Congress Looking at New Taxes on AIG Bonuses

By Shailagh Murray and Paul Kane
Washington Post Staff Writers
Tuesday, March 17, 2009; 2:25 PM

Senate Democrats will seek to recoup $165 million in bonuses paid to executives of the troubled insurance giant American International Group through a narrowly focused tax, unless the money is returned voluntarily, party leaders announced this morning.

Senate Majority Leader Harry M. Reid (Nev.) said Finance Committee Chairman Max Baucus (Mont.) would unveil a proposal by tomorrow that would tax up to 98 percent of the bonus money. "That will certainly send a message to the people at AIG and all others who try to benefit from the hardships the American people face," Reid said.

In the House, Reps. Steve Israel (N.Y.) and Tim Ryan (Ohio) introduced the "Bailout Bonus Tax Bracket Act" to create a 100 percent tax on bonuses over $100,000 that are distributed to employees of financial firms receiving federal bailout funds. Currently, the IRS withholds 25 percent from bonuses less than $1 million and 35 percent for bonuses more than $1 million dollars. The Israel-Ryan proposal would apply to all bonuses to government-supported firms such as AIG that have been given since Jan. 1.

The congressional efforts come as New York Attorney General Andrew M. Cuomo announced that at least 73 employees of AIG's Financial Products unit -- the London-based division of the insurance giant that sold the high-risk derivatives blamed for the company's near-collapse -- got bonuses of at least $1 million. He sent AIG subpoenas yesterday seeking data on who received the bonuses and the justification for them.

Although long planned, the AIG bonuses have sparked bipartisan outrage on Capitol Hill and place in serious jeopardy the prospect of further aid to the banking sector. AIG took huge risks with its investments in credit default swaps, an unregulated market that collapsed in the credit crisis and, it received more than $170 billion in taxpayer bailout money in the past year as a result of the financial meltdown. The company has received more bailout money than any other single firm, and is now 80 percent government-owned.

The bonuses, guaranteed through employment contracts that had been made public to the government earlier and paid out on Friday, were offered as a way to lure or keep top talent to help sort out the financial situation at AIG, officials there said. But when news of the payments surfaced in recent days, lawmakers turned to the Obama administration, demanding that the U.S. Treasury attempt to claw back some of the money.

Despite serious efforts to stop the bonuses, the administration apparently was unable to stop the payments. Yesterday, President Obama expressed his unhappiness with the bonuses and directed government lawyers to review the company's contracts to see whether provisions guaranteeing the bonuses can be overturned. The administration also last week persuaded the company to restructure some of the payments, and the top seven AIG executives had earlier agreed to forego their bonuses through this year.

Reid said Congress may be better equipped to do the job. "We as a Congress are not defenseless," said Reid. "We can also do things."

Sen. Charles E. Schumer (D-N.Y.) said AIG executives would be given an opportunity to pay back the bonus money voluntarily, before being hit with the tax. "If you don't return it on your own, we will do it for you," Schumer said.

The tax idea has quickly gained momentum as the quickest and most efficient method for capturing the bonus money. Sen. Charles E. Grassley (R-Iowa), the highest ranking GOP member of the Senate Finance Committee, told Baucus at a hearing this morning that "I want to back you up on looking into that and doing what we can to make sure these things don't happen in the future."

Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said yesterday he was advocating a narrowly tailored tax provision that would hit the AIG executives who received the bonuses at rates as high as 98 percent. The idea was, Dodd said, "to write a tax provision in a way that is specifically targeted to that audience."

This could serve as a deterrent to other firms receiving federal bailout assistance from issuing similar bonuses, and other key members of the banking and finance committees have indicated support for such an idea.

But House Majority Leader Steny Hoyer (D-Md.) said today that there might be issues relating to the "equal protection clause" in the Constitution that forbids laws that affect certain groups differently. For now, Hoyer advocated a course of action that centered around a public pressure campaign to persuade the AIG executives to voluntarily surrender the bonuses.

"Have they no shame, have they no sense of responsibility to American taxpayers? . . . Have they no sense of decency?" Hoyer asked at a press briefing today.

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