Financial services firms will vigorously oppose a provision of the fundamental tax reform proposal released by Rep. David Camp, R-Mich., that calls for a federal tax on large financial services firms — including insurers designated as systemically significant.
“A targeted tax on financial institutions, regardless of form or motivation, is misguided and utterly at odds with the fundamental objective of comprehensive tax reform,” a group of financial services trade groups, that included the Property Casualty Insurers Association of America, said in a letter to the House and Senate congressional leadership sent late Wednesday.
The letter said the assessment will penalize customers, employees and investors, increase the cost of capital for American businesses, and “undermine the competitiveness of America’s financial sector — all of which will adversely impact economic growth and job creation. “
In a separate statement, Jack Dolan, a spokesman for the American Council of Life Insurers, added that, “This proposed tax, which would hit some life insurers, is a bad idea.” He said that, “Among other things, it could affect companies' competitiveness, both domestically and globally.”
AIG, Pru and MetLife all declined to comment.
Moreover, the letter said, a tax on financial institutions would amount to a levy on lending, retirement savings, credit allocation, and financial services to businesses, households, municipalities, and investors with the effect of reducing availability and increasing costs.
The letter cited comments to Sen. Charles Grassley, R-Iowa, in 2010 from Congressional Budget Office Director Doug Elmendorf regarding a previous financial tax proposal. Elmendorf noted in his response to Grassley that the tax would undermine economic growth and job creation at a time when growth remains subpar and more than 20 million Americans remain either out of work or underemployed.
The Camp proposal calls for a .035 percent tax to be imposed on all financial company assets more than $500 billion as well as on all nonbanks designated systemically-significant financial institutions (SIFI). Its other major component as the price to pay for lower corporate and personal tax rates would be a 10 percent surcharge on large wage-earners, i.e., those earning more than $450,000. The proposal would also lower the allowance for home mortgage deduction.
Related story: Dozens of tax breaks to end in Camp’s plan
According to analysts at Capital Alpha Analysts LLC, the tax will impact such insurers as American International Group and Prudential Financial, which are designated as SIFIs. Once designated as a SIFI, as expected, MetLife would also have to pay this tax as well, the analysts said.
Ryan Schoen, an analyst at Washington Analysis, projected that the quarterly tax levy for Pru under the Camp provision would be $57.19 million, a total of $228.76 million annually, and for AIG, $14,465,150 quarterly and $57,860,600 annually.
Both Schoen and Charles Gabriel at Capital Alpha acknowledge that banks and large insurers would realize a substantially greater benefit from the corporate rate reduction proposed under the Camp plan than other industries, but that the 3.5 basis point quarterly tax on banks and nonbank SIFIs with assets more than $500 billion, as proposed in the draft legislation, would partially offset that gain. However, Schoen said the quarterly assessment on assets could be deducted from corporate income taxes.
Virtually all analysts say there is little chance in an election year that the Camp proposal will become law. Washington Analysis analysts called it “dead on arrival.”
Schoen said he expects the bank tax “to remain on the table” even if tax reform fails to materialize this year or even next Congress. For one thing, Schoen and Joe Lieber, another analyst at Washington Analysis, said Sen. Ron Wyden, D-Ore., incoming chairman of the Senate Finance Committee, is more liberal than Sen. Max Baucus, D-Mont., the outgoing chairman, and therefore more likely to support the bank tax.
Gabriel noted that the largest banks and insurers will have some time to modify this portion of the Camp proposal.
He said that, ultimately, “We believe that the weak reasoning for this tax will lead to its removal, or at least its modification,” adding that insurers and General Electric Capital Corporation Inc., another SIFI, have the greatest chance of being completely exempted.
“But it is hard for politicians to resist scoring political points by punishing banks,” Gabriel said. “And since both political parties have now proposed measures to tax the largest financial institutions, the odds of some type of tax being included in fundamental tax reform has now risen,” Gabriel said.
He also said that now that the precedent of taxing large banks is out in the open, “it will be up to the banks and insurers to argue against Camp's stated reasoning,” i.e. that Dodd-Frank creates a too-big-to-fail subsidy and the tax is a way to "ensure that Wall Street reimburses the American taxpayer for a portion of the subsidy it receives."
He agrees with Schoen that “much will depend” upon how Wyden responds, as well as the Republican leadership.
Besides PCI, other financial industry trade groups that signed the letter to the leadership opposing the tax were the American Bankers Association, the Consumer Bankers Association, the Financial Services Forum, the Financial Services Roundtable, the Independent Community Bankers of America, the Institute of International Finance, the Mortgage Bankers Association, the Securities Industry and Financial Markets Association, the Clearing House Association and the U.S. Chamber of Commerce Center for Capital Markets Competitiveness.