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Banks Investigate Constitutional Challenge to Proposed Bank Tax

2 min readBy: Joseph Bishop-Henchman

From the New York Times:

Wall Street’s main lobbying arm has hired a top Supreme Court litigator to study a possible legal battle against a bank taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. proposed by the Obama administration, on the theory that it would be unconstitutional, according to three industry officials briefed on the matter.

In an e-mail message sent last week to the heads of Wall Street legal departments, executives of the lobbying group, the Securities Industry and Financial Markets Association, wrote that a bank tax might be unconstitutional because it would unfairly single out and penalize big banks, according to these officials, who did not want to be identified to preserve relationships with the group’s members.

It sounds like the argument will be similar to that made against the proposed tax on AIG bonuses last year. I reviewed the precedents and constitutional arguments on that idea, finding it would probably be unconstitutional, here:

Determining whether a law is a bill of attainder involves the application of a two-part test: (1) whether the legislature has acted with specificity, and (2) whether the legislature has imposed punishment.[…]

[E]ven where Congress applies a law to a broad group of people, if it is easily ascertainable that a particular person or class is the target of the legislation, it satisfies the specificity test.[…]

[T]he questions are whether singling out a group for a very high tax would constitute punishment under any of three factors. For the first, it would be whether such a tax falls within the historical meaning on legislative punishment. For the second, it would be whether the tax’s nonpunitive purposes outweigh the asserted punishment. For the third, it would be whether there is legislative record demonstrating punishment was a motivation behind the bill.

Read the rest here. To the extent that the proposed tax on banks is viewed, by legislators and by observers, as a punitive measure, it could be in tension with the Constitution.

A friend of mine asked why a tax on banks would be unconstitutional but a bailout for banks wouldn’t be. The answer to that question depends on how broadly you think courts should interpret the phrase “general welfare” in the Constitution.