Seven Bps or Just a Blip – Obama Proposes New Fee on Financial Institutions

On Saturday, January 17, 2015, President Obama released a Fact Sheet outlining a new plan to “to simplify our complex tax code for individuals, make it fairer by eliminating some of the biggest loopholes, and use the savings to responsibly pay for the investments we need to help middle class families get ahead and grow the economy.”  The fact sheet is sparse on details but is likely to be expanded upon in the President’s budget.

Although it does not fit neatly in to the loophole-closing rhetoric, the new plan includes a new fee on large, highly-leveraged financial institutions to discourage excessive borrowing.  In particular, the proposal would impose a 7 basis point fee on the liabilities of U.S. financial firms with assets over $50 billion.  Presumably, this fee would be imposed on assets in excess of $50 billion, but the fact sheet is not clear on this point.  The fee would be double the 3.5 basis point excise tax on large financial firms to be imposed in former Ways and Means Committee Chairman Dave Camp’s tax reform plan.  More importantly the Camp’s excise tax would have applied to total consolidated assets in excess of $500 billion – a substantially higher threshold.  Unlike the Obama administration’s proposed “financial crisis responsibility fee,” it appears that the fee under the new plan will be a permanent tax increase.

It is wholly unclear whether this new fee will garner any support among either Democrats or Republicans.  One thing that is fairly clear is that burdened U.S. financial firms will seek to pass the new fees along to customers.  In particular, most loan agreements now include provisions requiring borrowers to indemnify lenders for changes in law that increase their lending cost.  These provisions are relatively recent additions and were motivated to address precisely the type of fee included in the proposal.

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