Our friends at the Treasury spent the weekend working primarily with the House Financial Services Committee to refine the Administration’s emergency plan to purchase hundreds of billions of dollars worth of mortgage backed securities.

According to Bloomberg, the scope of the proposal has expanded to include other troubled assets, including credit card debts and car loans. Members of Congress are also weighing in, seeking to add additional provisions such as limits on executive compensation and the cramdown of loan balances under bankruptcy.

The goal of these talks is to get a relief package through Congress and implemented before Congress leaves for the elections at the end of the week. As you can imagine, adding this 800 pound legislative gorilla to the existing long list of must-do items on Congress’ calendar has the potential to push the current session well into next week. At this point, Congress simply cannot leave without taking some form of action on this issue.

That’s not to say it’s a done deal. There is focused opposition to the expansive scope of the Treasury proposal that gives the Secretary of the Treasury unprecedented authority to purchase private sector securities and other assets. The broad nature of this authority should be viewed both as an expression of the enormous scope of the problem as well the size of the obstacle of getting it enacted.

How will this plan impact S corporations? A couple of thoughts:

Liquidity: The rational for the bailout is that the subprime contagion afflicting Wall Street was spreading to Main Street, infecting local banks and insurance companies and threatening your business’ line of credit, insurance policies, pension funds, retirement plans, and bank accounts. Presumably, the government purchase of these securities would cure the financial world and allow the sector to return to health.

It had better.

As we have discussed with our S Corp friends on the Hill and over at Treasury, after this plan, Treasury and the Fed will have used every tool they have, and several new ones they had to invent, in their efforts to restore confidence and order to the financial markets. Once some form of this proposal is enacted, there is no Plan B.

Tax Bills: While the ultimate cost of the proposed bailout to taxpayers is unclear (the taxpayer could actually see a profit when the multi-year process is complete) the initial cost of the plan will act as a massive drain on the budget.

A similar effect occurred during the Thrift bailout in the late 1980s and early 1990s. The ultimate cost of the bailout to taxpayers was around $150 billion, but Treasury had to spend many times that amount initially to pay off insured depositors of failed Thrifts. In later years, money from the sales of foreclosed properties resulted in revenues coming in to the Treasury. The net effect was a significant increase in deficits in the early years of the bailout and just as significant decrease in deficits as the process wound down

The deficit for 2008 is already projected to rise dramatically, from $161 billion to over $400 billion. Adding hundreds of billions of bailout expenses — or even a fraction of those costs, depending on how the CBO chooses to score the plan — will drive the deficit to records levels over the next couple years. These record deficits will squeeze Congress’ ability to move other priorities like extending portions of the Bush tax relief, stemming the growth of the AMT, or increasing federal spending for health care and other items.

The current setup reminds your S-CORP staff of the 1992 election, when candidate Clinton ran on a package of middle class tax cuts, but President Clinton pushed through tax increases instead. At the time, he argued that the deterioration in the budget made the tax hikes necessary. While there’s some debate over just how badly the deficit deteriorated between 1992 and 1993, there will be no debate next year. This bailout has the potential to double the federal deficit or more.

The net result is that once enacted, this bailout reduces the chances that Congress will act next year to reduce taxes or increase spending. The deficit, just like in the mid-nineties, will take center stage in budget and economic politics, placing additional pressure on tax rates to rise over the next couple years.