The Constitutionality of the Punitive AIG Taxation

The Punitive AIG Tax is Probably Constitutional

It may be punitive, egregious public policy, and unprincipled, but it’s constitutional. It may echo the old English practices of seizing personal and real property, practices which led to the Constitutional ban on bills of attainder, ex post facto laws and the impairment of contracts, but it’s constitutional.

Bills of attainder are those that penalize an individual or concern by name. Legislatures learned decades ago how to avoid this constitutional proscription by using a “generic” description to describe the offensive behavior rather than the “Name” of the offender.

For example, a tax of 90% on

1) Bonuses
2) of employees of companies receiving TARP funds of $5 billion or more
3) with family adjusted gross income of $250,00 or more

is not a bill of attainder because it applies generically to any specific individual, company or group fitting the description, whereas an express tax on "AIG employees" would be unconstitutional.

As for ex post facto laws, courts have long held that the constitutional bar on ex post facto laws applies only to criminal prosecutions. Since these taxes apply only in a civil context, they will not be unconstitutional ex post facto laws.

A trillion dollar ex post facto law has been in effect for almost three decades. It’s CERCLA (The Comprehensive Environmental Response, Compensation, and Liability Act), which imposed retroactive, joint and several, strict liability on owners and/or operators, past or present, generators, and transporters to hazardous waste sites. The contamination may have occurred a century ago, but the liability is today’s. Congress also did not provide many defenses to this liability. CERCLA liability can be draconian, but society has recognized the need to cleanup these toxic sites.

The Supreme Court has essentially ratified the concept that the power to tax is the power to destroy. The City of Seattle was competing decades ago with a private utility, Puget Sound Power & Light, for customers in Seattle. The city settled the conflict by imposing a gross receipts tax on Puget Power’s sales in Seattle, thereby giving the City an insurmountable cost advantage. The Supreme Court upheld the tax in 1954.

Fifteen years later the City of Pittsburgh imposed a 20% gross receipts tax on off-street parking receipts in Pittsburgh. It exempted though from the tax the municipally owned parking lots. Once again the City used the power of taxation to cripple a competitor. The Pennsylvania Supreme Court ruled the tax an unconstitutional takings.

The United States Supreme Court in 1974 upheld the tax. It held that the only question was if taxes raise revenues. If they do, then they are constitutional. Justice Powell in a concurring opinion, in dicta, opined that a point might exist when a tax became unconstitutional, but provided no guidance on that proposition.

The Court will not pass on the reasonableness of a tax that is within the power of Congress. A tax will not be unconstitutional even if it is so excessive as to render a business unprofitable or threaten its existence.

The bar against statutes impairing the obligation of contracts is similarly inapplicable. One of the first major steps taken by FDR during the New deal was to ban the private possession of gold, followed by signing on June 5, 1933 a Joint Resolution of Congress, which declared "gold clauses" unenforcible. About $100 billion in bonds in 1933 contained gold clauses, which pegged the repayment of the debt to the value of gold.

The Supreme Court in three 5:4 opinions on February 18, 1935 upheld the bans. So much for the sanctity of contracts.

Congress in the Stimulus Bill recognized bonuses issued prior to February 11, 2009.

However, the government is free to impose taxes. For example, California may collect royalties on oil production on lands the state has leased to oil companies. It may also, much to the surprise of the lessees, impose a severance tax on all oil production in the state, including state lease lands.

The retroactivity of newly imposed taxes is a wonderful phenomenon. Governor Clinton campaigned in 1992 on a plank of middle class tax cuts. After being sworn in on January 20, 1993 as President, he announced that the budget would require not tax cuts, but tax increases for all, retroactive to January 1, 1993. By an amazing coincidence, President Clinton’s wife, Hillary Rodham Clinton and her partners at the Rose Law Firm, cashed in their bonuses in late 1992, earlier than normal.

Congress is now trying to ride the wave of public outrage, which it could have averted had the members of Congress read the Stimulus Bill before voting on it.