March 18 (Bloomberg) -- U.S. House Democrats plan a vote tomorrow on a measure to impose a 90 percent tax on executive bonuses paid by American International Group Inc. and other companies getting more than $5 billion in federal bailout funds.

“I expect it to pass in overwhelmingly bipartisan fashion,” House Majority Leader Steny Hoyer, a Maryland Democrat, told reporters today in Washington. House Speaker Nancy Pelosi, a California Democrat, said, “The American people are very upset about what they’ve heard about bonuses.”

The legislation would cover 75 percent of companies that receive federal bailout funds, according to the House Ways and Means Committee.

“We go far beyond AIG, Citibank, Freddie Mac, Fannie Mae and others,” said committee Chairman Charles Rangel, a New York Democrat. “This is not going to happen again, the light is flashing and letting them know that America won’t take it.”

The measure is the first legislative response to a political furor that erupted after insurer AIG, which got taxpayer-funded bailouts totaling $173 billion, paid $165 million in bonuses last week to 4,600 employees. Many receiving bonuses are in AIG’s financial products unit, the credit-default swaps subsidiary whose losses pushed the insurer to the brink of bankruptcy in September.

The bill was being drafted today as AIG Chief Executive Officer Edward Liddy told a House Financial Services subcommittee that he asked employees who got bonuses over $100,000 to repay half.

$250,000 in Income

The 90 percent tax would apply to people with overall income exceeding $250,000, including bonuses. The 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 the company.

The legislation wouldn’t attempt to impose the tax on foreign employees of companies such as AIG, said Ways and Means Committee spokesman Matthew Beck. Many of AIG’s bonus recipients work in the London office of the credit-default swap unit.

The Senate is readying a separate measure that would impose a 70 percent excise tax on the bonuses, split between the company and employee. That tax would be collected from foreign workers by making the company responsible for paying the employee’s 35 percent excise tax if the levy couldn’t be collected using normal withholding in place under existing tax treaties, according to a description released yesterday by the Senate Finance Committee.

Baucus, Grassley

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, and the panel’s ranking Republican, Chuck Grassley of Iowa, said in a statement they sent a letter asking Liddy to identify who got bonuses from AIG, how long they worked for the company and whether they are still employed by it. They also asked Liddy for legal opinions on AIG’s risk of being sued if it hadn’t paid the bonuses.

Congress is acting after Treasury Secretary Timothy Geithner said in a letter to lawmakers yesterday that his department’s lawyers determined it would be “legally difficult” to prevent AIG from paying the bonuses because they were required by contracts.

“We passed a recovery act, we did not pass a license to steal,” New York Representative Steve Israel, a Democrat, said at the news conference. “The middle class will no longer subsidize pay for failure.”

State, Local Governments

Asked how lawmakers reached the 90 percent figure, Rangel said, “We figure the local and state governments will take care of the other 10 percent.”

Liddy said today he never would have approved the compensation contracts, which were signed before he took over at AIG last year, and said he asked employees to “do the right thing” on their bonuses.

AIG also budgeted $57 million in “retention” pay for employees who will be dismissed, according to a March 2 filing to the Securities and Exchange Commission.

The political heat generated by AIG bonuses indicates declining public and congressional support for shoring up beleaguered financial institutions with government funds and may make it tougher for President Barack Obama’s administration to win approval for future bailouts.

The bonus decision “may jeopardize our ability to get the majority of this Congress to support further largess, to provide funds, to prevent a recession, depression or meltdown,” Representative Paul Kanjorski, a Pennsylvania Democrat who heads the capital markets subcommittee, told Liddy today.

Republicans have criticized Democrats for tacitly allowing AIG to pay the bonuses in a $787 billion economic stimulus bill that became law last month. The law in effect allows bonus arrangements at companies receiving taxpayer bailouts as long as they were in place before Feb. 11.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Christopher Stern in Washington at cstern3@bloomberg.net

Last Updated: March 18, 2009 19:46 EDT