- The Washington Times - Friday, March 20, 2009

The House of Representatives hustled along a bill Thursday imposing a 90 percent tax on bonuses paid to executives at companies that receive massive taxpayer bailouts and brushed aside concerns that the action amounted to an abuse of the tax code that will not pass constitutional muster.

The 328-93 vote came just days after lawmakers learned that insurance giant American International Group had paid out bonuses worth an estimated $165 million to more than 400 officials even as it was receiving more than $170 billion in government loans and investments. Many of the bonuses went to executives in the AIG financial unit that brought the firm to the brink of insolvency.

“We heard from our constituents - do something and do something right now,” said Rep. Chellie Pingree, Maine Democrat.

The Senate Finance Committee has drafted its own bill imposing an effective 70 percent tax on the bonuses, but Senate Republicans blocked an effort by Senate Majority Leader Harry Reid, Nevada Democrat, to begin floor debate.

“I don’t believe the Congress should rush to pass another hastily crafted bill” to deal with the financial crisis, said Sen. Jon Kyl, Arizona Republican, who noted that the Senate finance and banking committees had not even held hearings on the bill.

Through Treasury Department and Federal Reserve loans and investments totaling more than $170 billion, the government now owns 80 percent of AIG. But the bonus payments are codified in employee contracts, and some legal scholars question whether the government has the authority to break such deals retroactively or to impose a tax on such a small targeted group.

“A contract is a contract,” said Jesse M. Fried, a law professor at the University of California at Berkeley, adding that past payments made as part of a valid legal agreement would be protected.

Mr. Fried also stressed the distinction between discretionary bonuses and “performance-based payouts” that are tied to specific benchmarks.

“I don’t think the exact nature of these contracts has been described publicly,” he said.

New AIG Chairman Edward Liddy told a House panel Wednesday that approving the payouts had been “distasteful” for him but that most were “retention bonuses” negotiated early in 2008 to persuade key AIG personnel to stay on and help untangle the company’s web of investments and derivative contracts. He argued that U.S. taxpayers would face an even greater loss if the bonuses were not paid and the employees quit as a result.

Many Republicans attacked the House bill as an attempt by the Democratic majority to paper over the mistakes of recent taxpayer bailouts and shield the Obama administration from criticism.

“This bill is nothing more than an attempt for everybody to cover their butt up here,” said House Minority Leader John A. Boehner, Ohio Republican.

Rep. Joe Wilson, South Carolina Republican, called the tax bill “an unconstitutional joke of a bill.”

Because the House Democratic leaders rushed the bill to the floor, the tax measure had to win a two-thirds majority under special rules suspending the regular parliamentary order. Democrats overwhelmingly backed the bill on a 243-6 margin, while 85 Republicans supported the bill and 87 opposed it.

House Ways and Means Committee Chairman Charles B. Rangel said the bill’s aim was “to stop the thievery at the taxpayers’ expense.” He said the tax provisions would cover not just AIG, but also any company that has received over $5 billion in federal bailout aid, including mortgage giants Fannie Mae and Freddie Mac and a number of the country’s largest banks and financial firms.

The House bill applies to bonus money paid out since Jan. 1. Recipients would not pay income tax on their bonuses but would face instead a special 90 percent federal tax. The tax applies to executives with family incomes of $250,000 or more.

The Senate version now being drafted would place a 35 percent excise tax on AIG for the cost of its bonuses and a separate 35 percent income tax on the executives who received the bonuses.

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