Republicans put brakes on rush to tax AIG bonuses

WASHINGTON -- Senate Republicans are drawing out a flap that has made the Obama administration squirm, applying the brakes to Democratic attempts to quickly tax away most of the bonuses at troubled insurance giant AIG and other bailed-out companies.

Sen. Jon Kyl, the Republicans' vote counter, blocked Democratic efforts Thursday evening to bring up the Senate version of the tax bill to recoup most of the $165 million paid out by AIG last weekend and other bonuses in 2009. The House had swiftly approved its version of the bill earlier in the day.

By rushing, Kyl said, Democrats were letting populist outrage trump informed decision-making in the Senate, which is supposed to be insulated from the pressures of public passion.

"I don't believe that Congress should rush to pass yet another piece of hastily crafted legislation in this very toxic atmosphere, at least without understanding the facts and the potential unintended consequences," Kyl said on the Senate floor. "Frankly, I think that's how we got into the current mess."

Senate Democrats said they will try again next week to take up the tax bill and hope to complete it before April 4, when Congress leaves for a two-week spring break. Combining the disparate House and Senate versions of the bill might have to wait until after the recess.

The Senate voted last month to block the AIG and other bonuses as part of the $787 billion stimulus bill, but Democrats then watered down the measure allowing them after Treasury Department officials warned that the move could trigger lawsuits against the government.

Last week, when Treasury Secretary Tim Geithner couldn't talk AIG out of paying the bonuses, Republicans were quick to blame Democrats, pointing out that they were in charge of Congress and the department when the decision was made about bonuses and the stimulus bill. Democrats sought to regain the offensive -- and stem the political damage -- with promises to tax the bonuses away.

How to impose those taxes without running afoul of the Constitution or the law is a dispute that has Republicans urging a go-slow approach. Doing so, of course, would drag out the Democratic discomfort over administration missteps and provide plenty of time for the GOP and others to question Geithner's performance.

Republican reluctance also appeals largely to a key constituency that traditionally finds regulation anathema: Wall Street.

Robert Willens, a corporate tax lawyer in New York, said the Senate bonus tax bill would still allow bailout beneficiaries to negotiate higher salaries with employees to compensate for lost bonuses. The Senate bill authorizes the Treasury to issue regulations preventing firms from masking bonus payments as salaries, but it does not prevent firms from handing out raises.

"If the vast majority of bonuses become fixed salaries that would harm the institutions because they would have higher fixed costs," Willens said. "What happens if the bank suffers through a poor year? It has all these fixed obligations they have to meet. That's the beauty of the bonuses."

The House bill, which passed 328-93 and split Republicans almost evenly, would impose a 90 percent tax on bonuses paid after Dec. 31, 2008, by companies that have received more than $5 billion in government bailout money. The tax would not affect workers with adjusted gross incomes below $250,000.

The Senate bill is much broader, affecting bonuses paid after Jan. 1, 2009, by firms receiving more than $100 million in government bailout money. The Senate bill would impose a 35 percent excise tax on the companies that pay the bonuses, and a 35 percent excise tax on the employees who receive them. Those taxes would be in addition to the 25 percent now withheld by the IRS on bonuses up to $1 million, and 35 percent withholding on bonuses above that.

Retention bonuses, like the ones paid to AIG employees, would be fully taxable. The first $50,000 of other bonuses, such as performance bonuses, would be exempt. The Senate bill would also cap deferred compensation for top executives at $1 million a year. Deferred compensation above that amount would come with steep penalties.

More bills are on the way.

House Financial Services Committee Chairman Barney Frank, D-Mass., is holding a hearing next week on legislation that would apply to bailout recipients such as Fannie Mae and Freddie Mac and prohibit them from paying "any bonus to any employee, regardless of when any agreement to pay a bonus was entered into."

Republicans say there are enough problems or unknowns about the bonus-limiting bills to merit a closer look. Imposing too high a tax rate, doing it retroactively and targeting a narrow group of people could violate several of the Constitution's prohibitions against government takings without due process, Republicans say.

Even House Ways and Means Committee Chairman Charles Rangel, D-N.Y., warned against using the tax code as a political weapon, but later backed off and supported the bill because, he said, that was the consensus and he saw no other way.

In practical terms, too, Senate Republican leaders do not yet know where members of their caucus stand on the measures, particularly the Senate bonus limits bill co-sponsored by Republican Sen. Charles Grassley of Iowa, GOP officials said Friday.

"I think the outrage is so obvious that we need to pass the legislation to send a clear message to corporate America that when your sucking the taxpayers, you don't do these outrageous things," Grassley said. "When you're under water, you don't suck in more water because then you die."

Then there's the question of the sanctity of contracts.

If the government goes around canceling contracts like those calling for AIG bonuses, people might stop entering into contracts that call for using government bailout money designed to get credit flowing again to help spend the nation out of recession.

Some firms could be scared away from the bailout program, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable.

"Ultimately it will undermine the recovery efforts," Talbott said. "It will have a chilling effect on ability to attract and retain employees," Talbott said.

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The House bill is HR 1586, the Senate bill is S 651.