March 21, 2009

Is The AIG "Super Tax" Unconstitutional?

The uproar over the $218 million in bonuses that AIG handed out to its executives has driven the House to push through a bill that would tax those bonuses at 90%.  But is this an unconstitutional bill of attainder?  Article 1, Section 9 of the U.S. Constitution states, 
No bill of attainder or ex post facto Law shall be passed.
What exactly constitutes a "bill of attainder" does not seem clear from the case law.  The basic question is whether the legislature has targeted an identifiable group of people for punishment, which usurps the judicial function.  An ex post facto law adds a punishment for past conduct after-the fact.

The L.A. Times's  David Savage has a lengthy write-up that suggests it will be difficult for AIG to win in potential litigation.  
"But [AIG] are not likely to win a court challenge if the legislation becomes law, because courts have given legislatures broad leeway to raise and lower taxes without running afoul of the Constitution, legal experts said Thursday.

"'The courts are very reluctant to strike down tax legislation,' said Edward McCaffery, a tax expert at the USC Gould School of Law. 'I think a tax this high and this targeted raises some difficult questions, but at the end of the day, I would bet a constitutional challenge would not work.'"

And as for the issue of the legislature not targeting an identifiable class,
"The tax legislation that the House passed Thursday did not name names. And it was broadened beyond AIG.

The 90% tax rate applies to people who will earn more than $250,000 in adjusted gross income in 2009 and who get bonuses from a company that received more than $5 billion in bailout money. Included are employees of Fannie Mae and Freddie Mac.

Since the tax-rate change would apply only to income in 2009, it cannot be attacked in court as a retroactive tax."
Harvard's Lawrence Tribe agrees with the TIme's conclusion.  He brings experience from arguing one of the most important bill of attainder cases in SBC Communications v. FCC.  Tribe points to legislative drafting being the key to working around the bill of attainder issue.
"It would not be terribly difficult to structure a tax, even one that approached a rate of 100%, levied on some or all of the bonuses already handed out (or to be handed out in the future) by AIG and other recipients of federal bailout funds so that the tax would survive bill of attainder clause challenge. 
Such a tax would presumably be leveled on the basis of some criterion sufficiently general to avoid classification as a measure targeting solely a closed class of identified and named individuals. The fact that the individuals subject to the tax in its retroactive application would in principle be readily identifiable would not suffice to doom the tax either from a bill of attainder perspective or from a due process perspective. Moreover, the fact that the aim of such a tax would be manifestly regulatory and fiscal rather than punitive and condemnatory, and that the tax would be part of a measure that would be prospective as well as retroactive in its operation, would serve to blunt the force of any bill of attainder challenge. Finally, such a tax would be devoid of the sting of political retribution and would not partake of the classic "trial by legislature" that the attainder ban was designed to avoid. 
All things considered, I believe it very likely that Congress could design a fully constitutional means of clawing back into the federal treasury all amounts paid (or to be paid in the future) in the form of retention bonuses from federal funds disbursed either by the Federal Reserve Board pursuant to legislative authorization tracing to the 1930s or by the Treasury pursuant to the most recently enacted federal bailout and stimulus measures."

Others disagree.  They focus on the legislative intent, which would seem to any reasonable observer targeted directly at AIG and these particular bonuses.  The Times quotes UNLV tax professor Steve Johnson, who believes that, "Courts sometimes look to the motivation of the legislature, and this looks like an intention to punish. It could also be viewed as government confiscation."  David Kravitz, a former O'Connor law clerk, picks up on this same theme over at Blue Mass Group.
"Someone challenging the super-tax shouldn't have any trouble finding evidence that the folks in Congress are interested in punishing AIG's bonus recipients, even setting aside Senator Grassley's call for them to commit suicide.  And though there are cases that declare taxes as non-punitive, a 100% (or close to it) tax might be a different thing -- especially with the current Supreme Court.  It's not a slam-dunk either way, but the argument that a 100% tax on pretty much anything is punitive seems pretty strong to me."

I think the legislative intent folks have a pretty good point.  The legislation seems particularly targeted at AIG and the recent bonuses.  This may present a new issue because most bill of attainder cases arise in the criminal context, and as discussed above, taxes are not generally thought of as punishment.

I also question whether any AIG employees would entertain brining a challenge.  They are already living in fear as the death threats pour in.  They may just want the issue to go away.

On a legislative note, Senate Republicans have blocked the bill in the Senate to let some of the outrage simmer down and to think through many of these Constitutional issues.

Update: Are we becoming a "banana republic?"

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