Steve Israel

The House of Representatives is tackling the issue of big bonuses by companies receiving federal funding, days after a furor erupted over such action by insurer American International Group.

“If we can’t kill the bonuses, we’ll tax the bonuses,” Rep. Steve Israel (D-N.Y.) said in a statement.

Israel and Rep. Tim Ryan (D-Ohio) are co-sponsoring the Bailout Bonus Tax Bracket Act of 2009, which would tax bonuses over $100,000 disbursed to employees of companies receiving money through the U.S. Treasury‘s Troubled Asset Relief Program. Because bonuses are already treated as taxable income, the bill applies what the legislators called a “bonus bailout” rate to the TARP bonus. Bonuses would be taxed beginning with those disbursed this year.

Currently, the IRS withholds 25% from bonuses less than $1 million and 35% for bonuses more than $1 million.

The action comes days after the announcement that AIG issued $165 million in contractual bonuses to members of its staff, in light of a $170 billion bailout package by American taxpayers, sparking the ire of many on Capitol Hill, including President Barack Obama.

“This is a corporation that finds itself in financial distress due to recklessness and greed,” Obama said March 16. “Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?”

Under the bill proposed by Israel and Ryan, if an AIG employee’s taxable income is $750,000, including an $150,000 bonus, that employee will pay the top marginal rate on $500,000 of personal income and the “bonus bailout” tax rate of 100% on the $150,000 bonus.

“American families shouldn’t be forced to reward these professional financial failures with extravagant bonuses that could buy fancy cars and yachts,” Israel said in a statement. “AIG may not like it, but since they had to come to the federal government for help, the federal government now has a say in how they spend taxpayer money.
If we can’t kill the bonuses, we’ll tax the bonuses.”

Ryan added “there is absolutely no way that AIG executives deserve to receive their bonuses while I’ve got constituents back in my district who are losing their jobs and can’t afford to put food on the table.”

Also today (March 17), New York Attorney General Andrew Cuomo announced that he has subpoenaed AIG for the names of those receiving the bonuses, indicating that the top recipient received more than $6.4 million.

In a letter to Rep. Barney Frank (D-Mass.), chairman of the House Committee on Financial Services, Cuomo encouraged the group to address the issue “head on.”

“I look forward to continuing to cooperate with the committee in any way possible to ensure that taxpayer funds are not misspent on unjustified bonuses or otherwise misused,” Cuomo wrote.