Daily Tax Update - March 23, 2009

SENATE MAY CONSIDER BONUS TAX BILL LATER THIS WEEK:  Although a specific timetable for Senate action on the “Compensation Fairness Act of 2009” (S. 651) has not been scheduled, Senate Majority Leader Harry Reid said that he wants to take up the bill before the Senate begins debating the budget bill on March 30th. However, Republicans are expected to try to block the bill from being considered on the Senate floor. Yesterday, Senator Judd Gregg (R-NH) said, “People are disgusted and outraged, as they should be. But let's not overreact in a way that basically has the Congress grabbing its pitchforks, and charging up the hill, and abusing what is a core authority of a government, which is the authority to tax its people.”

  • The bill was introduced last week by Senators Max Baucus, Charles Grassley, Ron Wyden, and Olympia Snowe. The Senate bill would impose a 35% excise tax on both employers and employees on retention bonuses and other bonuses paid this year. It would apply to all firms that have received Troubled Asset Relief Program funds, except community banks or other firms that took less than $100 million. Additionally, employees of affected companies could only defer up to $1 million of compensation tax free.
  • Last week, the House overwhelming approved a bill imposing a 90% excise tax on bonuses paid after December 31, 2008, by companies that have received over $5 billion in TARP funds, Fannie Mae, and Freddie Mac. However, both House and Senate bills would not tax the bonuses if the recipients give them back in the same taxable year that the bonus is paid.
  • Today, Treasury Secretary Geithner said, “We need to balance that basic objective -- we do not reward failure -- against the hugely important imperative that we get the financial system doing what it needs to do...On the specific legislation...we are going to look carefully at how this works with the Congress and try to make sure that we get this balance right.” 
  • Yesterday, President Obama said that he is seeking options “that are both legal, that are constitutional, that uphold our basic principles of fairness, but don't hamper us from getting the banking system back on track.” Obama added that “you certainly don't want to use the tax code to punish people.” A few Administration officials also expressed concern with the House bill yesterday. Vice President Joe Biden's economic adviser Jared Bernstein said, “I think the President would be concerned that this bill may have some problems in going too far -- the House bill may go too far in terms of some -- some legal issues, constitutional validity, using the tax code to surgically punish a small group. That may be a dangerous way to go.” White House economic adviser Austen Goolsbee said, “The President's also been clear we don't want to govern out of anger. He's going to look at what comes out of the House, what comes out of the Senate, see what ideas we have.”

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