H.R. 1586

H.R. 1586 is expected to be considered on the House floor on Thursday, March 19, under a motion to suspend the rules, requiring a two-thirds majority vote for passage. This legislation was introduced by Representative Charles Rangel (D-NY) on March 18, 2009.

H.R. 1586 would impose a new 90% tax on bonuses received by employees of certain companies that received funds from the Troubled Asset Relief Program (TARP). The tax would apply to any bonus given after December 31, 2008.

The legislation would apply the 90% tax to only the portion of a bonus that, in combination with other income, increases an employee's adjusted gross income to a level above $250,000 ($125,000 for married couples filing individually) in the taxable year when the bonus was received. Therefore, employees with adjusted gross incomes of less than $250,000 (including bonuses) would not be impacted.

The tax would apply to any retention payment, incentive payment, or any other payment made to an employee above their regular pay for their regular service. However, any commissions, fringe benefits, or expense reimbursements would be exempt from the taxation.

The bill would provide that employees that return a bonus in the same taxable year as the bonus was received would be exempt from the tax. The bill would also specify that any payment made by a TARP recipient to an employee to offset the cost of the tax would be considered as an additional bonus and would be subject to the 90% tax.

The bill defines a "TARP recipient" as any person or persons who have received more than $5 billion in TARP funds, Fannie Mae and Freddie Mac, and any company that is either connected to a TARP recipient through stock ownership or is more than 50% owned by a TARP recipient. If a company repays its TARP assistance funding to a level below $5 billion, its employees would no longer be subject to the 90% tax.

The American International Group (AIG) is one of the largest insurance and financial services companies in the world. Headquartered in New York, AIG employs more than 115,000 people and operates in more than 130 countries worldwide. In September, 2008, AIG's Standard and Poor's credit rating was lowered, due, in part, to AIG's sizable investments in the debt securities known credit default swaps. With stocks tumbling and confidence that the company could survive waning, on September 16, 2008, the Federal Reserve Bank of New York, under the leadership of now-Treasury Secretary Timothy Geithner, agreed to provide AIG with $85 billion.

Over the next few months, Congress established the Troubled Asset Relief Program (TARP) to buy up toxic assets from financial institutions, and quickly pledged an additional $37.8 billion to AIG. As the mission of TARP changed to provide direct capital infusions, AIG continued to collect taxpayer assistance. To date, AIG has received or been pledged $173 billion in taxpayer funds. The federal government now controls roughly 80% of AIG stock. On February 4, 2009, President Obama announced that his administration would impose strict restrictions on bonuses and compensation paid to employees of institutions that received TARP funds, stating that "We're going to be demanding some restraint in exchange for federal aid." However, on March 15, 2009, AIG announced that it had paid $165 million in contractually obligated retention bonuses-some as large as $6 million-to 73 AIG Financial Products Group employees. The announcement has since sparked public outrage regarding the use of taxpayer assistance and led to the consideration of this legislation.

It is important to note that the Majority took affirmative action on more than one occasion to ensure that these payments could be made. The $165 million in AIG bonuses were made possible by an amendment to the "stimulus" package added during the conference committee by Sen. Chris Dodd (D-CT). The amendment stated that provisions in the TARP and "stimulus" bills that limited compensation payments would not apply to "any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009." Thus, Sen. Dodd's amendment legally required AIG to pay the bonuses because they were agreed to months prior.

The conference committee also stripped a Senate-passed provision from H.R. 1, which would have completely prevented the $165 million in AIG bonuses. The conference committee removed an amendment sponsored by Senators Olympia Snowe (R-ME) and Ron Wyden (D-OR) that would have forced any TARP recipient to repay any bonus paid in excess of $100,000, or face a 35% excise tax on any TARP funds that were not immediately paid back to the Treasury. The amendment was accepted in the Senate by voice vote. However, the Snowe-Wyden amendment was taken out before the final vote. Despite their strong rhetoric, Democrats in Congress made the AIG bonus payments possible.

While Democrats have facilitated the payment of bonuses to employees of companies that have received taxpayer assistance, Republicans have attempted to enact legislation that would restrict TARP recipients from paying excessive bonuses and protect taxpayer money. On March 18, 2009, House Republicans attempted to offer legislation on the floor that would have required Treasury to recoup the AIG bonuses and would have denied AIG any additional TARP funds until the bonuses were returned in full. The Democrat majority blocked consideration of the Republican proposal. Instead, Democrats will offer a constitutionally questionable 90% tax on some bonus recipients.

By legislatively imposing a tax penalty on employees that were given bonus payments by TARP recipients, some Members may be concerned that the underlying bill may violate the Constitutional prohibition on bills of attainder. Article 1, Section 9, Clause 3, states that "No bill of attainder or ex post facto Law shall be passed." A bill of attainder is an act passed by a state or federal legislature that punishes a specific person or group without a trial. In determining whether a piece of legislation violates the constitutional prohibition against bills of attainder, the Supreme Court generally tests whether the act specifies a group of people, contains a punishment specifically for that group of people, and does not require a trial. Given that criteria, this legislation could be ruled unconstitutional for imposing a tax penalty on a specific group of individuals.

At press time, no Congressional Budget Office or Joint Committee on Taxation estimate of the cost of the legislation was available.