The Senate Finance Committee held the first of a series of hearings on the Obama administration’s proposal to tax financial institutions in order to recoup losses from the Troubled Asset Relief Program.

“The TARP legislation anticipated that there might be losses,” said chairman Max Baucus, D-Mont., in his opening statement at Tuesday’s hearing. “Congress anticipated that the banks might pay back something less than all of the TARP money. The most recent estimates anticipate that the Treasury will end up losing about $89 billion. We need to think about how we are going to get that money back on behalf of American taxpayers.”

President Obama proposed a bank fee in January to recover the TARP losses.  The fee is estimated to raise $90 billion over 10 years and would apply to about the 50 largest financial institutions in the country.  However, Baucus noted that such a tax needs to be approached cautiously.

“We want to understand the best approach to designing a fee, to whom it should apply, and how it might affect the economy and the markets,” he said. “We need to learn whether banks will pass it on to consumers, and how it might affect lending to small businesses. And we need to take into account what European countries might do as they consider similar levies.”

Ranking Republican member Charles Grassley, R-Iowa, was skeptical about imposing the excise tax. “All economists state that corporate entities don’t actually bear the burden of taxes - people do,” he said. “I wanted to know which people would bear the burden of the proposed TARP tax.  So I wrote a letter asking the nonpartisan experts at the Congressional Budget Office and Joint Committee on Taxation a series of questions. The CBO responded to my letter by saying that customers would probably pay higher borrowing rates and other charges, employees might bear some of the cost, and investors could bear some of the cost.  The CBO also said that the TARP tax ‘would also probably slightly decrease the availability of credit for small businesses.’ In addition, the CBO said that, ‘For the most part, the firms paying the fee would not be those that are directly responsible for loss realized by the TARP.’”

Special Inspector General for the TARP Program Neil Barofsky outlined the progress made toward repaying the TARP funds. He noted that many of the large banks and Wall Street firms that received TARP funds had repaid them far sooner than expected, resulting in a profit for the U.S. Treasury on those particular investments. Even Citigroup and Bank of America, which he said, “appeared to have survived only with extraordinary TARP assistance, have rebounded, with Bank of America repaying its TARP bailouts in full and Citigroup on the verge of doing the same.”

As of March 31, 2010, $205.9 billion has come back to the taxpayer through repayment of principal, interest, dividends, cancellation of guarantees, and warrant sales, Barofsky noted. As a result, although TARP is still expected to result in a loss of $127 billion according to the Office of Management and Budget, as of February 2010, the expected loss is far lower than previous estimates, and is concentrated in the programs designed to support AIG ($50 billion), the automotive industry ($31 billion), and housing ($49 billion).

However, even that estimate may be changing. The Treasury Department reported Wednesday that General Motors has repaid its TARP debt in full, and TARP repayments have now reached $186 billion. GM repaid the remaining $4.7 billion of the total $6.7 billion in debt it owed to the Treasury, five years ahead of the loan maturity date and ahead of the accelerated repayment schedule the company announced last year. With the repayment, less than $200 billion in TARP disbursements remain outstanding.

Grassley asked Barofsky whether he thought it was fair for banks that repaid their TARP funds to have to shoulder the losses of AIG and the automotive companies. Barofsky said it was a “difficult policy question,” according to Reuters. Baucus plans to explore the question in future hearings.

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