"We're not going to let Wall Street take the money and run," President Barack Obama told Americans last January. "We're going to pass this fee into law."
"This fee" is the Financial Crisis Responsibility Fee, a tax on banks designed to recover $90 billion over 10 years while reducing risk; it would shrink large banks and also fall harder on those with more debt, incentivizing lending over trading. Treasury staffers crafted the proposal in response to the TARP law's requirement that the government make up any shortfall in repayments.
President Obama announced the tax at his political low point last January, following Democratic defeats in Virginia and New Jersey. Health-care reform and financial reform were on the ropes. The move was seen by cynical observers as a cheap play for populist political appeal. Progressives worried the relatively limited tax would have a marginal effect on the financial sector's size or practices, but the idea emerged as a politically viable, much-needed framework for instituting a broad tax on banks.
Today, with financial reform made law, there is no sign the fee will ever become reality, or indeed that any new tax will be levied on the banks. Outrage over bonuses seems so 2000 and late, with the politics of financial populism muddied after the passage of the financial-reform bill and cultural issues taking the fore in day-to-day political debates. Though the financial-reform bill institutes de facto taxes on the financial sector, economists believe a carefully designed assessment could still do much to augment the new rules -- and raise much-needed revenue for the taxpayers who bailed out the banks in the first place.
The idea received an initially warm reception on Capitol Hill, but progress has been difficult. While staffers in the administration and the Senate seem to agree on the mechanism (taxing the bank's liabilities) House aides are arguing in favor of a more direct tax on profits.
Sen. Max Baucus, the chair of the Senate Finance Committee charged with tax matters, held several hearings on the legislation this past spring, telling reporters in April "there's not much doubt there will be a bank tax." By July, though, he was answering queries about the bill with "not soon." Finance Committee staff emphasize the April comments.
While no one will admit outright that enthusiasm is waning for the bank tax, administration and congressional aides speaking without attribution point to a number of reasons why the fee hasn't gained traction. The first is bandwidth: Between simmering fights over jobs legislation and two major reform efforts, members and staff haven't focused enough on the bill to overcome their differences. The other is the decreasing cost of TARP; when the president proposed the fee, $90 billion was still outstanding. Now, that stands at $66 billion, still a lot of money but a good deal less than before, and likely to continue falling.
Perhaps the biggest warning that the fee would not make it into law came during negotiations over financial reform. The final bill emerged from a House-Senate conference committee paid for in part by a bank tax modeled on the president's proposal. After Sen. Scott Brown and other moderate Republicans in the Senate threatened to pull their votes if the bill included the bank tax, the conference reconvened to strip it out and find a few back-door routes to cover the bill's costs. Without the support of at least one Republican, the bank tax will never make it to a floor vote, and this lesson was taken to heart by Democrats.
"We tried to do this, and the votes were not there," Regan Lachapelle, a spokesperson for Senate Majority Leader Harry Reid, wrote in an e-mail about the tax. Currently, no bill containing the tax has been introduced in the Senate; financial-sector lobbyists have breathed a collective sigh of relief.
While neither the tax-writing committee nor the White House would comment on the record about the idea, those still pushing for the tax do have one compelling case to make: Under pay-go rules adopted by Congress, most spending requires some kind of offset. This proposal could be low-hanging fruit for cash-hungry legislators, even if it was initially designed as a deficit-reducer. The tax could also come about as part of international negotiations, where consensus suggests a bank tax is possible but remains divided on how, exactly, to implement it.
"People may differ on details, but the president's basic proposal for a risk fee imposed on the largest financial institutions who benefited from the financial rescue policies has been well received by key parties in Congress as well as internationally and remains very much alive,” says Gene Sperling, a top Treasury official who works on the idea.
The ultimate problem may be the shift in public focus: Last January, the public was angry about the banks; now the public conversation is more focused on tangible economic problems -- the unemployment rate -- and absurdist controversies like the one surrounding the construction of an Islamic community center in Lower Manhattan. Making the tax a reality will no doubt require the political brow-beating of Republicans to test which they dislike more -- voting for tax increases or voting alongside the banks.
That Democrats have not put Republicans, who almost unanimously opposed the financial-reform legislation, to that test yet, is a worrisome political sign for a party facing a tough election this fall. The Wall Street bonuses that so enraged the public a year ago remain large and, on the whole, banker compensation is too risky. Bank profits continue to be high even as lending and investment are lackluster. If there was ever a time where changing the subject back to banks is good for the administration, it would be now.
Sperling is right that the bank tax isn't dead, but without enthusiastic congressional champions, it is in a coma -- and its limbo state is an embarrassment for the president and congressional Democrats who backed the proposal only to see it slide into irrelevancy. Yet surely taxing financial institutions to recoup taxpayer dollars makes sense. The proposal could fund new jobs legislation or extend certain portions of the Bush tax cuts, which expire this fall; their renewal, whole or in part, will be on Congress' front burner. And if legislators can't find a way to make this tax a reality, it says something very unpleasant about the state of our democracy, and the influence of the financial sector.