Senators, scholars question plan to tax AIG bonuses

Senate leaders on Monday slowed the drive toward heavily taxing AIG bonuses as President Obama and legal analysts questioned the constitutionality of such a levy and executives at the insurance company returned millions in payments.

Majority Leader Harry Reid, D-Nev., said the Senate probably won't take up the matter this week, saying in a floor speech that "Republicans have asked for more time to study the legislation."

Don Stewart, a spokesman for Senate GOP leader Mitch McConnell, R-Ky., said Republicans want to make sure there are no "unintended consequences or loopholes." As for possible legal problems, Stewart said Republicans don't have to raise them because "the White House did that already."

In a 60 Minutes interview broadcast Sunday, Obama said, "As a general proposition, you don't want to be passing laws that are just targeting a handful of individuals." Obama, who holds a law degree, also has criticized the AIG bonuses and wants to recoup the money.

The House overwhelmingly passed a bill last week that would impose a 90% tax on employee bonuses paid by companies receiving more than $5 billion in federal bailout money.

On Monday, New York Attorney General Andrew Cuomo said 15 AIG employees have agreed to return more than $30 million of the $165 million in bonuses awarded earlier this month. Those who do not return the money, however, could sue if a steep tax is imposed, and Congress would face potential constitutional problems if it is seen as targeting a company, some legal analysts warned.

"I have increasing doubts about the use of the 90% tax," said Harvard Law School professor Laurence Tribe.

Other legal scholars said the constitutional issues are easily addressed.

Joseph Bankman, a law professor at Stanford University, said Congress just has to make sure that the legislation can apply to employees of companies beyond AIG. Bankman also said Congress needs to specify a public purpose, in this case safeguarding federal money.

"You never know the answer until something is litigated," Bankman said. "But in general, the Constitution gives Congress the right to make the tax laws."

Bankman and other scholars said a major issue in potential lawsuits is what the Constitution calls a "bill of attainder," which is when a legislative body singles out an individual or group for punishment. In 2002, a federal appeals court struck down a New York law that prohibited Consolidated Edison from charging customers for costs related to a shutdown of a nuclear power plant.

Tribe said "the pitchfork mentality" surrounding the House bill may make it "at least potentially vulnerable to attack under the bill of attainder clause."

A more "constitutionally sound" approach, Tribe said, has been taken by the House Judiciary Committee. It voted for a bill authorizing the U.S. attorney general to legally challenge excessive payments from federal bailout funds; no full House vote has been scheduled.

Charlotte Crane, law professor at Northwestern University, said courts have few precedents to judge such a "tailored tax."

"Congress doesn't do this kind of thing very often," she said.