

“The question I have is the degree to which banks could game this,” Mr. Grassley said. “I’m no banker, but bankers are pretty clever. We’ve seen that over the last couple of years.”

Steve Bartlett, president and chief executive of the Financial Services Roundtable, said that the proposal was premature.

The cost of TARP are not yet clear, Mr. Bartlett said, and the fee could harm the international competitiveness of American financial companies. In addition, he said, the tax code is not the best way to address financial risks.

“The fee would reduce the total supply of credit in the financial system,” he said.

James Chessen, chief economist for the American Bankers Association, told the committee: “Large banks will clearly bear the brunt should any bank tax be applied, but the consequences go well beyond the largest banks and will likely affect community banks’ funding costs and the ultimate borrowing costs for their customers.”