The House of Representatives today passed H.R. 1586 which would impose a 90 percent federal income tax on recipients of any retention payment, incentive payment or other bonus paid after Dec. 31, 2008 by a company or an affiliate of a company that received more $5 billion under the Emergency Economic Stabilization Act of 2008 (EESA). The tax would not apply to bonuses paid after the company reduced the aggregate amount of EESA capital infusions to $5 billion or less. Introduced yesterday by Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, the bill passed 328-93.


In the senate, Senators Max Baucus (D-Mont.) and Charles Grassley (R-Iowa), the majority and minority leaders of the Senate Finance Committee, today issued a joint press release on their proposed "Compensation Fairness Act of 2009." The tax proposed by Baucus and Grassley is intended to tax "excessive" executive pay and would apply to any company that receives taxpayer funds. The press release indicates that the primary motivation for this tax is to recoup payments made to executives at American International Group (AIG). Other companies, including relatively healthy firms that qualified for the Capital Purchase Program, however, would also be in the crosshairs of the new tax. The recoupment effort is in the form of a 35 percent excise tax that is paid by both the employer and the executive. It applies to any "retention" payments, regardless of the amount, and all bonuses that exceed $50,000. The employer is responsible for either paying or collecting the excise tax on payments to non-U.S. employees. Exempted from this proposal would be small banks and large banks with less than $100 million of TARP funds outstanding. In addition, there would be a

$1 million annual limit on deferred compensation accruals. If this cap is exceeded, all compensation deferrals under all employer plans would be immediately taxable and subject to a 20 percent excise tax.


While AIG may be the intended target, these taxes have a broader range. All recipients under the Troubled Assets Relief Program (TARP) and all other companies in which the government holds an equity interest, including Fannie Mae and Freddie Mac, would be affected. The excise tax would apply retroactively to bonuses earned or paid from Jan. 1, 2009 and continuing through the period the government retains an equity interest. The $1 million deferred compensation cap is different in that it would only apply prospectively.


If either H.R. 1156 or the bill proposed by Baucus and Grassley become law, it would be the second time that Congress has added executive pay restrictions to TARP recipients since EESA was enacted last October. Currently, TARP recipients are subject to numerous compensation limits, including the following:

  • Compensation incentives cannot reward executives for taking "excessive risks"
  • Recoupment or "claw-back" of compensation if financial results are materially inaccurate
  • Prohibition of any golden parachute payments on severance for any reason
  • Compensation over $500,000 is nondeductible
  • Prohibition on bonuses or incentives, other than long-term restricted stock

The prohibition on bonuses was added by the American Recovery and Reinvestment Act of 2009

(the "stimulus package"). Contracts in effect prior to Feb. 11, 2009 were exempted from the Act. The bonuses to AIG employees were promised in retention agreements dated April 2008. The excise tax would effectively confiscate those payments, even though the stimulus package expressly permitted them.


Earlier in the week, the Treasury Department posted correspondence from Secretary Timothy Geithner to the Congress expressing its views on the AIG retention payments and measures being explored to recoup them. One alternative is to deduct the retention payment total from the $30 billion in new aid that has been pledged to AIG. Secretary Geithner notes that Treasury and its counsel had concluded that the retention payments were contractually-mandated (from April 2008) and would be legally difficult to rescind. The approach of a retroactive tax may have a similar effect.

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