Law for 90% tax rate could be hard to overturn

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The American International Group Inc. employees who received big bonuses and now could face a 90% tax bill may feel they have been singled out for unfair punishment by angry lawmakers.

But they 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.”


The Constitution says “no bill of attainder or ex post facto law shall be passed.” A bill of attainder singles out people for punishment, and an ex post facto law adds an after-the-fact punishment for past conduct. But the Supreme Court has limited those provisions to laws that “inflict punishment,” mostly in the criminal arena.

In one famous example, former President Nixon sued and lost in the Supreme Court after Congress passed a law saying tapes made by Nixon should be in the “complete possession and control” of the U.S. In a 7-2 decision, the court said the law was not a bill of attainder because it did not punish Nixon.

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.

House sponsors made clear this was no ordinary legislation but a measure targeted at unwarranted bonuses. “We have got to recover this money,” said Rep. Gary Peters (D-Mich.). “The very individuals who are responsible for this problem are getting the bonuses.”


Several tax experts said they were troubled by Congress using the tax code to mete out a form of punishment.

“Courts sometimes look to the motivation of the legislature, and this looks like an intention to punish,” said Steve Johnson, a former IRS lawyer who teaches tax law at the University of Nevada, Las Vegas. “It could also be viewed as government confiscation.”

Others noted that a 90% tax rate was not unprecedented in the U.S. During World War II, the top tax rate exceeded 90% for a few millionaires.

The Constitution also calls for the “equal protection of the laws.” In the past, companies and taxpayers have sued alleging they were subjected to unequal treatment by the tax code. Rarely, if ever, do such complaints prevail.

“Nobody wins an equal protection claim,” said Charlotte Crane, a professor of tax law at Northwestern University.

For example, the Supreme Court in 1992 rejected an equal protection challenge to California’s Proposition 13, which limited property taxes, even though it meant a new home buyer in Los Angeles could pay 17 times more in taxes than her neighbor who had lived in the same house for decades.


“The equal protection clause does not forbid classifications,” the court said, so long as people are not discriminated against because of race, gender or a similar classification.

It continued, quoting a Maryland case: “As a general rule, ‘legislatures are presumed to have acted within their constitutional power despite the fact that, in practice, their laws result in some inequality.’ ”