Taxes on Bonuses of TARP Recipients

Public outrage over the $165 million in bonuses paid to AIG executives after it received $173 billion in bailout funds spurred the House into passing H.R. 1586 by an overwhelming majority vote of 328-93 on March 19. The House bill would levy a 90 % tax on any bonuses from bailed-out firms (TARP recipients) paid out in 2009 to individuals with incomes over $250,000. Prospects for Senate passage of S. 651, the companion bill in the upper chamber, are looking dimmer each day. The Senate bill would impose an excise tax equal to 35% of the bonus on both the employee and entity effectively taxing the bonuses at a 70% rate.

Now the TaxProf Blog reports that the Congressional Research Service has issued a report that deals with many of the potential challenges to H.R. 1586 and S. 651 if they became law. The report called Retroactive Taxation of Executive Bonuses: Constitutionality of H.R. 1586 and S. 651 addresses the prohibition under the US Constitution of ex-post facto laws and whether these bills could be considered "Bills of Attainder".

U.S. Const. Art. I, § 9, cl. 3 reads “No Bill of Attainder or ex post facto Law shall be passed.”

The report disposes of the ex-post fact issue fairly quickly by citing to US v. Brown, 381 U.S. 437, 468 (1965) where Supreme Court defined a bill of attainder as a “law that legislatively determines guilt and inflicts punishment upon an identifiable individual without provision of the protections of a judicial trial.” The thornier issue is whether the proposed legislation would amount to a Bill of Attainder. The important role of legislative history is discussed at page 16 of the report. Whatever final action Congress takes, the details of the legislative history will determine whether the resulting law will be affirmed or declared unconstitutional.

An interesting aside is whether A.I.G. executives who returned their bonus still have to pay taxes on them. See the NY Times article Returned Bonuses May Still Be Taxable.

For further reading in the BLS collection, consult SARA, the online catalog, for Limits on States: A Reference Guide to the United States Constitution by James M. McGoldrick with a foreword by Kenneth Starr (Call # KF4600 .M36 2005).