Did The CBO ‘Confirm’ A ‘Big Emerging Problem’ With Obama’s Bank Tax?

Sen. Chuck Grassley (R-IA)

Sen. Chuck Grassley (R-IA)

Ever since the Obama administration proposed implementing a bank tax on the nation’s largest financial firms, Republicans have been up in arms and working with the Chamber of Commerce to kill it outright. The most common argument against the bank tax is that the banks will simply pass it on to consumers, driving up the cost of credit. “This cost will no doubt be passed down to the Main Street consumer,” said Rep. Peter King (R-NY).

In an attempt to confirm the GOP viewpoint, Sen. Chuck Grassley (R-IA) asked the Congressional Budget Office (CBO) to assess the impact of the bank tax. The CBO replied yesterday, and Grassley is pleased with the result:

A lot of analysts have said banks would pass the fees onto their customers. The CBO analysis confirms this and adds a lot of points for consideration from a very credible source.

Politico took to same angle, calling the CBO’s report a “big emerging problem for the bank tax.” But a closer look at what the CBO actually said shows that the bank tax will work exactly as intended.

First, the CBO did not say that the banks would absolutely pass the tax on to customers. In fact, it said some banks could do this, but their ability to do so will be limited by competition from smaller banks that don’t have to pay the fee. And the tax could just as possibly be paid for by lower executive compensation:

The cost of the proposed fee would ultimately be borne to varying degrees by an institution’s customers, employees, and investors, but the precise incidence among those groups is uncertain. Customers would probably absorb some of the cost in the form of higher borrowing rates and other charges, although competition from financial institutions not subject to the fee would limit the extent to which the cost could be passed through to borrowers. Employees might bear some of the cost by accepting some reduction in their compensation, including income from bonuses.

No one has denied that the big banks might try to pass the fee on to consumers. Obama acknowledged as much when he first announced it in January. But as many financial analysts said, doing so would give smaller institutions a competitive advantage, which CBO seems to agree with.

As Douglas Roberts at Channel Capital Research told the Christian Science Monitor, “banks would be hard pressed to pass along the fee,” as “smaller banks would be excluded…which means they would be able to compete for consumers’ accounts.” Felix Salmon agreed, writing that big banks passing on the fee “might be no bad thing, if it encourages bank customers to move their money to small-enough-to-fail banks and credit unions.”

CBO added that the tax would also “improve the competitive position of small- and medium-size banks, probably leading to some increase in their share of the loan market.” This is a good thing, as smaller banks do not pose the same systemic threat to the financial system as the larger megabanks. So far from proving the GOP’s point, the CBO analysis confirms that Grassley and the Republicans are just searching for a reason to oppose the tax (and any regulatory reform), as they court Wall Street’s money and support.