March 20 (Bloomberg) -- The Senate plans to vote next week on steep levies on employee bonuses after the House overwhelmingly approved a 90 percent tax on bonuses at American International Group Inc. and other companies receiving bailout funds.

The Senate’s proposal on companies that got federal money would place a 70 percent tax on the bonuses. Half that amount would be paid by employees, half by the companies.

The 328-93 House vote came amid a national outcry over $165 million AIG paid in bonuses last week after receiving $173 billion in bailout funds as part of the government’s efforts to stabilize credit markets. President Barack Obama said he was “stunned” by the bonuses and vowed to recoup the money. Nineteen state governments have begun probes of the AIG bonuses.

“Paying excessive bonuses to the same group of folks that helped get us into this crisis is simply unacceptable,” Senate Finance Committee Chairman Max Baucus said in a statement. “Millions of Americans continue to struggle to get by, counting their dollars, and Congress needs to do the same.”

The House measure would cover companies receiving 75 percent of federal bailout funds, according to the Ways and Means Committee. The Senate proposal would affect a larger pool of workers and the chamber may vote on it next week, said its primary sponsor, Baucus, a Montana Democrat.

Meanwhile, House Financial Services Committee Chairman Barney Frank proposed legislation late yesterday to ban payments at companies getting U.S. aid until the government is repaid.

More Than $250,000

The House bill passed yesterday would affect employees earning more than $250,000 who received bonuses from companies that received more than $5 billion in aid from the Troubled Asset Relief Program.

“These people are getting away with murder,” said House Ways and Means Committee Chairman Charles Rangel of New York. “They’re getting paid for the destruction they’ve caused to our communities.”

The financial industry is counting on the slower pace of the Senate to give it a chance to mount a defense, according to a Washington-based representative of the financial services industry. With a vote expected quickly next week, there may be little time to make a strong case.

Meeting with Reid

Citigroup Inc. Chief Executive Vikram Pandit met yesterday with Senate Majority Leader Harry Reid, said the senator’s spokesman, Jim Manley. Manley said the meeting was scheduled weeks ago, and the purpose was to talk about Citigroup’s condition and the overall condition of the economy.

Asked whether Reid and Pandit discussed the executive bonus pay legislation, Manley said, “The issue might have come up, but I don’t think it’s fair to say he lobbied Senator Reid.”

He added that if Pandit did push against the legislation, it clearly didn’t persuade Reid, who went to the Senate floor shortly after the meeting and tried unsuccessfully to get a vote on Baucus’s bill.

“If he did lobby Senator Reid, it wasn’t successful,” Manley said.

Pandit wasn’t the only one to reach out to Reid. “Did he get calls from people on both sides of the issue? Of course,” Manley said.

Still, the industry is building a case, arguing that the new taxes would affect far more workers than previous measures, hurt families and undermine the economic recovery at banks receiving TARP funds, the representative said.

‘Negative Effect’

“The concern is the negative effect on rank-and-file workers and couples,” said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group for the industry.

Because the House measure would apply to household income, a bank teller married to a lawyer who is given a modest bonus could see 90 percent of it taxed, he said.

AIG also is facing pressure from state officials, including those in New Jersey, New York and Connecticut.

New Jersey Attorney General Anne Milgram said she sent a letter to AIG Chief Executive Officer Edward Liddy demanding a list of employees in the AIG Financial Products unit who received bonuses since September. New York Attorney General Andrew Cuomo said yesterday the insurer sent him such a list to comply with a subpoena.

Attorney General Richard Blumenthal, who also issued subpoenas for information, said AIG was “categorically wrong when it claimed that Connecticut state labor law compelled” the bonus payments.

‘Strong Signal’

Obama said in a statement that the House measure “rightly reflects the outrage” among the public over bonuses, and said he hopes to receive a bill “that will serve as a strong signal to the executives who run these firms that such compensation will not be tolerated.”

The Senate measure, proposed by Baucus and the panel’s top Republican, Iowa Senator Charles Grassley, would also restrict the amount of income that can be deferred from tax to $1 million. Democrat Ron Wyden of Oregon and Republican Olympia Snowe of Maine also are sponsoring the measure.

While the two chambers differ in their mechanics, both pieces of legislation would target bonus pools that as recently as 2007 totaled more than $39 billion.

Court Fight Predicted

Senator Judd Gregg, a New Hampshire Republican, predicted Congress’s efforts to rescind the bonuses through higher taxes would be thrown out in court. He said the legislation violates the constitutional ban on bills of attainder, which restricts lawmakers’ ability to punish individual Americans.

“It’s basically targeted on a small group of people,” Gregg said. He also said the bill may exceed lawmakers’ power to rewrite existing contracts. He said “of course” the government ought to try to rescind the bonuses “but we’ve got to do it legally.”

Some academics said the legislation may survive a court challenge. “From what I’ve seen, it would pass constitutional muster,” said Alexander Tsesis, an assistant professor of law at Loyola University in Chicago.

Tsesis said the legislation targets all companies receiving above a certain dollar amount of government TARP funds. For the measure to be unconstitutional, courts would have to find that the primary motive of the legislation was to target one company, he said.

‘Think It’s Okay’

“We’ve pushed the constitutional question pretty hard with constitutional experts and we think it’s okay,” Baucus said.

The House’s 90 percent tax would apply to bonus payments made after Dec. 31, 2008, and it would cease when the U.S. government’s investment in the company fell below $5 billion. The tax wouldn’t apply to any bonus returned to a company, or to commissions or fringe benefits.

About $3.6 billion in Merrill Lynch & Co. bonuses wouldn’t be affected by the new legislation because they were paid before Dec. 31. Bonuses for employees at Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley would be affected because they were paid after Dec. 31.

The measure also would affect employees of Fannie Mae and Freddie Mac, Rangel said yesterday. It wouldn’t apply to foreign workers of U.S. companies.

Separately yesterday, Grassley called on Fannie Mae and Freddie Mac to justify their retention bonuses while the entities were losing money. Fannie Mae awarded a total of $4.4 million in retention bonuses to four of its top six executives in 2008. Freddie will release its payments to top executives in April.

‘Extravagant’ Bonuses

“Just as with the extravagant bonus pay at AIG, it’s important to make sure that taxpayer support isn’t enabling unreasonable compensation arrangements that would never have been possible without taxpayer assistance,” Grassley said.

Voting for the House measure were 243 Democrats and 85 Republicans; six Democrats and 87 Republicans voted against it. A two-thirds margin was required under a fast-track procedure that barred amendments by opponents.

“The House vote absolutely reflects public outrage,” said Barry Burden, director of graduate studies in political science at the University of Wisconsin in Madison. “It is populism at its most intense.”

The Senate bill would tax retention and performance bonuses paid to foreign workers of U.S. companies. The 70 percent excise tax, split between employee and company, would be non- deductible. It would apply to 100 percent of any retention bonus and any other bonuses, including those that are performance- based, over $50,000. Certain stock options that vest for at least three years would be exempt.

‘Didn’t Stop the Bonuses’

“I wish we didn’t have to do this, but the administration didn’t stop the bonuses this year,” said Grassley. Using bailout dollars for bonuses after companies have been run into the ground adds insult to injury against taxpayers.”

House Republican Leader John Boehner of Ohio opposed that chamber’s measure, demanding to know who added language to the $787 billion economic stimulus bill last month that protected executive bonuses promised before Feb. 11.

Boehner called the measure a “political charade” and said, “Why don’t we just get it all back?”

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

Last Updated: March 20, 2009 12:18 EDT