Could A New Tax on Banks Destroy Your Dividends?

With a new tax proposal spreading across Capitol Hill, Wall Street's banks, both big and small, are standing together in protest. But the impact of the tax would spread much further than the banks' financial statements -- all the way through Main Street's pocketbooks.

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Camp tax
House Weighs and Means Committee Chairman David Camp (R-MI) has proposed a new tax for banks that would charge 0.035% on total consolidated assets each quarter. The proposal is part of a larger tax-revision package announced this month, and Wall Street is preparing to fight.

The tax would only apply to banks and other non-bank financial firms with assets totaling $500 billion or more. With that in mind, Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) , Citigroup (NYSE: C  ) , JPMorgan Chase, American International Group (NYSE: AIG  ) , General Electric's (NYSE: GE  ) Capital division, MetLife, Morgan Stanley, Goldman Sachs, and Prudential Financial would all be on the hook.

According to Camp's office, the tax is meant to offset the lower borrowing costs that banks enjoy thanks to the perceived backstop from the government. Essentially, since lenders believe that the government will step in should a bank begin to fail, they are happy to charge lower rates. Camp's office equates this to a "massive taxpayer-funded subsidy."

The nation's banks of course believe that there is no subsidy, with higher capital reserves and federal stress tests proving their strength and worthiness of the low borrowing costs.

Below the belt
With the proposed tax expected to provide an estimated $86 billion in the next decade, it stands that some of the largest banks could pay over $2 billion per year. Based on the recent fourth quarter financial results, we can see that the tax would be no small chunk of change:

Though the majority of the banks could handle the tax, with the average impact below 20% (excluding Morgan Stanley), Main Street would likely become the biggest loser in a variety of ways.

Balancing act
One of the most serious consequences of the proposed tax could be a nationwide tightening of lending. The biggest portfolio of assets held by the nation's banks are loans. With the US economy still growing slowly, lending is a key factor in continued recovery from the financial crisis.

Banks have just begun to expand their lending practices into a broader swath of borrowers, helping small businesses and less qualified personal borrowers. This type of expansion has been called for by regulators and the White House numerous times when discussing the needs of a recovering economy.

But if the increased balance of assets, including new loans, will be taxed each quarter, there's little incentive for banks to continue their new lending practices. A dampening of lending would once again slow the nation's economic recovery -- something that would no doubt effect Main Street.

Passing the buck
No company likes to see their earnings diminished, so it would likely surprise no one if banks sought out new ways to supplement their income through higher fees. Once again, Main Street sit squarely in the middle of the issue, as customers would have to pay the price of the higher tax.

As an investor, the prospect of customers paying higher fees may not be concerning, but the tax may have implications for you too.

Investors beware
We all know that with the stricter Federal Reserve oversight that banks have had to strengthen their capital positions in order to have their distribution plans approved. Most also know that the recent run of record earnings reported by the nation's banks have helped shore up capital to meet the strenuous stress scenarios posed by the Fed's stress tests.

With every capital plan that's approved, investors can thank those record earnings for the higher dividends or share buyback programs. Banks have been happy to return excess capital to their patient shareholders as of late, but if the proposed tax whisks away close to 20% of earnings each quarter, you can be sure that distributions will be on the chopping block.

All about timing
The proposed tax-reform package is unlikely to gain much traction before this year's mid-term elections. But there is genuine concern that 2015 and beyond could prove to be the time for politicians to tackle broad tax reform.

Though Republicans have generally deflected any attempt by Democrats to enact a similar tax -- President Obama has included such a levy in each of his budgets since 2010 -- the fact that the current proposal was brought to the table by David Camp, a Republican heavyweight, may have Wall Street more concerned than with any previous attempts.

For now, you can rest easy that the banks and their lobbyists will be in full force on the Hill. A letter signed by 54 Republicans has already reached Mr. Camp citing concerns. But the situation may develop in the coming quarters, so keep an eye out for more coverage on Fool.com.

It's getting personal
Banks aren't the only ones that may have to acclimate to higher taxes. The increases that took effect at the beginning of 2013 affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "How You Can Fight Back Against Higher Taxes," the Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.


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