CQ TODAY PRINT EDITION
March 18, 2009 – 9:40 p.m.
Bonus Tax Bills Move Forward
By Phil Mattingly and Richard Rubin, CQ Staff
While American International Group Inc.’s chief executive says the firm could recover millions in bonuses via voluntary means, that’s not slowing a legislative effort to recoup the money and shift the incentive-based pay structure traditionally used by financial institutions.
The House is scheduled to act Thursday on legislation (
“I expect to see an overwhelming vote,” House Majority Leader Steny H. Hoyer , D-Md., told reporters Wednesday afternoon.
The House response, and Senate legislation also likely to see action in the coming days, will largely change the incentive structure for many banks on the receiving end of federal bailout funds.
The bills represent a continuation of a huge shift in the government’s approach to corporate management that began last fall, when the government started to take stakes in private firms.
They are also a quick pivot on an issue that could reverberate throughout Wall Street for years to come, something that has sparked criticism from a battered banking industry questioning the motives of lawmakers.
“The government should have to prove [that the surtaxes on bonuses] add value to the institution which strengthens the government’s investment,” said Scott Talbott, the senior vice president of government affairs of the Financial Services Roundtable, an industry group representing 100 of the largest financial institutions in the country.
But for lawmakers barraged with calls and e-mails from critical constituents, the corporate bonuses are part of a larger problem surrounding the troubled institutions — the idea that there is no financial accountability for risk-taking.
“The problem is not the dollar amount, but the incentive structure,” said Massachusetts Democrat Barney Frank , the chairman of the House Financial Services Committee. “It’s a heads-they-win, tails-they-break-even.”
Edward M. Liddy, the chief executive of AIG, caught onlookers and committee members alike off guard when he broke from prepared testimony Wednesday in front of a House Financial Services subcommittee and announced a request that all recipients of more than $100,000 of the $165 million in bonuses return at least half of the money. Leaders of the battered AIG financial products division have been asked to return 100 percent of their bonuses, Liddy said.
But that is unlikely to satisfy lawmakers.
The House Rules Committee on Wednesday paved the way for consideration of the tax bill, unveiled late Wednesday by Rangel under suspension of the rules, an expedited procedure that bars amendments and requires a two-thirds vote for passage.
On the Senate side, legislation being written by Finance Chairman Max Baucus , D-Mont., and ranking Republican Charles E. Grassley of Iowa would place a 35 percent excise tax on AIG for its bonus costs and a 35 percent tax on the bonus income of recipients. It would impose a 20 percent surtax on any deferred compensation over $1 million annually and apply to companies that have received federal bailout money or companies in which the federal government has an equity stake, possibly affecting nearly 400 companies. It would apply to all payments from Jan. 1, 2009, forward.
Baucus said Wednesday the timing for floor consideration of his bill remains up to Senate leadership. Sen. John Ensign , R-Nev., said the first focus should be on analyzing the details coming out about the bonuses and determining what government officials knew, and when.
Careful Drafting
Lawmakers must be careful as they try to craft laws that can pass constitutional muster. Imposing too high a tax rate could risk a lawsuit calling the tax a “taking” without due process. Reaching too far back in time could also violate the Constitution’s prohibition on ex post facto legislation. And targeting too narrow a group could also be constitutionally suspect.
Rep. John Yarmuth , D-Ky., a member of the Ways and Means Committee, said he wasn’t sure the proposed approach was constitutional, though he said tax writers were being careful in their drafting.
“The public’s demanding we do something, so it’s the best alternative,” Yarmuth said.
Separately, the House Judiciary Committee approved, by voice vote, a bill (
There is ample precedent, however, for imposing retroactive tax increases, such as the rate increases (PL 103-66) pushed by President Bill Clinton, which were enacted in August 1993 but applied to the entire tax year.
As long as any tax law applies to the current tax year, there should not be a problem with retroactivity, said Leslie B. Samuels, who was a Clinton administration Treasury official and is now a partner at Cleary Gottlieb Steen & Hamilton in New York.
However, Samuels said, lawmakers’ loud public comments about taking back the bonuses could come back to hurt them in future litigation.
“If a court considers the constitutional issue of a taking without appropriate compensation, these statements of the legislators and the intent of Congress, I believe, would be likely to be taken into account in court,” he said.
Rangel, who had expressed skepticism on Tuesday about using the tax code to go after the bonuses, said Wednesday that the situation called for setting aside his usual preference against retroactive tax policy.
“The depth of the damage that has been done requires very unusual and unique retaliation,” Rangel said.
Broader Question
Rangel’s comment pointed to a broader question: the role of the federal government in the private market. The Treasury Department’s capital injections into financial institutions, beginning in 2008, changed the nature of the economic debate in Congress, making government intervention more common. But populist anger is overtaking a more measured response to the grave economic crisis, some lawmakers say.
“This is exactly why the federal government should not be in the business of bailing out private companies,” Rep. Tom Price , R-Ga., said of the current frenzied state of Congress. “This is what a political economy looks like. And it’s a very dangerous place to be.”
While there was plenty of outrage directed Liddy’s way during the testimony Wednesday — “AIG now stands for arrogance, incompetence and greed,” said Rep. Paul W. Hodes , D-N.H. — some lawmakers sought to dig deeper.
“The bonuses are important, the bonuses are shocking, but the bonuses are not the only element here,” said Rep. Paul E. Kanjorski , D-Pa.
Liddy, who was installed in his position last year by federal regulators, warned that the return of the money could have negative effects, since it would likely mean the resignations of employees largely responsible for winding down the most systemically risky aspects of the company.
“We will get the bulk of that money back, they will return it, but they will return it with letters of resignation,” Liddy said, warning that a dire situation still confronts the insurance giant.
Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke are expected to testify at a full committee hearing on AIG on March 24, Kanjorski said.
Liddy, who gave no indication before the hearing that he would request repayment from his employees, also appeared to grasp the dangerous road his company was moving down should the bonus money not be recouped.
“We are acutely aware,” Liddy said, “that the taxpayers’ patience is wearing thin.”
Benton Ives and Edward Epstein contributed to this story.
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