The Congressional Research Service has found that both the Senate and House bills that seek to tax bonuses paid to employees of entities receiving assistance from the federal government under the Economic Stabilization Act of 2008 may have constitutional problems.

Under H.R. 1586, the bonuses would be taxed as income to the employee at a rate of 90 percent. S. 651 would impose an excise tax equal to 35 percent of the bonus on both the employee and entity. Both bills would apply to bonuses received on or after Jan. 1, 2009. The House bill was passed on March 19, 2009, by a vote of 328 to 93 (see House Votes to Tax AIG Bonuses). No legislative action has been taken yet on the Senate bill.

The Congressional Research Service reached the conclusion that while certain aspects of the proposed taxing schemes may raise concerns under the Fifth Amendment and “ex post facto” clause, the strongest arguments against their constitutionality arise under the bill-of-attainder analysis.

The two main criteria that courts look to in order to determine whether legislation is a bill of attainder are whether specific individuals are affected by the statute, and whether the legislation inflicts a punishment on those individuals. Both bills appear to meet the “specificity” prong, according to the analysis. The closer that a tax rate gets to 100 percent on income already earned, the more likely that such a tax would be seen by a court as rising to the level of punishment, according to the analysis.

Although the most logical non-punitive regulatory purpose for the statute would appear to be revenue raising, a review of the legislative history indicates that raising revenue is not a primary purpose behind the proposed bills, according to the analysis.

“Rather, the legislative history seems to contain comments that would indicate the existence of a congressional intent to punish those individuals receiving bonuses,” the Research Service said in its report. “Consequently, while both of these bills may raise constitutional issues, H.R. 1586 raises the serious constitutional concerns.”

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