Democrats on Tuesday considered stripping out a controversial tax from their landmark financial-reform bill in order to win the swing votes needed to pass it in Congress.

With crucial Republican moderates threatening to withdraw their support, Democrats were weighing alternative ways to fund the most sweeping rewrite of the Wall Street rulebook since the 1930s, several sources said.

Democrats were considering reopening negotiations on the bill later on Tuesday, sources said.

Until Sunday, the bill had been expected to pass both chambers of Congress and be signed into law by President Barack Obama by July 4.

But Democrats are now two votes short of the 60 needed to clear a Republican procedural hurdle in the Senate. Democratic Senator Robert Byrd died on Monday, depriving his party of a needed vote, and Republican Senator Scott Brown said on Tuesday he would withdraw his support unless Democrats strip out $19 billion in taxes that would apply to large financial institutions.

The tax was added during a final all-night negotiating session last week to cover the costs of the bill.

It is especially troubling that this provision was inserted in the conference report in the dead of night without hearings or economic analysis, Brown wrote in a letter to the Democrats who are handling the bill. This new provision takes real money away from the economy, making it unavailable for lending on Main Street, and gives it to Washington.

Other moderate Republican senators who previously supported the bill have also expressed reservations over the new tax.

One of those Republicans, Senator Susan Collins of Maine told reporters she was working with Senate Banking Committee Chairman Christopher Dodd to get away from the tax and they were making progress.

The bill is not perfect. But I believe if you take out the new bank tax that, on balance, it would improve our financial system and I would support it, she told reporters.


The tax was added to ensure that the bill does not add to the government's ballooning budget deficit. The nonpartisan Congressional Budget Office estimated on Monday that the legislation would be deficit-neutral with the tax provision.

If the tax is removed from the bill, lawmakers may propose tapping the $700 billion bank bailout fund and banks' deposit insurance fees, sources said.

One memo being circulated on Tuesday showed Dodd was considering a proposal to raise the Federal Deposit Insurance Corp premium ratio to 1.35.

Currently the FDIC by law must maintain the insurance fund at 1.15 percent of banks' covered deposits. The increase in the premium ratio would result in a rate hike on banks.

If negotiators agree on a solution, the House could vote on the measure on Wednesday. That conceivably could give the Senate enough time to approve it and send it to Obama by July 4.

The bill, which aims to prevent a repeat of the 2007-2009 financial crisis that shook the global economy, is a top priority for Obama and would give him and his fellow Democrats a big legislative win ahead of November congressional elections.

We continue to work with Congress to find all possible paths to ensuring Wall Street reform is enacted as soon as possible, an Obama administration official said.

The legislation would force banks to reduce, but not cease, risky trading and investing; set up a new government process for liquidating troubled financial firms; and establish a new consumer-protection bureau.

Bank stocks fell sharply when the market opened on Tuesday and were down 4 percent in early afternoon trade.