Tax Quote of the Week
"I know of no power, indeed, of which a free people ought to be more jealous, than of that of levying taxes and duties."
-- Joseph Story
Proposed Bank Tax to Pay for Troubled Asset Relief Program (TARP)
During the financial crisis in October of 2008, Congress authorized a fund of up to $700 billion under the Emergency Economic Stabilization Act of 2008. The funds were transferred to Treasury for the purpose of buying "toxic assets" during the banking crisis that month.
During the next year, substantial loans were made to large and small banking institutions, including AIG, CitiCorp, Fannie Mae, Freddie Mac and many major banks. In addition, the automotive industry was also bailed out through loans to General Motors and Chrysler.
Many of the banks have now repaid their loans with interest. The Federal Reserve reported a substantial profit in 2009 due to the interest on the repayments. However, the expectation is that there will eventually be net losses of an estimated $117 billion. A portion of the loans to AIG, CitiCorp, Fannie Mae, Freddie Mac, General Motors and Chrysler will probably not be recovered.
In order to repay the Treasury, President Obama is proposing a tax on large banks. The tax will be 0.15% of their covered liabilities. The banks will start with total assets and subtract equity capital, disclosed reserves and FDIC-insured deposits. The balance represents the banks' liabilities and will be subject to the tax. It is estimated that the tax will raise approximately $90 billion during the next decade.
House Majority Leader Steny Hoyer (D-MD) supported the tax. He stated, "At a critical moment in our history, taxpayers rescued the financial sector from a crisis that could have brought down our entire economy. Thanks to U.S. taxpayers, the big banks are healthy, recording huge profits and paying large bonuses. Therefore, it is only right that Wall Street repay the taxpayers in full for their actions."
Minority Leader John Boehner (R-OH) responded, "The last thing American families and small businesses need right now is a new tax that makes it harder to save, invest and hire."
Healthcare Conference Claims Compromise
House and Senate Democrats have been meeting behind closed doors to merge their respective healthcare bills. A key issue has been the tax levied to fund the healthcare plan.
Many unions and several Senators and Representatives have opposed the 40% excise tax on "Cadillac" plans in the Senate bill. The Senate bill would levy that tax on plans for single persons costing over $8,500 per year and on plans for married couples with costs over $23,000. The concern by House Democrats and unions is that the tax, even though it is paid by the medical insurance companies, will lead to benefit reductions for some union members.
The White House has continued to support the "Cadillac" healthcare plan excise tax. It indicated again that this is the preferred method for funding healthcare reform.
Following meetings this week in Washington, unions claimed that they had negotiated a proposed reduction in the excise tax. The 40% excise tax would apply for single persons with plan cost over $8,900 and families with plans over $24,000. Healthcare plans under collective bargaining agreements and those of state and local employees would be exempt from the tax until 2018. Vision and dental coverage would also be exempt. Finally, the limits would increase at the urban cost of living index plus 1%.
Editor's Note: If the excise tax on "Cadillac" plans is reduced, there will necessarily need to be increases in other taxes. The speculation by observers is that the increased taxes would be levied on drug companies and medical-device makers. These higher taxes will then be passed through to those who purchase drugs and medical devices.
