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LABOR & EMPLOYMENT LAW — 01/19/10

Bill would impose a 50 percent tax on bonuses paid by companies receiving TARP funds

A bill (H.R. 4426) that would amend the Internal Revenue Code to impose a 50 percent tax on bonuses paid by companies that receive assistance under Troubled Asset Relief Program (TARP) was introduced on January 12, 2010 by Rep. Peter Welch (D-Vt). Called the Wall Street Bonus Tax Act, the bill would tax bonuses at firms that have received assistance through TARP at a rate of 50 percent for all bonus compensation in excess of $50,000, both cash and stock awards. Revenues generated through the tax would fund a new direct lending program administered by the Small Business Administration (SBA). The program would offer low-interest, government loans to otherwise healthy businesses that are having trouble obtaining the credit they need for operating expenses and expansion. The SBA's direct lending program would help compensate for a distinct drop in lending to small businesses by TARP recipient firms, said Welch. According to CNN, the 22 banks receiving the most in TARP assistance have scaled back small business lending by $11.6 billion since April last year.

In a statement, Welch pointed to media reports that Wall Street banks are soon expected to announce their bonus packages for 2010. According to the New York Times, five of the biggest banks to receive federal assistance last year - Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley - have collectively set aside $90 billion for compensation for 2010. Welch's bill follows similar actions taken by Great Britain and France to tax excessive bonuses.

The bill would take effect on the date of enactment.

The bill, which has four cosponsors, has been referred to the House Ways and Means and Small Business Committees.

Separately, On January 12, Rep. Dennis Kucinich (D-Ohio) introduced the Responsible Banking Act (H.R. 4414), legislation that would impose a 75% tax on bonuses paid by certain financial and other businesses. The Kucinich measure taxes all banker bonuses whether the bank has received or repaid TARP funds or not.

Obama's fee proposal. Meanwhile, on January 14, President Obama, citing reports of "massive profits and obscene bonuses" in the financial sector, proposed a Financial Crisis Responsibility Fee to be imposed over a 10-year period on financial firms with consolidated assets exceeding $50 billion. The fee would be assessed at approximately 0.15% of covered liabilities, or debts, per year.

In his proposal, the President said, "Our goal is not to punish Wall Street firms but rather to prevent the abuse and excess that nearly caused the collapse of many of these firms."

The fee, which would take effect June 30, could be in place longer than ten years if all of the TARP funds are not paid back in full, Obama said. The fee is expected to raise $90 billion. The current estimated cost of TARP stands at $117 billion, down from earlier estimates of $341 billion.

Over 60% of revenue from the fee is expected to come from the 10 largest financial institutions. Federal Deposit Insurance Corporation, or FDIC-insured deposits will not be counted toward the asset total of individual firms.

Under the White House plan, which requires congressional approval, banks and thrifts, insurance and other companies that own depository institutions and broker dealers would be covered by the fee. Neither small nor community banks would be impacted.

The fee would cover the liabilities of all relevant firms organized in the US, including US subsidiaries of foreign firms. Operations of US subsidiaries of foreign firms would be consolidated with respect to the $50 billion threshold and administration of the fee. For those firms headquartered in the U.S., the fee would cover all liabilities globally.

Congressional reaction. Senate Banking, Housing and Urban Affairs Committee Chairman Chris Dodd (D-Conn), said he supports the proposal. "The taxpayers wrote the check that saved these firms. If it wasn't for the American taxpayers, they would just be empty offices now. It's time for Wall Street to return the favor." Dodd added that his committee may also consider additional means to limit executive compensation as part of its financial regulation overhaul.

House Financial Services Committee Chairman Barney Frank (D-Mass), said the proposal complies fully with the taxpayer protection language of the original TARP bill. Referring to President Obama, Frank said, "His decision to do this before 2013 is a good one because there is no need to wait." He added that he is confident the House Ways and Means Committee will act on the proposal soon.

While regulators would report the level of firms' liabilities, the actual fees would be collected by the Internal Revenue Service and would be put into the general fund in order to reduce the deficit. The White House said the administration will work with Congress and regulators to ensure that firms do not find ways to avoid payment.

For more information on this and other topics, consult CCH Employment Practices Guide or CCH Labor Relations.

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