By just about every account, House Ways & Means Committee Chairman Dave Camp is one of the most decent, earnest and thoughtful public servants in the United States Congress today. And he deserves immense credit for trying to advance the conversation on comprehensive tax reform – a serious subject that has not been dealt with in a very serious way since 1986.
Unfortunately (or fortunately depending upon how you look at it), Mr. Camp is beginning to resemble Don Quixote de la Mancha in that he is pursuing what many view as an impossible dream. Abandoned by the majority of his Republican colleagues, it is the Obama Administration playing Sancho Panza when it comes to a number of key provisions. For example, both the Camp plan and Obama budget propose to raise money through a levy on the country's largest banks.
More specifically, Chairman Camp's bill would create a new tax on financial institutions with assets greater than $500 billion that have been labeled by U.S. regulators as "systemically important" to the stability of the broader economy. Those firms include JP Morgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs and Morgan Stanley, as well as GE Capital, AIG and Prudential Financial. Under the Camp proposal, these financial institutions would be required to pay a quarterly excise tax equal to 0.035% of their total consolidated assets that exceed the $500 billion threshold.
According to the summary released by the Ways & Means Committee, the new tax "would address the significant implicit subsidy bestowed on big Wall Street banks and other financial institutions" due to the perception they are "too big to fail." The provision is also expected to raise $86.4 billion over the next 10 years, according to the Joint Committee on Taxation.
Similarly, the White House earlier this week revisited a proposal to raise about $56 billion through a "financial crisis responsibility fee." That proposal was included in past budgets to help pay down the estimated $341 billion cost of bailing out financial institutions after the 2008 economic meltdown. Under the Obama plan, the 0.15 percent fee would apply to banks with assets of more than $50 billion.
In addition to a new tax on the largest financial institutions, Chairman Camp's bill would limit the ability of big banks to deduct premiums they pay for federal deposit insurance. Under the current proposal, banks with greater than $50 billion in assets could make no such deductions, while banks with between $10 billion and $50 billion in assets would have their deductions reduced. That provision is expected to raise revenues by an estimated $12.2 billion over 10 years.
The Camp bill further singles out private equity, real estate, and venture capital investment by exacting a 40 percent tax increase that has the potential to discourage new investment. Private equity managers and others who received profit income as carried interest would pay $3.1 billion more over the next decade, with a portion of income that is now considered capital gains becoming ordinary income with higher rates.
With respect to municipal bonds, the Camp proposal also includes a 10 percent tax on otherwise tax-exempt interest income and would prohibit private activity bonds and advance refunding bonds. These new taxes would be borne ultimately by states and localities in the form of higher capital costs, and could result in increases in state and local property and income taxes. Taken together, these proposals would have the effect of raising capital costs for state and local governments and discouraging investment in much needed infrastructure.
Another provision of the Camp bill regarding company owned life insurance (COLI) would impose new taxes on life insurance used by businesses. As it stands now, many businesses use COLI to protect against financial risk or job loss stemming from the death of owners or key employees. COLI is also a widely-used funding mechanism for employee and retiree benefits. Congress affirmed the benefits and tax treatment of COLI and assured its responsible use in bi-partisan legislation enacted in 2006.
In yet another whack at life insurance companies, the Camp legislation includes a number of tax increases that would make industry products such as life insurance and annuities less affordable. The Chairman's proposal also imposes new taxes on retirement savings and affects changes to contribution limits and distribution rules that would generally make it more difficult to save for retirement. Improving our tax system is an important goal, but most agree that we should be doing more to encourage savings, not less.
Chairman Camp's dream of comprehensive tax reform has so far gained very little traction on Capitol Hill and is likely impossible to achieve, at least in the current Congress. Even so, the bipartisan tilting and jousting at big banks and insurance companies will continue and should remain a serious cause of concern to industry and consumers of financial products alike. A tax on bank assets is the functional equivalent to a tax on lending, and increasing the cost of access to investment capital is a bad idea – even if it is bipartisan.
While comprehensive tax reform is unlikely to take shape this year, the ground work is being laid for reform in the 114th Congress. On top of that, the proposed taxes on banks and insurance products are revenue raisers, any of which can all too easily can be adopted as a "pay for" in the tax extenders bill expected later this year.