TAX NEWS - January 2010

Obama proposes levy on financial firms to cover TARP costs

President Obama on January 14 proposed levying a "Financial Crisis Responsibility Fee" on large financial institutions to offset the costs of the Troubled Assets Relief Program (TARP). The fee would go into effect on June 30, 2010, and would continue for at least 10 years.

The White House outlined the proposal in a release and said more details would be provided in the president's fiscal 2011 budget, which is expected to be unveiled sometime in February.

The fee would apply to financial institutions – whether they received TARP assistance or not – with more than $50 billion in consolidated assets and would cover insured depository institutions, bank holding companies, thrift holding companies, insurers, and companies that own insured depository institutions or securities broker-dealers. The fee would apply to global liabilities of U.S.-headquartered firms and would also apply to the U.S. subsidiaries of foreign firms.

The 0.15 percent fee would be assessed against "covered liabilities," which the release says would be assets less tier 1 capital, FDIC-assessed deposits, and insurance policy reserves. The amount of covered liabilities would be reported by the firms' regulators, but the fee would be collected by the IRS.

The administration estimates that more than 60 percent of the revenue collected by the fee will be paid by the 10 largest financial institutions.

If TARP costs – currently estimated at $117 billion – are not recouped at the end of 10 years, the fee would remain in place until those costs are recovered. Based on the administration's projections, the fee would recoup TARP costs in about 12 years. It is generally believed that the fee would be tax deductible and that the revenue estimates take deductibility into account. Treasury would be required to report within five years on the fee's effectiveness and its progress in recouping costs.