House Votes For 90% Bonus Tax

by Mike Godfrey, Tax-News.com, Washington

20 March 2009

The US House of Representatives has given overwhelming bipartisan support legislation written by Ways and Means Committee Chairman Charles Rangel to tax the bonuses of highly paid individuals employed at companies in receipt of bail-out funds at a rate of 90%. Meanwhile, over in the Senate, four members introduced legislation to discourage excessive compensation by companies that have taken taxpayer dollars.

Rangel's legislation passed the House by a vote of 328-93 on March 19, drawing support from 85 Republican Members. The legislation would slap a 90% tax on bonuses paid by companies which have received more than USD5bn in Troubled Asset Relief Program funds if the recipient earns adjusted gross income of more than USD250,000. It would apply to bonuses paid on or after January 1, 2009.

“This bill rights a wrong,” said Rangel following the vote. “We are not trying to punish anybody, but rewards should be subjective and you don’t reward greed with taxpayer money. I am so pleased this bill passed with overwhelming bipartisan support and I hope the Senate will follow suit.”

The Senate however, is taking a different approach to the matter, and the House vote coincided with the introduction of the Compensation Fairness Act of 2009 to discourage the payment of unjust bonuses and recoup payments made to executives at institutions partaking in the TARP by imposing a 35% excise tax on both employers and employees, on retention bonuses and other bonuses, and by imposing a limit on non-qualified deferred compensation. Small banks as defined by the tax code and entities that received less than USD100m in TARP funds would be exempt from the legislation.

"We need to track Federal dollars now more than ever,” said Senate Finance Committee Chairman Max Baucus, who introduced the legislation along with fellow Democrat Sen. Ron Wyden, and Republican Senators Chuck Grassley and Olympia Snowe.

“We must act quickly on this proposal – for the sake of the American taxpayer, for the sake of what’s right to do. I will work with my colleagues in both the House and Senate to make sure that’s what happens," Baucus added.

“I wish we didn’t have to do this, but the administration didn’t stop the bonuses this year, and the TARP legislation Congress passed last year didn’t include strong provisions to limit executive compensation at companies taking bailout money, and I said so at the time," Grassley remarked.

The Compensation Fairness Act imposes the tax on the full amount of any retention bonuses paid to employees of the affected firms. For non-retention bonuses, the excise tax would apply to all amounts over USD50,000. Non-retention bonuses would not include certain equity-based compensation - including certain stock options and stock appreciation rights, and long-term restricted stock - provided such equity-based compensation is subject to a three year service vesting period. The legislation attempts to prevent companies from avoiding the tax by characterizing bonuses as ordinary salary. Executives can forgo the tax, however, if they pay back their bonuses.

The provision also imposes a USD1m limit on non-qualified deferred compensation, preventing taxpayers from deferring more than USD1m in a 12 month period. If the USD1m limit is violated, compensation deferred under all non-qualified deferred compensation plans covering the taxpayer (including compensation deferred in previous years) would be taxable and such deferred amounts would be subject to a 20% penalty tax and interest payment. Like the first measure, this provision would not apply to small or large banks (as defined be Section 585 of the tax code) that have received USD100m or less of TARP funds or other government assistance.

The provision directs Treasury to issue guidance allowing an institution to cancel or modify an outstanding deferral election or an individual to terminate participation in the non-qualified deferred compensation plan without being subject to the legislation or the penalties that would otherwise apply under the tax code.

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